3 LLC Legal Pitfalls You Need To Avoid

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If you are about to set up an LLC or have just set one up, you need to ensure that it is set up correctly to ensure its effectiveness in limiting your liability exposure.

The purpose of an LLC is to limit your personal liability exposure by creating a division between your personal and business assets. This division ensures that if you were sued, only your business assets could be targeted, not your personal assets, such as your home, car, or personal bank accounts.

In this article, we will explore the three legal pitfalls that you must avoid when setting up an LLC to ensure that it is rock solid and does what it is supposed to do for you.

Pitfall #1 – Choosing the Right Name for Your LLC

The name of your LLC is important and can be a potential legal pitfall if not chosen carefully. It is crucial to conduct thorough research before choosing a name for your LLC to avoid potential legal issues down the line. You must ensure that your chosen name is not already trademarked, registered, or being used by someone else in your state or category. Failing to do so could result in lawsuits or a demand to change your LLC’s name.

One way to avoid this pitfall is to use a free tool provided by Incfile, a service that has set up over 800,000 businesses. The tool will conduct the necessary research on your behalf and let you know whether your desired business name is available or not based on your state and category.

You can also use fictitious business names or DBAs (Doing Business As) if you want to change the name of your LLC down the line. This allows you to take some of the pressure off when deciding on the perfect name for your LLC.

Pitfall #2 – Commingling Funds and Employer Identification Number

“Commingling funds” is a common mistake made by many LLC owners. It involves using a personal bank account to run your business, which is not only unprofessional but could also lead to lawsuits that could pierce the corporate veil. Piercing the corporate veil means that the division between your personal and business assets is removed, and your personal assets become exposed to lawsuits.

To avoid this pitfall, it is essential to open a separate business bank account and use it exclusively for your business transactions. This will help you keep track of your business finances and avoid co-mingling funds. Additionally, you need to obtain an EIN (Employer Identification Number) for your LLC, similar to a social security number. You will need it to hire employees, open a business bank account, and apply for a loan, among other things.

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Pitfall #3 – Business Licenses and Permits

Depending on your state and business category, you may need to obtain certain permits and licenses to operate your business legally. It is crucial to research and obtain the necessary licenses and permits to avoid potential lawsuits and penalties that could harm your business’s reputation.

To make this process easier, you can use a tool like Incfile to help you obtain all the necessary licenses, permits, and tax registrations required for your business. The tool will provide you with a comprehensive package that includes all the application forms you need to file with the appropriate licensing authorities.

Paying yourself as an LLC

One important part of setting up your LLC is figuring out how to pay yourself once you start making profits. Whether you are the sole member of your LLC or you have employees, the way you pay yourself will vary depending on your situation.

As a sole member LLC, you are considered a disregarded entity by the IRS. This means that the LLC’s income is considered your personal income, and you will report it on your personal tax return. You can pay yourself as an employee of the LLC, taking a salary and having payroll taxes withheld, or you can take an owner’s draw, which is simply taking money out of the LLC’s profits.

If you have employees, you will need to set up payroll and withhold payroll taxes from their paychecks. You can also pay yourself as an employee, taking a salary and having payroll taxes withheld.

It’s important to keep accurate records of your LLC’s income and expenses, as well as your own salary or draws. This will make it easier to file your tax returns and stay compliant with IRS regulations.

Ultimately, the way you pay yourself as an LLC will depend on your specific situation and goals. It’s important to consult with a tax professional or financial advisor to make sure you are doing things correctly and optimizing your tax strategy.

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Three Things To Be Aware Of When Starting Your LLC

The video below covers three things you must know when creating your LLC.

  1. Commingling Funds
  2. Registered Agent
  3. Piercing the Corporate Veil 

If you are unfamiliar with these terms, please watch the video below.

Conclusion

Starting your own business and setting up an LLC may seem daunting at first, but with the right resources and guidance, it can be a smooth and successful process. By avoiding the legal pitfalls mentioned in this article, such as choosing the right name for your LLC, setting up the proper bank accounts, and obtaining the necessary licenses and permits, you can ensure that your business is set up for success and protected from legal liabilities.

At BizBuddy, we understand the challenges that come with starting a business, and that’s why we offer a range of tools and resources to help entrepreneurs navigate the process. From our free business name search tool to our LLC formation services, we’re here to help you every step of the way.

So what are you waiting for? Take that first step towards creating the business of your dreams and let BizBuddy be your guide. With our expertise and support, you can turn your entrepreneurial vision into a reality and achieve the financial freedom and independence you’ve always wanted. Start building your future today!

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