Last month, "Jane" launched her dream business, a digital marketing agency. She'd done everything by the book: filed her LLC paperwork, got her EIN, and opened a business account. Six months later, she faced a $5,000 fine because of a simple mistake in her initial filing. "I thought I'd done everything right," she told me. "I wish I'd known what to look out for."
Jane's story isn't unique. As a business attorney, I've seen countless entrepreneurs make costly mistakes during LLC formation, not because they skipped steps, but because they didn't know the pitfalls within each step. Here's what you need to know to avoid the most common (and expensive) mistakes.
1. Filing Your LLC: Where Most People Get Trapped
The typical advice? "Just file your LLC paperwork with the state." But here's what others won't tell you:
The Wrong Name Structure Can Cost You: One client chose "Natural Health, LLC" without checking trademark databases. Three months and $12,000 in legal fees later, she had to rebrand completely.
Hidden State Requirements: In New York, you'll need to file a notice of publication and sign your operating agreement within 90 days. Each state has its own "gotcha" requirements.
Pro Tip: Before filing, get a business name availability search AND a trademark search. It costs about $300 upfront but can save thousands later.
2. Business Documents: The "Simple Paperwork" That Isn't
Most guides tell you to get an Operating Agreement. Here's what they miss:
The Template Trap: "Tom" used a free template he found online. When his partner wanted to leave the business, he discovered their agreement had conflicting clauses that cost $15,000 to resolve.
Missing Provisions: Your Operating Agreement needs to address:
- Member withdrawal procedures
- Capital contribution requirements
- Profit distribution methods
- Voting rights and percentages
Pro Tip: Your Operating Agreement should reflect your actual business operations. Cookie-cutter templates often miss industry-specific needs.
3. EIN Registration: Small Mistakes, Big Headaches
"It's just a tax ID number," they say. Until it isn't:
The Responsible Party Problem: Choose the wrong responsible party, and you'll need the IRS's permission to make any changes. This process can take months.
Timing Issues: Apply too early (before your LLC is approved), and you'll have to start over. Apply too late, and you can't open that bank account you need.
Pro Tip: The IRS only allows one EIN application per day per responsible party. Plan accordingly if you're setting up multiple businesses.
4. Business Banking: The Details That Destroy Protection
Opening a business account seems straightforward, but here's what can go wrong:
The Commingling Curse: Jane ran all her business expenses through her account but occasionally used it for personal purchases. When she got sued, the court "pierced the corporate veil," making her personally liable.
Signature Authority Issues: Without proper documentation, some banks won't let your employees make deposits or handle basic transactions.
Pro Tip: Get a banking resolution signed when you open your account. It costs nothing extra and saves headaches later.
Don't Learn These Lessons the Hard Way
Every week, I help business owners fix expensive mistakes that could have been avoided. While these steps might seem simple, the details that trip people up can cost you thousands.
Want to make sure you're starting your business on solid legal ground? I've created a detailed guide that walks you through each of these steps, complete with state-specific checklists and sample documents.
Download my free "Starting Your LLC: The First 4 Steps to Get It Right" to see the complete breakdown of what you need to know.
Do I Need a Business Attorney?
If you're getting your LLC started and would like to make sure your business has the right legal foundation, let's schedule a Legal Strategy Session online or by calling my Edina, Minnesota office at (612) 294-6982 or my New York City office at (646) 847-3560. My office will be happy to find a convenient time for us to have a phone call to review the best options and next steps for you and your business.
