Whether you are a blogger, podcaster, YouTuber, day-trader, or have an affiliate marketing business, if you are running any type of online business then chances are you have considered starting an LLC, otherwise known as a Limited Liability Company. And in today's post, we are going to talk about 5 of the most common LLC mistakes we see online entrepreneurs make when they are just getting started.
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An LLC is one of the most popular types of business entities to form, in large part because they are much more flexible than traditional corporations while still providing limited personal liability protection…
…if they are set up and run correctly.
But that is where most online entrepreneurs make big mistakes with the set up and running of their online business.
Since LLC’s are so popular right now, I wanted to highlight 5 of the top mistakes I see online businesses make when they go about the process of getting their businesses set up.
- File in the wrong state
- Don’t use a registered agent
- File and forget
- Don’t use a proper business address
- Don’t maintain proper business records
RELATED: Get this Legal Checklist to make sure you set up your business the right way!
Let’s take these one at at time:
#1 Filing Your LLC in the Wrong State
Many online entrepreneurs have been duped into believing that they need to form their LLC in Wyoming or Nevada or Delaware or somewhere else OTHER than the state that they live in (and presumably where they operate their online business).
Typically people do this for one of a variety of reasons, including: 1) The cost to form an LLC is cheaper in another state; 2) They can set up a “private” LLC; 3) By filing in a state that doesn’t have an income tax they won’t have to pay taxes; or, 4) the state they will form in has more “business friendly” laws.
I’ll be honest with you. None of these reasons are legit.
But… It’s cheaper to form in another state, isn't it?
Yes, it may be cheaper to form an LLC in another state,
but you will also need to file a “foreign LLC” in your own state (since that is where you are conducting your business), you may need to set up a virtual address in the state in which you form the LLC, and you will need a registered agent in the state where you formed the LLC.
All of this adds up to a lot of cash that you wouldn’t need to spend if you just formed your LLC in your home state to begin with.
Well, other states will allow me to maintain “privacy”
Yes, this is also true. However, what is the actual cost of maintaining that privacy?
For most people, it just isn’t worth it to file somewhere else just so that their home state won’t know they started a business.
I don't have to pay taxes if I file in a state with no income tax… right?
If you live in a state that doesn’t have a state income tax, then congratulations – you don’t have to pay state income tax. But if you live in any other state, then the fact that you filed your LLC in Wyoming or Florida won’t change the fact that you still live in a state that has an income tax.
Whether or not you pay income tax is determined by where you LIVE, not by where you form your LLC.
Another state is more “business friendly” than my state…
Yes, that may be true. But this only comes into play if you get sued (maybe). And don’t forget that you still have to file a “foreign LLC” in your home state where you actually live and operate the business. Which means you would likely have to deal with the laws in your state anyway.
#2 Don’t use a registered agent
To set up an LLC (affiliate), you must complete a document called the “Articles of Organization”. Many entrepreneurs don’t really know what they are doing as they complete this document, and they gloss over the important section that asks them for the name and address of their “registered agent”.
A registered agent is the business or individual that is charged with receiving important legal documents on behalf of your LLC. To serve as a registered agent (affiliate), you must have a business that is open during normal business hours and is ready and available to sign for important legal documents, such as subpoenas, annual notices and reports, tax documents from the state, and even lawsuits.
If you list yourself as your own registered agent, and you fail to respond to an important legal or tax document, there can be dire consequences for both you personally and for your business. It typically costs between $100-200 per year to hire a business to serve as your registered agent and this is money well spent.
RELATED: Get this Legal Checklist to make sure you set up your business the right way!
#3 File and forget
Many online entrepreneurs file their LLC, get their documents back from the state, and then file everything away without giving their LLC much thought. For the LLC to provide you with legal protection, you must treat it with the attention and care it deserves.
This means that as soon as you receive the new filing back from the state, you must set up a new EIN number, open up a bank account in the name of the business, and transfer your funds and assets into the name of the LLC.
Forming your LLC (affiliate) and then placing all of your legal documents into a file drawer somewhere just won’t cut it.
We have an annual business maintenance package that can help you stay on top of your LLC requirements. Click here to learn more.
#4 Don’t use a proper business address
I’m amazed at how many online entrepreneur clients I work with that think it is ok to use their home address (or apartment they are sharing with a roommate) as the address of their LLC. If you are worried at all about privacy, this is an absolute no no.
The day after your LLC is formed you will immediately be bombarded with a ton of junk mail from numerous businesses trying to sell you everything from internet service to office supplies.
You will be amazed at the stack of mail you will get in the first several weeks that your business is open. Trust me on this.
But here’s the thing… the mailings don’t stop.
You will still continue to receive junkmail for as long as you are in business.
So if you don’t want to piss off your roommate, parent, spouse or anyone else you share a home with, then do yourself a favor and set up a virtual business address (affiliate) or post office box.
#5 Don’t maintain proper business records
The last major mistake I see business owners make is that they don’t maintain proper business records.
If you make major decisions related to your LLC, you need to document those decisions. Many business owners fail to do this.
You must have an operating agreement in place – even if you are the only owner of the business. Again, many online entrepreneurs fail to put this simple document, which governs how their business is run, into place.
You need to keep up with your annual reports and make sure your business address is updated with your local Secretary of State’s office. Again and again I see online entrepreneurs fail to maintain adequate records with their local governments.
So what should you do now?
But there is good news too. It’s not too late to get your legal house in order and set your LLC up properly.
I've created an LLC starter course that will teach you everything you need to know to set up your LLC correctly.
