When setting up an LLC for a business, it is vital that the process strictly comply with state limited liability company rules and processes. This is because the personal liability protection afforded by an LLC only exists if the legal entity itself properly exists.
When starting a business, the first step is always to form a separate asset protection vehicle as your business entity. You should never start conducting any business activity until this step is completed or you will risk personal liability that could come to haunt you in later years. There are 4 major pitfalls that new business owners fall into when setting up an LLC.
1. Choosing an Unacceptable Name.
The name for your company must be distinguishable from all other businesses on record with your state agency. This usually means it not only cannot be the same as another name but must not be too similar as others as well. Each state has its own set of rules and guidance on determining whether something is too close to another to not be acceptable. For example, Texas is notorious for rejecting many choices while Colorado will accept most anything proposed.
You should always check your name for availability prior to submitting your official formation filing because a name rejection can cause a lot of delays and headaches in the process. A reputable formation company will handle this for you to ensure a smooth and quick process.
2. Failing to Appoint a Qualified Registered Agent.
Every state requires that an LLC appoint an agent and an office within the state as the official administrative representative for that company. This is a person who can formally accept legal papers sent to the business during business hours as the stated registered office address.
Again, each state imposes its own set of rules for who can serve in this role and what addresses are permitted. In most states, the address cannot be a post office box and must be a physical permanent one. Also, the agent must be a resident of the state or another legal entity duly registered in the state. Few states require that the person also be a member or manager or a lawyer licensed in the state.
Some business owners choose to serve this role for their legal entity if they otherwise meet all the requirements. Others prefer to keep their names of the registered agent records and buy annual registered agent services. Not having a properly designated registered representative will cause an LLC to not be in good standing and this significantly raises the risk you will lose the protection and benefits you think you have.
3. Omitting Legally Required Information in Filing.
Every state has its own list of legally mandated information that must be included in the formation documents for a limited liability company. This list can change each year depending on amendments made to the regulations. An incomplete set of filing documents will cause your LLC creation to be significantly delayed. In some cases, you may be in limbo as your file sits in a huge pile of defective filings. In some states, they will not return your filing fee so you are stuck waiting for them to contact you and determine how to get it back on track.
You can do this yourself but you should spend the time necessary to review the laws related to this process in your state, get copies of all forms and instructions provided by the agency, and call up a representative to ensure you are complying with every requirement.
Many go through this time consuming process and still find themselves in a bind because of one small oversight. This is huge frustration of a new entrepreneur who needs to start conducting business. The best way to minimize this risk is to use the services of an established and proven formation services provider who guarantees turnaround times and compliance with your state’s requirements.
4. Error in Filing Fee Payments.
Believe it or not, one of the top reasons for a delayed and rejected filing is that the fee amount is wrong or the check is written to the wrong payee. While this is purely administrative, agencies will cause havoc on you if the payment is messed up.
The amount and the payee is so important it usually is made a part of the official regulations. Remember, state agencies are not private businesses. They do not really care if so called customers are inconvenienced or delayed. They want you to strictly follow the rules and processes. If you do so, your LLC will be formed expeditiously and without hassles. If you miss even one small thing, you may be stuck in limbo for weeks or months.