Many entrepreneurs find it difficult to choose a business structure for their companies. Some form a sole proprietorship, while others choose more complex structures such as a corporation.
Another popular choice among new business owners, when it comes to picking up an entity type, is a Limited Liability Company (LLC).
LLCs offer the flexibility startups need. They are not only easy and inexpensive to form, but they also provide limited liability protection to the business owners.
However, even LLC owners may face some issues while registering it with their state.
In this post, we’ve listed some common issues that you may face while starting an LLC and we’ll discuss ways to resolve them.
But first, let’s learn a bit more about LLCs…
Table of Contents
What is a Limited Liability Company? Why Should You Form One?
A Limited Liability Company or an LLC is one of the most common entity types that startup and small business owners choose due to their flexible structure.
LLCs offer a number of advantages to business owners, including:
- Fewer legal formalities
- Minimal ownership restrictions
- Personal asset protection
- Tax flexibility
- Flexible operational and management structures
The Key Issues Business Owners Face While Creating an LLC
Here are some of the key issues business owners face while creating a limited liability company and how to resolve them:
1. Picking the State in Which to Create Your LLC
LLCs are formed in accordance with the rules and regulations of a particular state. Also, the formation and administrative fees for an LLC depends on the state you choose.
You should carefully check with the state government to find out the fees, rules and regulations, annual reporting, and ongoing legal requirements for an LLC.
To save time, money, and complexities, it is best to form an LLC in the state where you’ll operate your business. Even if you set up your LLC in another state, you may still be liable for taxes in the state in which you operate your business.
If your LLC will conduct business in multiple states, you should check each state’s requirements to see if any additional licenses or filing are required.
2. Legal State and Federal Filing Issues
Forming a legal business entity such as an LLC is a tedious process. It involves state and federal filings and a lot of documentation.
While a lot of business guides and articles outline the process you need to follow, it can still be a challenge for budding entrepreneurs to get everything right.
You may have problems understanding, creating, and submitting the legal documents needed to set up an LLC. These include:
- Finding a Registered Agent for your LLC to communicate with the state.
- Filing the Articles of Organization with the Secretary of the State’s office.
- Creating an LLC Operating Agreement.
- Filing for an EIN/Tax ID with the IRS for taxation purposes.
- Creating non-disclosure and contract agreements.
- Annual report filing that LLCs in most states need to file on time. Delays in filing these can lead to penalties, late fees, or even suspension of your LLC.
Many entrepreneurs consider hiring a lawyer or an accountant to complete the legal state and federal filing paperwork for them. However, hiring one may be very costly.
To save on legal startup fees, you should consider buying an LLC formation package from companies such as GovDocFiling. This company offers a quick, easy, and cost-effective package to form an LLC in the state in which you want to conduct your business.
You can seek help from their experienced business formation experts to create your limited liability company.
3. Naming Your LLC
Many new business owners don’t understand the nuances that go into naming an LLC.
You need to take care of a number of points to ensure that your business is named correctly, including:
- Your company can’t have the same name as another LLC in the state. You need to check with the Secretary of the State to make sure the LLC name is available.
- The name of your LLC can’t contain terms that may be prohibited by state law. Some of these terms include “bank” and “insurance company.”
Similarly, the name of your LLC can’t contain words such as “corporation,” “Inc.,” “Corp.,” or “incorporated.” This naming law is to ensure that no one mistakes your LLC for a corporation.
You can easily avoid this naming issue by keeping these prohibited words in mind while choosing a name for your LLC.
- LLCs in every state may face legal hassles and penalties for trademark infringement lawsuits.
The best way to avoid these issues is to check your prospective LLC name against the official trademark database, which is maintained by the USPTO (the United States Patent & Trademark Office).
- Another common issue that business owners face is choosing a name that limits the growth and scalability of your company in the long run.
If you name your LLC, “Kate Lipsticks LLC,” you’ll limit the scalability of your business. However, naming your LLC, “Kate Cosmetics LLC,” increases the chances of growth in the long run.
You should aim to cover a wider target market while naming your limited liability company.
Keeping these points in mind can help you choose a business name that is unique, scalable, and brandable. Make sure that you take the right foundation steps to build and grow your business into a profitable venture.
4. Raising Money From Investors
As a startup owner, you may need to raise funds to build and grow your business.
One major con of starting an LLC is that the company may not be as attractive to investors as corporations are.
Many investors prefer to put their money into a corporation against a few stocks in return. However, LLCs don’t allow you to offer stock in your company, which makes it challenging for LLC owners to find and attract investors.
How can you attract investors?
LLCs allow you to issue ownership or units to investors, but you may need to include such information on the paperwork when you’re registering the company.
You can also draft an Investor Right Agreement to define the rights that an investor will have on the profits and distributions. Doing so might assure investors and convince them to put their hard-earned money into your company. However, we recommend that you seek legal advice before doing this.
Are You Ready to Start an LLC?
Though forming an LLC as a new business owner may seem tedious and challenging, you can always seek help from the experts in this field.
Other than that, we hope the advice mentioned in this article is helpful. This article was written to help you learn how to resolve, and hopefully, avoid the common issues that you may face while setting up an LLC.
Are you experiencing any other challenges while creating an LLC? Feel free to discuss them in the comments below. We’ll be happy to help you resolve them.
Featured image source: Freepik (Affiliate Link)