How to Start an LLC: Avoid These 6 Common Mistakes

When you're learning how to start an LLC, it's easy to keep your eye on the prize and stay focused on getting your LLC certification. After all, it can be a nice addition to your brand and can help you stand out to potential customers.

But you could be so goal-oriented on the big picture that you forget small details that may have the potential to make an impact on your business.

We'll go over details that business owners sometimes miss and mistakes they make when learning how to start an LLC so that you can set yourself and your business up for success.

The Top 6 Mistakes People Make When Starting an LLC

1. Not declaring a business entity.

When you're a new business owner, it's easy to get your first customer and feel like you're off to the races. Once you get started working, you typically want to continue finding new business, bringing in more revenue, and growing your business.

Some business owners get so invested in the working that they don't stop to take the time to declare their business as any type of entity at all.

A business entity not only determines how your business is taxed, but also how you could be exposed to certain risks. Without registering your business as any type of entity, you may inadvertently expose your company to more liability than expected.

Of course, all businesses typically can expect to face some type of liability in the work they do, and we'll talk more about that a bit later. Registering your business as an entity is key to helping lay the foundation for its protection.

2. Choosing LLC when it isn't right for your business.

While making sure to declare some type of entity for your business, one mistake business owners sometimes make is learning how to start an LLC, when another entity may better suit them.

Some business owners choose to remain a sole proprietor or become a C-Corp. (You may have heard about S-Corps, but we won't discuss those, because you have to first register your company as an LLC before becoming an S-Corp.)

Some of the differences between these entities lies in how your business will file taxes with the IRS, how separate you want to keep your personal assets from your business assets, and whether or not you want to be the only one in charge of your business.

For example, say that a marketing consultant in their first year of business decides to declare their company an LLC. When it comes to tax season, they haven't made a large profit and their accountant lets them know they may have benefited from remaining a sole proprietorship for a bit longer, until they had more revenue.

Whether or not you choose to declare your business a C-Corp, an LLC, or a sole proprietorship is a decision only you can make. We suggest consulting a tax expert or lawyer, since you may find their expertise helpful in guiding you through your decision specific to your business.

3. Declaring the wrong type of LLC.

While choosing to create an LLC for your business may be the smart choice for you, it does require you to make certain specifications when you register.

How you register and classify your LLC will typically determine how you're taxed by the IRS. You may choose to make your LLC "manager-owned," meaning it's managed by the business owner, or "member-owned," meaning it's run by more than one person.

Beyond that, you may choose between registering your LLC "at-will" or "term," which determines what happens to your business's assets if for some reason the business closes.

To decide which options may be the right ones for you, we suggest speaking with an accountant or legal representative.

4. Not having a business license.

When learning how to start an LLC, some business owners make the mistake of taking steps to get their business certified as an LLC and forgetting to check if they need to get a business license.

While both help your business to gain trust with employees, a business license and an LLC are different types of documentation.

Depending on what state your business is in, you may be required to have a business license. Requirements often differ not only by state, but are also based on your specific profession. For example, an accounting consultant and hair stylist will likely have different requirements for a business license.

Beyond state requirements, many local municipalities also have their own requirements for business owners. Even if not required by your particular state, you may be required to get a license or permit in your city or county, so be sure to check.

5. Registering your LLC in the wrong state.

When it comes to business licenses, it's important to check your local versus state requirements, but it's also important to make sure that you're registering your LLC in the correct state.

Some business owners decide to register their LLC in a different state (e.g., Delaware) because of the supposed tax benefits, but you have to first determine if that is the correct approach for your particular business.

While it may seem attractive at the outset, this decision may not be the best for you, depending on the size of your business and location.

Beyond getting a tax break, you'll still need a registered agent in the state where your LLC is registered. For many business owners, it's easiest to name a registered agent who is in their home state and/or local community.

While you should consult a tax expert on your business's tax decisions, if you're getting started with research, you can learn more about some small business tax laws here.

6. Thinking you're invincible.

Getting an LLC for your business is a big, exciting step. But the classification and those three added letters behind your company name don't mean that your company isn't liable to potential risks.

Remember, you could become involved in a civil lawsuit, and even if your LLC were found not at fault, you'd still typically be required to pay legal fees for your defense.

While LLCs may have benefits like helping to separate your business and personal finances, when it comes to risk, they don't shield you. So we've saved the biggest common mistake for last.

The Biggest Mistake? Not Getting LLC Insurance

When you create an LLC for your company, you're usually benefiting from the separation of your personal assets and your business assets. This means that in the event a customer takes legal action against your company, you generally wouldn't lose personal assets, such as your house. Though it always depends on your particular situation.

But before you sigh with relief, remember that you also may have business assets you value. Whether it's a pricey software subscription or large, technical equipment, if your business is sued, the LLC typically won't protect those assets.

You may be thinking something along the lines of, "But I'm just starting out, so I don't need LLC insurance."

It takes only one step for a client to claim you're at fault, and that claim could cost you your company's future. Do you want to take that risk with your business? On average, 43% of businesses surveyed are threatened with or involved in a civil lawsuit each year.

Businesses that weren't found at fault, likely still incurred a large bill from the lawyers who worked to defend their business.

Not every LLC is the same, so there are also different policy types you may consider.

General liability insurance

A general liability insurance policy can be added to your overall LLC insurance coverage. It can protect your business from claims involving:

• Third-party accidents
• Property damage
• Bodily injury
• Claims resulting from product defects
• Personal and advertising injury
• And more!

Sometimes a scenario can help give better context for a list, so here are a few ways that general liability insurance could come in handy for an LLC:

• A carpenter is building a shed for a client behind their house. On the first day of construction, the carpenter leaves some wooden planks under a tarp and brings his equipment home with him. He doesn't realize that he inadvertently dropped a nail in the grass.

Later, the homeowner's child is playing in the yard and accidentally steps on the nail, requiring a visit to the emergency room. The homeowner sues the carpenter for the cost of their child's medical bills.

• A photographer is hosting a pop-up studio at a local cafe. A woman signs up to have headshots taken later that day. A few hours beforehand, though, she is carrying a coffee back to the table she was working at, and slips on a photo that had fallen out of the photographer's portfolio.

Not only did the coffee burn her, but it also ruined the expensive blouse she was wearing. She sues the photographer for the cost of her blouse and the medical bills incurred for the burns caused by the hot coffee.

• A plumber is hired to install a new showerhead in an apartment that the landlord is getting ready for a new tenant. The plumber installs the showerhead and checks their work. Later that week, the landlord called to tell the plumber that the showerhead fell off and hit the new tenant's head.

The tenant needed stitches, and the showerhead needed reinstalling. The landlord sues the plumber for the time it will take to install the new showerhead and for the cost of the tenant's medical bills

In all three of these scenarios, the LLC business owners could likely be protected by general liability insurance. If they had coverage, it could help pay for the cost of the claims, as well as resulting legal fees.

Protecting yourself against scenarios like these doesn't usually come at a high cost. In fact, it costs less money than it likely takes you to fill up your vehicle’s gas tank each month.

Simply Business has general liability policies starting as low as $22.50/month.*

Curious to learn what your monthly LLC insurance premium may look like? You can compare quote options for free, using our comparison tool here.

Professional liability insurance

A professional liability insurance policy can be included in your LLC insurance coverage. It can typically protect your business in the event of:

• Negligence (or alleged negligence)
• Claims involving libel and/or slander
• Copyright infringement
• And more!

Let's look at a few scenarios where professional liability insurance may help an LLC:

• An accounting consultant is filing taxes for a client. They file the return with no issue. Months later, the client sues the accounting consultant, because they're being audited by the IRS and they owe a high fee. They claim it's because the consultant wasn't paying close enough attention, and they want the consultant to pay the IRS fee.

• A photographer is doing well as a new small business and LLC. They're slowly growing their business with more clients, and soon they extend beyond their town to a town nearby. Soon, they're sued by a photographer in the neighboring town for copyright infringement.

The other photographer claims that the business names are too similar and that the other photographer copied their branding. The neighboring town’s photographer wants the new business to change their LLC business name, just when they're getting started.

• A travel agent helps newlyweds book their dream honeymoon. When the honeymooners arrive at their destination, they're told by the hotel that there's no reservation for them and no vacancy.

The couple sues the travel agent for the inconvenience. They sue for the money it cost them to stay in the other hotel, which was more expensive, as well as a portion of their contract with the travel agent, since they claim they didn't get what they were promised.

In these scenarios, these business owners likely could have used their LLC insurance to help cover the cost of the claims, as well as the attorney fees they incurred.

You Know How to Start an LLC That's Protected

As business owners, it's common to make an occasional mistake. After all, just because we know how to start an LLC, doesn't mean that we aren't human. But now, after reading through the top mistakes to avoid, we hope that you understand how valuable LLC insurance can be in protecting your business from risk.

Want to learn more about how to protect your business as it grows? Bookmark Simply U, our blog for business owners, where you can find content on growing and protecting your business.

* Monthly payment calculations (i) do not include initial premium down payment and (ii) may vary by state, insurance provider, and nature of your business. Averages based on January - December 2020 data of 10% of our total policies sold.