The 20 Deadly LLC Sins…And You Thought There Were Only 7

February 4, 2011 by Josh Buscay

Relax, relax…the world isn’t going to come crashing down on you because your varying indiscretions have caught up with you. These 20 sins are those that can cost you dearly in your business.

When business owners incorporate they often think, “Hey! That was easy. Now I can sit back, relax, and enjoy the benefits that come my way.” Unfortunately this isn’t really the case and the incorporation process takes a bit more effort than it may appear at first glance. It is important to realize that owning a Corporation, LLC or LP has its many benefits, but also its obligations. As I was cruising around looking for some material to help out business owners understand the incorporation process I came across this helpful article.

I posted the top 20 deadly sins that can be made before and after incorporating your business. Check it out here and post your comments about the most deadly mistake you’ve made throughout your incorporation process! No matter the blunder we can always help out and give you that extra hand to guide you along the way, so please reach out to us with your questions should you be uncertain about something regarding your company.

10 Costly Mistakes Before Entity Formation:

1. Forming an LLC and NOT knowing how it’s taxed (Are you a single or multi-member LLC? Will you be disregarded for tax purposes, taxed as a partnership, a C-, or an S-corporation?)

2. Forming an LLC for real estate and NOT knowing which is best. Is the property investor vs. dealer? (Make the wrong choice, and be doomed to a life of unnecessary taxes.)

3. Forming an LLC and having it managed by Members instead of Managers (A sure way to lose flexibility and control)

4. Forming an S corporation and NOT knowing the shareholder rules (Imagine discovering years later that you’ve violated an S corporation shareholder rule — and that you now owe years of expensive C corporation back taxes.)

5. Forming an S corporation when your company anticipates future value (There must be a better approach. and indeed, there is!)

6. Forming a C corporation to take advantage of fringe benefits when your business doesn’t fit the C corporation model. (Can you spell nightmare?)

7. Forming an entity in Nevada and NOT knowing when to foreign register, and for what reasons. (“Can’t you just get a mailbox?”)

8. Forming an entity and hiring independent contactors and employees WITHOUT knowing the rules. (It makes a difference as to which states you’ll need to foreign register.)

9. Forming an LLC taxed as a partnership WITHOUT having an “official” partner . (Maybe the IRS won’t notice.)

10. Selecting an inexperienced or disreputable company to help you form your entity. (There’s no excuse for not checking references with the BBB, local professional organizations and testimonials.)

10 Costly Mistakes After Entity Formation:

1. NOT completing corporate AND LLC formalities (Yes, LLCs should have them too!)

2. NOT completing the LLC operating agreement (Unless you’ve got a lemonade stand, it’s essential)

3. NOT properly capitalizing the entity, and especially not being crystal clear with partners about your capitalization (A disaster waiting to happen!)

4. Putting LLC Members on payroll vs guaranteed payments (Do you know the advantages?)

5. Forming an LLC taxed as an S corporation and having the incorrect operating agreement (A subtle, but effective nuance that must be handled properly.)

6. NOT completing a buy sell agreement for the partners (Again, being crystal clear will save your sanity.)

7. Falling behind on employee payroll taxes to the IRS and your state (This will cost your business dearly — at best .)

8. NOT meeting with your CPA to set up a chart of accounts (Running your business off a checking account balance is a fast track to bankruptcy.)

9. Registering your domain name to your operating entity (This may account for 70% or more of your lead generation-a huge asset at risk.)

10. NOT obtaining the proper business licenses (Being out of compliance can punch gaping holes in your bottom line.)