US LLC Formation: Business attorney Laura Cowan discusses 3 common mistakes

Business applications continued to increase gradually over the past decade in the United States and spiked in 2020. Despite a slight drop in 2021, business startup statistics from the U.S. Census Bureau indicate that 432,000 applications were received in November 2021.

For new business owners in the United States, the most common business structures include sole proprietorships, partnerships, limited liability companies (LLCs), and various corporations. Choosing the correct business structure for your business is vital because it affects everything from the taxes you pay, to how the company operates, and the protection of your personal assets.

In the United States, small business owners by far prefer to form LLCs as they offer flexibility and the benefits of pass-through taxes. Laura Cowan, the New York Rising Star™ business lawyer, business strategist, and former CPA, offers invaluable resources and advice for business owners in the United States and globally. She discusses the three most common mistakes of LLC formation. 

Not understanding LLC types

The most popular LLC is the single-member. New business owners can also form multi-member LLCs or an S-Corp (a tax designation for an LLC).

Laura Cowan stresses, “Each of these three LLC types has distinctive features, but choosing the correct one for your business is essential. Therefore, if you are unsure, seek professional advice.”

Single-member LLCs are ideal if you want liability protection without much paperwork and corporate formalities. Your responsibilities are to file quarterly taxes, and you personally pay the tax on the business profits, just like in a sole proprietorship.

If your LLC will have a high annual profit, it is best to form the LLC as an S-Corp. S-Corps have different regulations and tax deadlines. As the owner of an S-Corp, you pay yourself a salary and payroll taxes.

Neglecting to remain compliant

Once you set up your LLC, you must ensure it is, and remains, compliant. Business compliance is crucial because you need to ensure that your corporate veil is protected to prevent placing your personal assets at risk.

Other actions that help your business remain compliant include placing the business name on all your documents, submitting an annual report, and amending the LLC articles if there are any changes.

As an LLC owner, you must ensure your business funds are maintained separately from your personal funds to prevent piercing your corporate veil. Keeping funds separate requires maintaining separate bank accounts and accounting logs.

If you set up an LLC with a partner, you must protect your business and business relationship. Two essential documents for an LLC partnership are the operating agreement and the buy-sell agreement.

The operating agreement sets the terms for how the business will be managed, the percentage of ownership for each member, sharing of profits and losses, and each member’s responsibilities.

According to Cowan, the buy-sell agreement addresses issues like retirement, incapacity to work, or death of one of the members, ensuring the business remains compliant under any unexpected circumstances.

Each state has different requirements for LLCs, and they are available from the Secretary of State, your business, or legal adviser.

 Filing an LLC in the wrong state

“It makes sense for most business owners to incorporate their LLC in the state they live in,” says Cowan. But, you can also choose to file your LLC in another state with more tax or legal benefits. Delaware, Wyoming, and Nevada are currently some of the most popular business formations.

However, filing for a business in another state can prove too costly and demanding for a smaller business. It means you must do the paperwork and pay the fees twice, in both the state you live in and the state your company incorporates.

These extra fees and troubles are usually not worthwhile for smaller companies. Get advice from your legal counsel or tax specialist on leveraging the business taxes in your state.

 Getting reliable business resources

Business resources and legal advice are essential to startup owners, especially when deciding on the best business structure. Top-ranked New York attorney Laura Cowan has several years of CPA and business law experience.

In addition to being a sought-after business attorney, clients often approach Cowan for business consulting. Soon, the launch of her new website will offer an invaluable business startup course and plenty of business resources including legal templates and free resources. Being competitive requires a strategy, and Laura Cowan understands business strategy better than most.