In setting up an LLC, we have the experience of seeing the mistakes made by others. It’s a real advantage to observe the failures of others and learn how to avoid making the same mistakes. Here are a few of the ones we see repeated by newcomers to starting a business.
1. Thinking Your Business Is Too Small For An LLC
We will use “Joe” as a hypothetical to make our point. Joe is starting his own business and going about the start-up by keeping his overhead to nearly nothing. The low cost of his operating expenses nearly guarantees Joe’s new business isn’t going to run out of funds. After all, Joe works out of his garage (you know, that Bill Gates fellow from Microsoft started up at home).
Joe only buys inventory when it’s necessary so he’s not going to get caught with a ton of products that he can’t sell. Joe is keeping his day job. The side hustle isn’t necessary for Joe’s family mortgage, utilities, insurance, and living expenses. In many ways, Joe thinks there’s no way he can lose! Joe knows new businesses are often under-capitalized — a big word for plain, old “not having enough money”!
However, Joe sees his business as too small for an LLC. He has big plans for his new company and intends to set up an LLC when his business is big enough.
Unfortunately, Joe’s mistake is all too common and one many new entrepreneurs make. Joe’s belief that he’s too small to have an LLC is wrong!
The reality is that Joe’s little business may not suck down cash every month with fixed costs like building rent, electricity, water, gas, and those recurring expenses that drain away the profits, but Joe has his and his family’s assets at risk for liability.
Joe thinks that it’s highly unlikely that he will make any kind of mistake in his work; he’s super careful. He also assumes if there is an error that he’ll see it right away! Joe’s honest; he’ll fix anything that goes wrong on the spot!
Joe’s simple approach lets him sleep well. It’s honest, straightforward, and Joe is treating others like he wants to be treated.
Over time, Joe’s business prospers. His business model, integrity, and insistence on giving a great service for a fair price bring in customers by the dozen. Joe hardly even has to do any marketing; word of mouth referrals keep the business expanding.
A few years later, Joe’s business is no longer small. Now it’s big enough for an LLC so Joe hires an Oklahoma LLC attorney because he wants the LLC set up the right way and 100% legal. Since Joe is making a great income, he’s not bothered by the high cost of paying one of the more expensive LLC lawyers in a big law firm. Joe wants his personal assets and increasing wealth to be safe.
The LLC attorney forms the LLC and “dots the i’s and crosses the t’s” — it’s a solid LLC and Joe pays the lawyer to help maintain the LLC.
One day, a lawsuit arrives naming Joe. The lawsuit isn’t against Joe’s LLC; it’s against him. It’s a bit concerning to be sued, but Joe takes a deep breath and is sure glad the LLC was filed. There’s some peace of mind that Joe’s growing bank account at home is safely away from greedy people and their lawyers.
Sadly, the litigation involves an error that Joe made when he believed his business was too small to set up as an LLC. It sure surprised Joe that he made the mistake! However, he was really busy with his old day job. But, his little side hustle operation was growing in leaps and bounds. Since the mistake resulted in some pretty serious and unexpected damages, the lawsuit is going to cost a bundle to settle.
Joe’s attorney has to break the news; Joe’s LLC that he set up won’t be any help. The LLC had not been started at the time when the mistake occurred so Joe’s legally responsible.
All of those profits from Joe’s business in his personal name are not safe like Joe had thought. If Joe could do one thing over, he would get his LLC set up by a competent attorney before he ever reached out for the first customer!
2. Choosing The Wrong State In Which To File Your LLC
Joe didn’t make this mistake. When he decided it was time to form his LLC, he didn’t listen to his buddy who “knew a lot about LLCs and litigation”. Although Joe’s friend had graduated from paralegal training and almost worked for a law firm, Joe decided the advice to form an LLC in Delaware, Nevada, or Wyoming would be a question for a licensed attorney.
Joe appreciated his friend trying to help with the free advice. However, Joe had learned from his accountant that good advice rarely comes cheap.
Joe consulted his LLC attorney about the best place to file for the LLC. The attorney explained how these other states received considerable publicity about the benefits of setting up an LLC in their jurisdiction. Some of the claims were accurate; there were benefits of, say, Delaware over California. Delaware was known as being a more business-friendly place than California.
However, the LLC lawyer said that Oklahoma was also business-friendly and Oklahoma’s LLC laws provided great protection. The lawyer explained a downside to being out-of-state that Joe had never considered. “If you get sued in Delaware or some faraway location, you’re going to really increase the expense!” advised Joe’s LLC lawyer.
Lawyers in Oklahoma cost far less than the East coast for example, and Oklahoma lawyers have some investment in creating a long-term relationship with you. A law firm out of Oklahoma knows you’re more or less a one-time client. Not to mention, depositions, hearings, and the litigation mean you’ll be catching quite a few flights. The travel expense of airlines, motels, rental cars, and time away will indirectly add up.
The lawyer said, “No one wants to be sued! But, if I’m gonna get sued, I’d rather play here in my own backyard where I know the players and how the game is played!”
Joe thought this was good advice and avoided setting up his LLC someplace where he had no ties, no connections, and no reason to be there! He started his LLC at home in Oklahoma!
3. Assuming Your LLC Is A Business License
Your LLC is not a license to operate a business. Understandably, this can be a little confusing to people first starting into a new venture.
After the State sends the certificate showing authorization as an LLC, the certificate gives the appearance that the government officials have licensed your LLC to proceed.
A growing number of industries and professionals require a license to engage in the activity. An easy illustration is Joe’s LLC lawyer. Although Joe’s law firm operated in an LLC entity form, no one can legally practice law without a valid license. If Joe had decided that he was going to operate a law firm, the issuance of his LLC certificate did not give him the license to practice law.
As a short, and less-than-fully-exhaustive list, here are some businesses that require a license separate from the LLC that was set up: engineering, medicine, pharmacies, nursing, physical therapists, surveyors, realtors, stockbrokers, hairdressers, electricians, plumbers, heat and air conditioning service providers, insurance sales, and insurance adjusters to only name a few. Opening up shop without the proper license will get you in serious hot water and the LLC won’t keep you out of trouble.
Joe’s company only did business in Oklahoma. He didn’t have to worry about registration of his LLC to do business in another state. If Joe’s company decided Florida or Texas offered the possibility for expansion, then Joe would have needed to obtain authority to do business there.
Oklahoma’s issuance of the LLC certificate doesn’t mean you can go anywhere with your company’s services or products. The penalties for not registering the LLC you set up to do business in another jurisdiction can be severe.
The construction industry is sometimes prone to skip over the proper authorization to engage in construction projects. A general contractor on a job in Michigan suddenly needs drywall installed or tile laid. The general contractor calls some subcontractors in Oklahoma who drive up the next day and proceed to work. The failure to get permission, including registration to pay taxes, can be a really big oversight with costly consequences.
4. Not Keeping Your LLC Up-To-Date
One of the hardest concepts to communicate to people about LLCs is that the LLC must be kept current, maintained, and up-to-date. There’s a misconception that once an LLC is set up, it’s like shares of stock purchased in a 401k or brokerage account. When the LLC certificate arrives, you should avoid thinking that you paid the State so the LLC is yours! Nothing could be more inaccurate!
The LLC is a business structure, not a certificate. If the LLC entity is not kept current and up-to-date, then it won’t protect the LLC members from liability. Some mistakenly conclude that all it takes to maintain an LLC is the annual payment to the State of Oklahoma. It’s true that the yearly fees have to be paid to avoid the LLC being suspended. However, there’s far more to an LLC’s care and maintenance than sending a check once a year.
If you believe that the status of your LLC is measured by looking at the Secretary of State’s website to see if the LLC shows as “active” or “suspended”, then you need to do more research. A quick glance at the State’s website to see if your LLC shows “suspended” can create the false impression that all is okay. Don’t make this mistake!
The dashboard of your car or truck has several gauges to inform you of the working condition of the vehicle. If you check the fuel gauge and the indicator shows full, you understand that a full gas tank doesn’t mean you have good oil pressure or air in the tires.
For your automobile to serve its intended use of transporting you (and your stuff), a number of components have to be serviced and maintained. A few include antifreeze, air pressure, oil, grease, tire tread, etc. No one aspect, no matter how new or good the condition, means the vehicle is going to function. A full tank, fresh oil change, and brand new tires aren’t much help when the car battery has died. You are sitting still not going anywhere.
Business owners who typically comprehend LLC maintenance better than others are those who have seen their LLC challenged in court. As the legal proceedings play out, the seriousness of the lossing their LLC’s protective shield sets into their minds firmly and clearly. They see how not taking care of their LLC puts at risk all of the personal assets the LLC was set up to safeguard.
The legal attack on the LLC brings home the fact that their LLC’s veil of protection can be pierced. This realization keeps the experienced LLC members and managers diligent in keeping all aspects of their LLCs inspected and periodically checked.
After all, the more times you find yourself waiting on the turnpike having run out of gas, the more significant it becomes to check the fuel indicator. For most of us, it only takes running out of gas once or twice to learn to keep an eye on the fuel gauge.
The owner (or, technically, member) of an LLC who has experienced the piercing of his LLC shield and seen his personal assets confiscated doesn’t forget the significance of keeping each and every part of his LLC in tip top shape!
5. Believing Your LLC Offers Unlimited Protection
The good thing about Joe’s LLC lawyer was the education that he provided when he set up Joe’s LLC. Joe’s attorney explained the term “LLC” stands for “limited liability company”. The “limited” portion means within certain limits there’s no liability. The phrase “LLC” doesn’t mean complete and absolute immunity to do anything you want. Here’s the rest of the story.
Joe decided that he wanted and could use a bulldozer — one of the big ones! He shopped the various models but ultimately made his purchase from the dozer place that also offered a training package. Although there were less expensive bulldozers on the market, Joe had never owned or operated a bulldozer. He wanted to know its limitations, safety issues, and how to effectively use it.
Recognizing that because you know how to drive a car (and have a license) doesn’t qualify you to operate heavy equipment is no surprise. Joe realized as he climbed up inside the cab of the dozer that it was considerably different than a car. Noticeably, there was no steering wheel. The few minutes of initial explanation by the bulldozer salesman about how the controls worked saved Joe hours figuring out things. In fact, the training Joe was given about checking the hydraulic fluid prevented him from running the dozer without sufficient fluid inside.
Unlike a big yellow bulldozer, an LLC doesn’t present the obvious dangers of not knowing how to operate one. It’s understandable why people mistakenly conclude the LLC will let them do anything and without consequences. The LLC looks powerful and capable of anything.
Joe found out that although the new bulldozer could push around huge trees, rocks, and dirt, the dozer had limits. Occasionally, Joe would run across a giant ledge of rocks under the ground that his mighty dozer couldn’t even budge. The bulldozer, like Joe’s LLC that he set up, had limitations. Both the LLC and the dozer required periodic check-ups and maintenance in order to perform in a satisfactory way.
An LLC gives you certain limited protection, but not full and unlimited security. If you don’t understand the limits of the LLC you set up, then you consider some training like Joe did!
We offer LLC set up, training, maintenance services, periodic LLC check-ups, and much more. We’re happy for you to arrange a convenient appointment online with a prearranged, flat fee price. It’s easy and there are no surprises on the cost! Give it a try!