New business owners face a number of important decisions, but few are more consequential than their decision regarding the legal structure of their company. One of the most popular options is the limited liability company, or LLC. There are a number of reasons why LLCs are popular, foremost among them the fact that starting an LLC is famously quick and easy.
How quick and easy? It depends somewhat on your state, but whether you’re forming an LLC in Florida, California, or Tennessee, the entire process should involve just a few short steps. You’ll need to file some paperwork, pay a filing fee, and claim your EIN. In most states, forming an LLC takes mere hours.
For as easy as it is to start an LLC, there are also some potential pitfalls to avoid. In this post, we’ll outline some of the most common LLC filing errors that entrepreneurs make in New York.
Common Pitfalls When Filing an LLC
1) Not double-checking your business name.
When you launch an LLC, you’ll need to provide the state with your business name. In New York, the law requires that you choose a name that has not already been claimed by another LLC operating in the state.
As such, it’s always wise to check the state’s small business registry before landing on a name for your company. Failure to do your due diligence may result in some headaches later, including the need to change your business name.
2) Choosing the wrong state.
Just because you live in New York, that doesn’t mean you have to file your LLC in the state. Technically, you can file anywhere, and many entrepreneurs “shop around” to find the state they think will be most advantageous from a tax perspective.
With all of that said, note that filing an LLC in another state may also yield some inconvenience. For example, you’ll need to hire a registered agent (someone appointed to receive legal and tax documents on your behalf) in the state where you live and in the state where you file your LLC. This can be costly in and of itself, potentially erasing any of your purported tax benefits.
3) Failing to maintain full LLC compliance.
One reason why entrepreneurs gravitate toward the LLC structure is that it involves much less regulatory rigor than incorporation. With that said, there are certainly some legal requirements that LLCs must meet, and failure to do so can lead to fees and other penalties.
Here are a few of the most common forms of LLC non-compliance:
- Failure to file an annual LLC report to the Secretary of State.
- Failure to use the official LLC business name on all legal and business documents.
- Neglecting to submit a formal amendment when there are changes to the structure of your LLC.
Make sure you’re fully aware of the regulatory demands of your LLC, particularly as it relates to the laws in New York.
4) Establishing an LLC without getting the right permits.
There is no federal requirement for LLCs to have business licenses. However, local municipalities often do require permits. Additionally, certain industries (especially those related to legal or financial services, or personal health and wellness) also have their own permitting requirements.
Before you file your LLC, take some time to research any additional permits you might need in order to maintain full compliance.
5) Failing to keep business and personal funds separate.
A major benefit to the LLC structure is that it allows you to create a clean legal distinction between your personal assets and your business assets. This is especially pertinent when it comes to lawsuits: If someone files suit against your company, they cannot come for the money in your family’s savings account, for your personal automobile, or for the home you share with your spouse.
However, to take full advantage of the LLC’s personal liability benefits, it’s critical that you maintain separate bank accounts for your personal assets, and for the business itself. In fact, mixing up these accounts (for instance, accidentally paying off a personal debt from your LLC business account) is one of the quickest ways to land yourself in legal peril.
6) Using random online documents.
Establishing your LLC will require you to complete some basic paperwork, providing the State of New York with basic details about your business, your contact information, your management structure, your registered agent, and more.
It’s easy enough to do a quick Google search for the paperwork you need, but doing so can also be hazardous. Don’t settle for generalized online templates, which may fail to meet state-specific requirements. Instead, ensure you get the right documents from the New York State Department.
7) Choosing the wrong legal structure.
Finally, you may make the error of choosing the wrong legal structure overall.
To be sure, LLCs offer many advantages, including tax flexibility, management flexibility, and liability protections. For a lot of business owners, the LLC route is the way to go.
With that said, there are situations where the ease and convenience of a Sole Proprietorship might make more sense. And if you want to attract investors or venture capitalists, starting a Corporation might be the best bet.
Don’t make the common mistake of choosing an LLC without also researching the other options.
Be Wise in Forming Your New York LLC
As you prepare to file your LLC in the Empire State, be sure you do your due diligence. Be aware of common pitfalls, and avoid the mundane errors that lead to long-term hassle.