5 Common misconceptions about forming an LLC
Here are 5 common misconceptions about forming an LLC (limited liability company):
1: When I register my LLC in State A, I can do business with anyone, anywhere in the world without restrictions.
FALSE: If the LLC is registered in State A but also plans to operate in State B, the business may have to qualify as a foreign entity in State B. The foreign qualification process will be similar to the registration process in State A. It gets more complicated when another country is involved. So we need to plan for it from the beginning, because it can affect other things, including the name that’s chosen for the business.
2: I can have any business name I want, as long as when I Google it, no website comes up.
FALSE: The name used for the business will matter to its customers and to whoever is responsible for marketing, but the official business name of the LLC matters to the Secretary of State. The name must be unique, so the name search starts there. A discussion about potential trademarks would happen at this point as well, but that’s a separate topic for a trademark lawyer. And back to #1, if the business plans to operate in State B or another country, the name search will need to take place there as well.
3: I can open a business checking account as soon as I pick a name.
FALSE: A business must wait to receive the Certificate of Organization from the Secretary of State and then apply for the Federal Tax ID Number from the IRS. The bank will require both of them to open an account. And the bank may require the LLC operating agreement as well, so I recommend completing one while the registration is being processed.
4: A business license is only required if I have a dedicated business office or storefront.
FALSE: The rules for a business license are governed by local governments -- the city or county in which the business operates. This needs to be researched and handled as soon as the Certificate of Organization is issued.
5: It doesn’t matter where (or who) my registered agent is.
FALSE: Online services have convinced many startups that they (the service) needed to be the registered agent, and not the owners themselves. Even worse, the county in which the business was domiciled was chosen by the service and not the owners, effectively establishing the business’ location (for legal purposes, including lawsuits and other filings) in a jurisdiction that the owner likely would not have chosen had they agreed to serve as their own registered agent.
Forming an LLC may be ‘easy’ from a process perspective, but it’s a trap for the unwary. Litigators make a lot of money fixing problems for businesses that could have been prevented with proper help at the time of formation. It’s a small investment to make in the solid foundation that most businesses deserve.