Mistake # 1 Doing Business Before LLCs Form.
You are personally responsible for any business activities or transactions that take place before your LLC is formed. Someone may sue you years later for something you did today. If your business is successful, these early actions can make you the subject of a personal lawsuit. Do not think that is not done. With over 70,000 lawsuits filed a day, this world is filled with people and their predatory lawyers looking for successful small businesses to attack.
Error # 2, which does not actually issue ownership interests in LLC.
Many business owners create an LLC, but never actually issue ownership interests (known as membership units) to the individuals who will be owners of the LLC (known as members). It may be easy for you to mistakenly believe that because you created the LLC, you are automatically the owner of the LLC. The basic premise of an LLC is that it is its own separate entity. When an LLC is formed by a state agency, it has no owners. Membership units or a percentage of the LLC must be issued to the persons who will be the owners. This issuance transaction must be in writing. The LLC operating agreement is the typical place where the LLC issues shares to the members. Make sure that after your LLC is formed, complete this next step.
Error No. 3 Does not lack the creation of a management structure.
An LLC must have a management structure. A management structure determines who has the authority to make decisions on behalf of the LLC. There are two management structures. A member-controlled LLC is when members automatically have the rights to operate and manage the LLC business. The second is a manager-managed LLC that creates a company-type structure. A board committee is established, and persons appointed to the board have the authority to run the company. The best place to create a management structure is in the LLCs operating agreement. All LLCs must have an operating agreement, as this agreement creates the rules for your LLC.
Mistake No. 4 Failure to comply with investment obligations in writing.
The LLC actions in most states require that all agreements from a member of an LLC to contribute money to the LLC be in writing. An oral agreement cannot be enforced under the law. If you are planning to start a new business with other people, you will probably meet and decide how much of the business each of you will own and what commitments each of you agrees on in relation to that business. Commitments usually include how much money you will each contribute to the company, or what type of services and time commitment each of you will allocate to the company.
These conversations take place, but in many multi-member repze llc they are never placed in writing. Without a writing, any oral promises cannot be enforced. If you issue membership units based on an oral promise and the member does not deliver, you cannot take the units back.
Mistake # 5 Thinking that an LLC is a bad layer of liability protection
Yes, it is established that a member of a properly formed and maintained LLC is not liable for the LLC's debts, obligations and litigation only by being a member of the LLC. But in a realistic business context, people who are members are usually not passive owners of LLCs. They are also active managers and operators of the LLC business.
In today's disputed world, all businesses must be run through a limited liability entity as an LLC. LLC liability protection is an important safeguard. However, the LLC protection layer does not extend to all potential liabilities that may arise in the middle of operating an LLC. Do your homework in performing the administrative tasks of your LLC, and keep the right professionals to advise you when appropriate. There are certain standards and formalities you must meet, otherwise you risk being personally liable (this risk is known as the pervasive risk of veil).
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