Common Issues When Setting Up an LLC

Several issues can arise when setting up an LLC. From the name of the LLC to the formation documents, it is imperative to set up everything in compliance with state law and with a mind of anticipating future issues. Below are common issues that some people face when setting up an LLC.

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1.       Choosing the Name of the LLC

The name of the LLC must comply with your state’s regulations. In order to be approved, it must comply with several guidelines. First, the name must be unique to your business. Second, it must have a designator in its name reflecting its status as an LLC. Third, it cannot contain any restricted words (like “bank” or “Commission”). Lastly, it cannot be offensive or illegal.[1] Also, the name of your business cannot already be taken by another business in your state.[2] Choosing the right name is important when forming the LLC.

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2.       Using Online Templates for the Formation Documents

Many websites offer free legal forms to help in forming an LLC. However, many of these are generic, too specific, or are filled with errors (outdated, improperly drafted, etc.). If you use a template operating agreement, you may still need to hire an attorney to fix it. If you do not, the generic template could expose you and your business to unwanted liability.[3] Having the right documents used in formation protects your business and its status as an LLC.

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3.       Not Seeking Professional Guidance

Just like using online templates can be problematic when forming an LLC, it is also more common to make mistakes by not seeking legal help. Attorneys can give advice on how to form the LLC, how to file the required paperwork, how to structure the operating agreement, and how to structure the LLC from a federal tax perspective. While it is possible to form an LLC on your own, it is highly recommended to seek advice and assistance from an attorney with the formation process.

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4.       Not Obtaining Liability Insurance

An LLC generally protects the personal assets of its owner(s) from creditors and lawsuits. However, when forming an LLC, it is important to obtain business insurance for your LLC. Otherwise, if you do not have insurance, your business assets can be completely exposed.[4] Having business insurance for your LLC ensures that you have coverage in case of lawsuits, theft of assets, storm damage, etc.

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5.       Not Remaining Compliant

LLCs are also required to file annual reports, pay franchise taxes, and maintain records. For example, one common issue is that Texas LLCs fail to file their annual Public Information Report (Form 05-102). It is important for business owners to stay compliant and maintain good standing by doing these required steps.[5] Staying compliant ensures that the entity remains an active LLC and keeps its liability protection. Failure to follow these steps can result in noncompliance, and the LLC can lose its status, thereby exposing its owners to personal liability.

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Conclusion

To avoid potential issues with your LLC, it is imperative that you utilize the proper forms, follow the correct procedures, and seek professional guidance. Seeking legal help is beneficial and a preventative measure in forming an LLC. Contact Montgomery Legal today to discuss your specific business’ needs. Schedule a Consultation or call (214)432-6100.

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[1] Belle Wong & Lauren Holznienkemper, LLC Name Requirements, Ideas, & Examples, Forbes Advisor (February 2024), available at https://www.forbes.com/advisor/business/llc-names/#:~:text=Uniqueness,name%20you%20want%20to%20use.

[2] Team ZenBusiness, Does LLC Name Have to Match Business Name or Website, ZenBusiness (January 2024), available at https://www.zenbusiness.com/blog/llc-name-and-business-name/.

[3] Forbes Legal Council, Three Things to Consider Before Using Online Legal Templates, Forbes (June 2016), available at https://www.forbes.com/sites/forbeslegalcouncil/2016/06/16/three-things-to-consider-before-using-online-legal-templates/.

[4] Cassidy Horton, LLC Insurance in 2024: Best Choices For Your Business, Forbes Advisor (January 2024), available at https://www.forbes.com/advisor/business-insurance/best-llc-insurance/.

[5] Jennifer Woodside, I Have an LLC, Now What? 7 Things You Should Do After You Form an LLC, Wolters Kluwer (April 2024), available at https://www.wolterskluwer.com/en/expert-insights/i-have-an-llc-now-what.

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