You’d think it would be easy to avoid some of the worst LLC business structure mistakes, staying on the right path with business structure and formation. It honestly might be for a lot of them — sole proprietor, partnership, and even corporation filings are practically no-brainers. But LLCs? Those “limited liability companies”? Pitfalls abound.
Now don’t get us wrong: registering an LLC, if it serves your business well, comes with a variety of perks not limited to superior flexibility and convenience, but you can also go horribly wrong.
For instance:
#1: Forgetting the foreign LLC registration rules
Stay in your own backyard
Simply put, don’t form your LLC in Nevada, for example, when you’re planning on doing business in New York. What happens? The tax and corporation laws in New York will then require registration of your Nevada-based (hence, “foreign”) LLC! That means having to pay more state income taxes.
The reason why this is often a problem is how tempting it is to try and leverage a lot of “perks” some states have with their LLC registration rules — such as with Nevada and its no-income-tax benefit. It sounds great and all — until you realize within the fine print of it, that you’ll need an actual office, employees, everything there.
#2: Electing to be taxed as a C Corporation
Avoid double taxation
Not smart. Well, at least for smaller businesses that would honestly benefit from being taxed as a “sole proprietorship.” There may be some LLCs that become so profitable and even have members that may resemble “shareholders” (as in corporations) that being taxed as a C corporation is a good thing. But that’s very rare.
If you own an LLC, and you don’t want double taxation (which that honestly would be all LLC owners!), don’t file as a C corporation. Being taxed twice if you’re not benefiting from any of the other perks that come with being a C corp doesn’t work too well.
#3: Choosing to be taxed as an S Corporation way too early
Don’t rush it!
Likewise, sometimes even electing to be viewed as an “S Corporation” can mess you up if you’re, in fact, an LLC. But here, it’s a matter of timing. There’s a reason why the option’s there for LLCs. We reiterate: sometimes LLCs will benefit from C or S corp filings, but more often than not, it’s a bad move.
In the case of an S Corporation, if you actually file for S corp status too early in your biz journey, you’ll then need to file a corporate return along with payroll. How many “employees” on payroll for your LLC? Most likely — just you! And for just you, you’re paying an additional payroll tax for your own social security and federal unemployment tax, which is extraneous.
So what should you do? Wait until you’re profitable before changing up your LLC to an S corporation. That will mean simpler accounting and cheaper tax returns.
That’s just 3 possible problems you’ll have for the worst LLC business structure mistakes
Avoid them. But best of all, take heed of this advice: get a respetable, reputable business attorney. Who knows the ins and outs of business tax filings. You may find your LLC will be much better off!
