Why You Shouldn't File Your Own LLC

Forming an LLC is not just a matter of filling out a few forms. Approaching it this way can cost entrepreneurs in the long run. LLC formation has legal requirements, and not following these can have long-lasting impacts on your business.

This article will cover the issues with filing your own LLC documents. We'll look at common errors and their consequences. This way, you'll understand why professional help in forming your LLC can save you time and money.

Complexity of legal requirements for LLCs

Forming an LLC can be challenging, even for those with business experience. These are some of the factors that make it so complex.

1. State-specific regulations

Each state has rules for forming an LLC. These can include:

• Different filing fees
• Varying processing times
• Unique naming requirements
• Specific language needed in articles of organization

For example, California requires LLCs to file a Statement of Information within 90 business days. New York requires publication of a notice in local newspapers after forming an LLC. Missing these steps can create business problems from the start.

2. Choosing the right business structure

Selecting the appropriate business structure makes all the difference. It affects everything from tax benefits to operations. Every business is different. So, there are several factors to consider before making a choice.

When choosing your structure:

• Assess your small business needs and goals
• Think about your future plans
• Consider your federal tax returns
• Evaluate your liability needs

A freelance graphic designer might decide a single-member LLC is the best fit. A tech startup seeking venture capital might choose another business structure like a C-corp. You can change your business structure later. However, it can be a lengthy process.

3. Understanding document requirements

Business formation documents aren't just about filling in blanks. They require careful consideration. For example, you need to make note of these things:

• Member rights and responsibilities
• Management structure
• Profit and loss allocation
• Procedures for admitting new members

Misunderstanding or omitting any of these can lead to internal disputes or legal challenges down the road.

4. Managing compliance

Forming an LLC is just the beginning. You must maintain compliance with state regulations. This includes:

• Annual reports
• Business and personal tax returns
• Registered agent services
• Accurate records

Compliance requirements can vary depending on your industry and location. A restaurant LLC, for instance, needs to comply with health and safety regulations, while a financial services LLC must manage data privacy.

How do you keep track of it all? You can use a checklist and review it regularly. This proactive approach may help you avoid penalties. It can also make it easier to secure contracts in highly regulated industries.

Risk of errors and omissions

When filing LLC documents yourself, the risk of errors and omissions is high. Even small mistakes can have consequences. These are some of the errors to look out for.

Inaccurate information

Leaving fields blank or providing incorrect information on your formation documents can cause all kinds of problems. For example, documents may get rejected, or you can see delays in processing. You may even have additional fees to deal with.

For example, incorrectly stating your LLC's purpose or forgetting to list all members may result in rejection, which delays your ability to start operating as an LLC and may cause you to miss business opportunities.

Naming errors

Choosing a name for your limited liability company isn't just about creativity. It must comply with state laws. You can’t have a name similar to an existing business in your state. You also may be unable to use some words in your name or DBA. For example, you can’t use “doctor” in many states.

Poor capitalization

Ensure the LLC has sufficient funds. Undercapitalization can be a sign of misusing the LLC structure. This can pierce the corporate veil and create legal issues. To avoid this, focus on:

• Maintaining separate bank accounts for the business entity
• Gaining enough funding for business operations
• Proper documentation of all financial transactions

Inconsistent records

Your LLC documents should present consistent information, including member names and your place of business. Inconsistencies can raise red flags with state authorities and might also cause problems when dealing with banks or vendors.

Missing clauses in the operating agreement

If your state requires an operating agreement, make sure you draft it the right way. You’ll want to include clauses that will things like cover:

• Procedures for resolving disputes
• Rules for adding or removing members
• Processes for transferring ownership interests

Failing to get licenses and permits

Forming an LLC is separate from obtaining the licenses and permits. Your business may need licenses and permits. These could include:

• General business license
• Professional licenses
• Zoning permits
• Health permits
• Environmental permits

For example, the Florida Business Tax Application lists all of the types of activities that require a state sales tax license. Reviewing the state's tax requirements is essential if you do business from a Florida location.

Understanding state-specific requirements

Each state has its own set of rules and regulations. What works in one state may not be enough or even legal in another. How do you handle these nuances? The first step is knowing what to look for.

1. Publication requirements

Some states require LLCs to publish a notice of their formation in local newspapers. LLC owners can’t afford to miss this if their state requires it. You also need to have a plan to make sure this task gets done the right way.

For example, the Arizona Corporation Commission maintains a list of newspapers that meet publishing requirements. It must be a newspaper of general circulation and must meet all of the following criteria:

• It is printed in the English language
• It is a publication regularly issued for dissemination of news of a general and public character at stated short intervals of time
• It has a known office of publication
• It has dates of issue
• It is numbered consecutively
• It has a bona fide list of paying subscribers
• It has been admitted under federal law as second class matter in the U.S. mail for at least one year
• It must not be designed for advertising, free circulation, or circulation at nominal rates

2. Annual reports and income tax filing

The frequency and content of annual reports vary by state. For example, some states require you to file on the anniversary of formation. Others require it by the end of the calendar year. Tax filing requirements may also be different.

Make sure you get this information right. Otherwise, your filing may get rejected. The Division of Corporations in Florida must examine your document for minimum statutory filing requirements. If you received a rejection notice, your application failed to meet one or more requirements.

3. Naming restrictions

Search to see if the name you want has already been taken. You may be able to reserve a name. But this usually comes with an additional fee. Your LLC application may be rejected if you pick a name that violates your state's rules.

For example, in California, names are checked only against names of like-entities registered with the California Secretary of State. That means a proposed corporation name is checked for availability only against other corporation names.

In that state, names are not checked against trademark or service mark registrations or fictitious business names. So it’s important to do a trademark check. Otherwise, you could face legal issues even if your application does get approved.

Registered agent rules

All states require LLCs to have a registered agent. Most states charge a fee for appointing or changing a registered agent. These filing fees are usually small. For example, in Georgia, the filing fee for an LLC is $100. This filing must include the name of your registered agent.

No matter who you choose, your registered agent must:

• Be 18 or older
• Have a physical address in your state of business
• Be available during normal business hours

Importance of drafting operating agreements the right way

An operating agreement is important for any LLC. It can prevent disputes and protect your business interests. Here’s what you should know.

1. Legal protection

A properly drafted operating agreement provides legal protection by:

• Reinforcing the limited liability status of your LLC
• Outlining clear procedures for dispute resolution
• Defining the rights and responsibilities of members

2. Customization for your business

Every business is unique. A well-crafted operating agreement allows you to:

• Define specific management structures
• Outline how profits and losses will be distributed
• Set procedures for adding or removing members
• Establish protocols for major business decisions

3. Clear decision-making

A good operating agreement clearly defines:

• Who has the authority to make decisions
• How decisions will be made
• What types of decisions require member approval

Without these clarifications, decision-making can become contentious. This may lead to deadlocks or actions that not all members agree with.

4. Ownership structure and contributions

The operating agreement should cover:

• Each member's ownership percentage
• Initial capital contributions
• Procedures for additional capital calls
• How ownership changes will be handled

5. Exit strategies and succession planning

A comprehensive Operating Agreement includes provisions for:

• Buyout procedures if a member wants to leave
• What happens if a member dies or becomes incapacitated
• How the business will be valued in these scenarios

Risks of generic operating agreement templates

Templates are available online. But using them comes with risks. The documents may not comply with your state's specific laws. Generic provisions may also not fit your business model or industry. Getting professional assistance will save you time and stress.

Tax implications and considerations

You must understand the tax implications of forming an LLC. The choices you make during formation can have significant impacts on your tax obligations. Without professional guidance, it's easy to make costly mistakes. This is what you need to know for tax purposes.

Tax classification

Single-member LLCs are taxed as sole proprietorships, and multi-member LLCs are taxed as partnerships. However, this default classification may not benefit you the most. There are other options.

LLCs have the flexibility to choose their tax classification. They can elect to be taxed as an S-Corporation. Some LLCs may qualify for C-Corporation taxation. Don’t guess here. Get help with this to avoid making a costly mistake.

Benefits of professional help with LLC filing

While it might be tempting to handle LLC formation on your own, seeking professional help offers numerous advantages. Let's explore the benefits of working with experts when setting up your LLC:

1. Ensuring compliance

Professional services ensure your LLC complies with all relevant laws. They stay up-to-date with changing regulations and understand state-specific requirements, reducing the risk of delays and legal issues.

2. Saving time and reducing stress

Forming an LLC is a lot of work. Some tasks, like managing all the documents, won’t come naturally to some aspiring business owners. Professionals handle these tasks efficiently. That allows you to focus on your business plans. They take the stress out of the process, giving you peace of mind.

3. Relevant advice

Professional advisors provide tailored guidance. They help choose the right business structure for your needs. They can also help you customize operating agreements to fit your specific situation.

This approach ensures your LLC is set up to serve your business goals. For example, a professional may advise you to get an employee identification number right away, which can make it easier for you to establish the LLC as a separate entity.

4. Avoiding mistakes

Professionals have the experience to anticipate and avoid common pitfalls. For example, they may catch errors in documentation before filing. They also help you understand your obligations as an LLC owner.

5. Tax planning

Taxes come with additional considerations when you’re a business owner. Professionals can advise you on structuring your business to minimize tax liabilities. They can also give you guidance on setting up working accounting systems.

6. Ongoing support

Professional services often provide support beyond the initial formation. For example, they can help with annual filings and reports This ongoing relationship ensures your LLC remains in good standing. It can also help you adapt as business needs change.

7. Faster processing

Many professional services may have relationships with state agencies. They may advise you on how to pay to get an answer quickly. For example, by paying with a credit card instead of through the mail. They know how to expedite filings when needed. Faster formation means you can start operating your business sooner.

Hidden costs of DIY LLC filing and management

Filing your own LLC documents might seem like a cost-effective option. However, there are hidden costs associated with the DIY approach. This is what you should know about the expenses:

1. Filing issues

Mistakes in your filing can be an expensive fix. Some states charge fees. Or you might need to pay for expedited processing. This is especially important if your filing is time-sensitive. For example, if you have a specific opening date in mind.

2. Time

Your time as a business owner is valuable. DIY filing often requires hours of research to understand state-specific requirements. You could spend this time developing your business plan or improving your product.

3. Missed opportunities

Lack of expert guidance can lead to missed opportunities. For example, you may not be aware of state-specific incentives or programs for new businesses. These missed opportunities can have long-term impacts.

4. Legal fees

Filing issues can create legal issues. For example, if your operating agreement isn’t clear about how to manage disputes. Resolving these issues often requires hiring an attorney. That engagement could last weeks or even months. Avoid this by getting legal advice from the start.

5. Fines and penalties

Non-compliance with state regulations can result in fines and penalties. Things like late fees for missed annual report filings. Or fines for failing to maintain a registered agent. These can add up quickly.

6. Tax consequences

Without proper guidance, you might make tax-related mistakes. For example, you could miss out on deductions you're entitled to. Or you could fail to make estimated tax payments. These errors can result in higher tax bills or penalties from the IRS.

If you fail to file a required tax report in Texas, the Comptroller's office will send you an estimated bill with instructions on filing a report, providing your actual sales data for the estimated period. Failure to file or pay a tax report may result in collection actions, including additional late filing penalties, liens, and criminal charges.

7. Personal liability risks

If your LLC is not formed correctly, you might lose personal liability protection. This could put your personal assets at risk in case of business debts or lawsuits. The potential cost of personal liability far outweighs the savings of going DIY.

8. Business disruptions

Errors in your LLC formation can lead to business disruptions. Banks may freeze accounts if your LLC's status is questioned. Or contracts may become invalid. These disruptions can result in lost revenue. They can also damage business relationships.

Examples of LLC issues and lawsuits

What could some of the consequences of filing and running your LLC without consulting a professional be? These are examples of common LLC lawsuits.

1. Trademark issues

An LLC might choose its business name and file formation documents without doing a trademark search. Then, it could get a cease and desist letter from a business with a similar name in its state.

According to the United States Patent and Trademark Office, a trademark owner who believes its mark is being infringed may file a civil action in either state court or federal court for trademark infringement, depending on the circumstances.

If the trademark owner can prove infringement, available remedies may include the following:

• A court order (injunction) that the defendant stop using the accused mark
• An order requiring the destruction or forfeiture of infringing articles
• monetary relief, including the defendant's profits and any damages sustained by the plaintiff
• An order that the defendant, in certain cases, pay the plaintiffs' attorneys' fees

In this case, the LLC would likely have to rebrand completely and pay to update its business name with the state. Professional services often include trademark checks to prevent issues.

2. Missing operating agreement

Imagine two friends starting a software development LLC in New York. They filed the necessary legal documents, but they didn't create an operating agreement because they didn’t see the need to put one together.

A year later, they could disagree about the company's direction. Without an operating agreement, there’s no clear way to move forward, and it could even escalate to requiring mediation. They could have avoided these issues had they included an operating agreement when they filed.

3. Tax classification mistake

A growing e-commerce LLC could fail to manage its taxes correctly. After filing, it may realize that it made the wrong election. When trying to make a late election, it may discover that the business doesn’t meet the new requirements.

This could cause the LLC to pay thousands of dollars more in taxes and incur legal fees to restructure. Understanding and choosing the right tax classification early on can prevent such problems.

4. The corporate veil

A small construction LLC could face a lawsuit from a client over alleged faulty work. Imagine that the owner had been using the business bank account for personal expenses. There’s also no clear separation between the owner's personal finances and the LLC's finances.

In this case, the court could "pierce the corporate veil, " which would allow the client to pursue personal assets. Maintaining strict separation between personal and business finances is important, as it preserves the liability protection of an LLC.

5. Failing to file as a foreign LLC

A successful online retailer may want to expand its operations. To do that, it may start fulfilling orders in other states without realizing it needs to file as a foreign LLC in the new state. This could lead to fines or even stop it from doing business in that state.

As businesses grow across state lines, there are new compliance requirements. Professional guidance can help you find the right way to move forward, ensuring that you don’t put the business at risk.

Manage LLC filings the right way

Forming an LLC is one step in establishing your business. But it's more complex than filling out a few forms. The process involves navigating complex legal requirements and making important decisions. A professional can help you avoid mistakes and hidden costs.