Good Business Practices - LLC

By Katie Martens

Just like you should brush your teeth AND floss (I hate flossing) for good dental hygiene, there are a number of business hygiene practices you should practice if you have a Limited Liability Company (LLC). This article will provide you some tools for good LLC maintenance, including:

1. What expenses you can expect with forming and maintaining your LLC; and

2. Common pitfalls of LLC ownership;

Costs of Forming and Maintaining an LLC

A lot of the initial costs of creating an LLC depends on the state you live in. Generally, you’ll have a filing fee to file an organizing document with your state’s Secretary of State’s office. The cost will vary, but you can probably count on a filing fee of around $100. Then, if your state requires a publication notice, that usually costs anywhere between $50 - $100. Those are generally the only costs associated with legally forming an LLC, unless you also hire an attorney to create the LLC for you. Legal fees range widely, but it will likely cost you between $500 - $1000 for an attorney to assist you with the LLC creation.

Part of your agreement to be legally formed as an LLC is that you abide by the rules and regulations created by your state’s Secretary of State. Usually, that means you must keep your registered agent name and address current on the Secretary of State’s website, and maintain contact with the Secretary of State. Maintaining contact usually means that the Secretary of State sends out annual or biennial requests for reports. Depending on your state, you’ll need to fill out a simple report every year or every other year that confirms or edits contact information for your LLC. There is usually a fee attached to this report, usually in the amount of $20.

Does the industry in which your LLC operates require or need insurance? Typically, you know well in advance whether you’ll need insurance for your LLC business because you are a lawyer who needs malpractice insurance, or you’re a real estate broker in a state that requires brokers to have liability insurance. More generally, if your LLC owns property that is visited by clients or other third parties, you’ll want to get property insurance. Insurance costs vary widely depending on the industry, for example, a first year attorney starting their own practice will probably have insurance costs around $500, but a property insurance coverage likely would be far less for monthly or quarterly payments.

In the same vein, does the LLC operate in an industry requiring any licenses or certifications? For example, in our food truck example in a different article , the food truck owner likely needs to get food handler permits and food truck permits if he operates his business in a city that requires food truck permits. A good rule of thumb, if you’re not sure, is to call your local Small Business Administration office to see if they have guidelines, or even the clerk’s office at the Secretary of State. Many health professionals have to maintain licenses in order to operate their businesses, and many governmental agencies oversee these licensing requirements.

Finally, are you going to do the books for your LLC or are you going to hire someone? I have found that using a bookkeeper gives me much better peace of mind than trying to do it myself, but there are many business owners who would rather keep track of their expenses and income through software like QuickBooks or WaveApps. The expense for this varies widely, but I have a bookkeeper that I use that costs me $20 per month, and I haven’t found a similar service for such an affordable rate. Usually, if using a person or local CPA to provide you bookkeeping and tax return services, you are looking at anywhere between $20 - $100 per month, plus the cost of doing the business’ tax returns. This is a cost that you can certainly save yourself if you’re just starting out, need to save a few extra bucks, and feel confident that you can handle whatever the business needs for bookkeeping. My best suggestion is to ask multiple businesses or accountants what their rates are, if you think you can work with them, and compare to the software costs you can find online.

Common Pitfalls of LLC Ownership

Running your own business comes with its own joys and hurdles, and the same is true for running your business inside the confines of an LLC. Here are some common pitfalls I see as a business formation attorney:

1. Not getting an EIN - this is a small thing, but seems to happen often. Usually, the bank where you are opening your business bank accounts will stop you, but if you’re using your personal bank accounts for business costs or income, I suppose that’s two problems we can address in one bullet point.

   1. First, always have a separate business bank account from your personal bank accounts. I go a step further and often encourage business owners to create their business bank accounts in a bank that’s different from where they do their personal banking. That way, there’s no mistaking your business debit card with your personal debit card. I have found that many smaller, local banks often have free business checking accounts that require a very small minimum starting deposit.

   2. Second, in order to get a business bank account, you’ll need a separate tax ID number for the business. Just as you have your own, unique Social Security number that identifies you, you can request and receive from the IRS an Employer Identification Number (EIN). This is the tax ID number the bank will use, your accountant will use to file your business’ tax returns, and if your business ends up with employees, the number you’ll use to pay payroll taxes. For some reason, many business owners don’t go through the simple process of obtaining an EIN, which suggests to me that they’re choosing to bank through their personal accounts for the business, which is a big no no.

2. Not keeping your personal assets separate from business assets - this relates, to some degree, to paragraph 1.a above. Unless your LLC is a delivery service involving driving, don’t use your business money to pay for your car’s gas. Naturally, there will be some start-up costs involved, that will have to be used from your personal accounts because your business doesn’t exist yet. That’s fine. But once the LLC is formed, fund the LLC with whatever start-up capital you think your business will need, and never let personal accounts get mixed with business accounts. Intermingling personal with business is one of the hallmarks of not respecting the state law formalities of corporate formation, and makes you a prime target for litigation. I read some advice long ago from another attorney that suggested that every first time business owner should only operate from a checkbook for the first year of business. The attorney’s point was that writing checks forces you to really think through whether your business needs to spend on that expense, and to be mindful of where the money is coming from. I agree with his sentiment, even though checks are a bit outdated with the advent of so many online payment options.

3. How to responsibly pay yourself - Often, operating agreements for your LLC will include a provision that says something along the lines that LLC members won’t pay themselves before making sure the debts of the business are covered. That provision should be foremost in every LLC member’s minds as they look to pay themselves each month, or each week, or every quarter. How you pay yourself through an LLC also depends on the following factors:

   1. Single member LLC, paying yourself through a draw → a draw is when an owner takes money out of the business for personal uses. Because the IRS treats single member LLCs as disregarded entities, the business income your LLC generates passes through to you directly on your personal tax returns. You’ll pay yourself by writing a check to yourself from your business account, and depositing the check into your personal bank account. Make sure you record all withdrawals for tax purposes.

   2. LLC taxes as an S-Corp, paying yourself through a salary → if you elect to have your LLC taxed as an S-Corp through the IRS, you can’t take draws for personal income. Instead, you’ll have to hire yourself as an employee of your LLC, and create a payroll for yourself. In some ways, this is preferable if you want to generate a W-2 for yourself and have payroll taxes automatically deducted from each paycheck.

4. Not following the formalities required by state law - I often have to help people correct mistakes they made in forming their LLC. In Nebraska, publication notice is required, and most people don’t realize that until they’re being sued. Or, business owners will often ignore communications from the Secretary of State’s office, which is a big problem. Your LLC can be deactivated simply by failing to file your annual or biennial report, and if your LLC becomes deactivated, it means the curtain separating your business assets from your personal assets is dropped. If you no longer have an active LLC with the Secretary of State, you can be sued, and you can’t shield your personal assets if someone prevails in court against you.

Including someone as a member of the LLC when they won’t be doing equal amounts of work as you - this might be a more controversial take, but I often see people who don’t feel confident in going out on their own in their business. Instead of soloing it, these people persuade friends or family members to join them in the business, and these people often have no business involvement. Then the non-confident person, who is working tirelessly on the business and in the business, builds up the business to a place where it’s profitable. And then has to share the profits with someone who had little to no involvement in the business. Or that non-involved person suddenly becomes opinionated on how the business should operate. My point is that if you’re starting a business, be careful about who you allow into the business with you. It’s far easier to start out on your own and gradually add people who will help you grow the business, than it is to buy someone out of the business. Alternatively, you can consult an attorney on how to structure the LLC in a way that allows you to run the LLC as you see fit, but to allow someone who may be able to provide financial assistance to be a part of the LLC without giving them full voting power.