Step one: make business.
Step two: run business.
Step three: profit….right?
That’s not wrong, per se, but if you’ve run your own biz for more than two minutes, you know that there’s a whole other side to things. Turns out, step two requires some legal logistics, like possibly forming an LLC. Of course, anything legal-ese can make people clench up real tight, so let’s talk about how to avoid the most common LLC mistakes.
Avoid these 6 mistakes when starting your LLC
While we don’t recommend that you form an LLC if you’re just starting out, we do believe that — when the time is right — you want to pay special attention to the LLC process. Our first tip is to look at your state’s Secretary of State website. They will often have details that you need to know about how to form an LLC properly. From there, we want to share a couple of mistakes to avoid:
Mistake #1: Not keeping personal and business funds separate.
You know that saying, “Don’t make a mess where you eat’? (We know the real saying is a little more descriptive...let’s keep it classy, for now.) Well, when it comes to your money management in your LLC, this becomes all the more crucial.
One of the perks of starting an LLC is getting to manage your business assets as a separate entity from your personal ones. If disaster strikes and your business assets are seized, that means your personal belongings are safe from harm, but only if you actually, you know, separate them.
This is why one of the first things you should do as an LLC owner is to set up a separate bank account for your business needs, if you haven’t already. Even the most well-intentioned business owner can land themselves in hot water if they don’t sort this out beforehand.
Money mismanagement doesn’t just happen to the villains among us. It happens to the unorganized, the overworked, and — above all — the unprepared. You have enough to keep track of in your biz; make money the least of your concerns.
This is easier than you think! Just integrate these tips into your day-to-day operations:
- Create separate accounts for your business funds and personal funds. Having them in physically different accounts makes it way easier to manage and monitor.
- Document, document, document. Give every dollar a paper trail. You want to be able to prove where every penny came from, especially when it comes to tax time.
- Speaking of tax time, keep the receipts (literal and metaphorical). You may even consider investing in a good accounting software that helps you organize your expenses and payroll as you go. The more you can automate, the less you need to stress.
Mistake #2: Not having a contract
You knew we were gonna say this, right? Not having a contract when you operate an LLC means that you’re actually not protecting your new business entity. There are plenty of reasons why you need a contract, but the biggest thing is to protect your LLC (and yourself, and your clients). It’s just good business.
Mistake #3: Not following your operating agreement
Did you create an LLC partnership? Awesome… but. We say this because we love you: even if you have been best friends with your business partner since kindergarten, you still absolutely 100% need an operating agreement in place for your LLC. This is one of the most critical steps in forming an LLC, and it’s a nonstarter.
Remember, if it’s not in writing, it doesn’t exist. And if it is in writing, it’s non-negotiable. Your agreements need to be clear and reasonable so that everyone involved can follow them without any heartache or resentment. Agreements like these determine how the financial responsibilities are managed, how your LLC is structured and, ultimately, when things get tough, who makes those hard-to-swallow changes.
There’s some value in being flexible, of course, but if you don’t follow your agreements, things spiral out of control faster than you can blink. Even if your partners don’t mind at first, it becomes harder to enforce terms of the agreement later when someone does mind. The same goes for LLCs that don’t have partners: you want to have a clear plan for what happens inside your business so you don’t waffle when the time comes. (Mmm, waffles.)
Mistake #4: Undercapitalization on the LLC
Starting a business can be unexpectedly expensive. It can be tempting to jump right in once you have secured just enough funds to get started, but not raising enough capital for your LLC can actually hamper you in the long run.
Remember: one of the perks of an LLC is the separation between personal and business assets. That unfortunately means that your business assets may be a little sparse at first. “Undercapitalization” is just a fancy way to say your business doesn’t have enough money.
If you want to keep your LLC in good standing, you need to be able to pay your contractors or employees, which is why you need to make sure that you have enough capital (aka cold hard cash) in the bank when you start it up. While we won’t go into funding or anything like that here, that’s an option once you form an LLC.
Mistake #5: Not properly representing the LLC
This one can be tough if your business was initially “just” you. It’s still you, but you are also the “LLC-you.” Confused yet? In the eyes of the law, you are two different people now — and it really matters which one signs on the dotted line.
When drafting up service contracts and agreements, if you are agreeing to terms on behalf of your LLC, make sure to document it as such. The responsibility — and liability — need to be legally laid on the right shoulders. That way, if things go wrong, your personal assets aren’t targeted.
Mistake #6: Failure to get insurance coverage
No one needs insurance...until they really, really do. We know, insurance isn’t the most exhilarating topic. But you really should choose your business insurance with care. It protects you against things like
- Financial loss
- General liability
- Bodily injury and property damage claims
Along with general insurance, errors and omissions (E&O) insurance is another great resource. If a mistake happens during your services, such as a breach of contract, misrepresented deliverables, etc., this insurance protects you if your client submits a legal claim.
You may never need to even use your insurance, and we hope you never do. But even the best companies occasionally need a little support, and if something goes wrong, you will want to be prepared.
Don’t let fear of making mistakes stop you from forming your LLC
The big takeaway here is this: LLCs are great... when they’re done right. Give your business the best chance possible and protect yourself against these all-too-easy-to-make mistakes that can keep your LLC from really thriving. Don’t let the fear stop you, either!
If you haven’t caught our video on critical next steps after forming an LLC, this is your sign to check it out! You never know, it could literally save your business from a huge headache, so be sure to click the video on your screen now. Drop any questions (or horror stories) about LLC mistakes in the comments below, and let’s arm you with the knowledge you need to succeed!