We live in a litigation friendly country and because there are a so many people who use the legal system as a means to profit instead of recover, it is important that the new entrepreneur be cognizant of all state and federal laws when forming an LLC. Here are five legal pitfalls to avoid when forming an LLC.
1.) Selecting the wrong business Designation
You may think that forming an LLC is the best way to register your business but are you sure? Do you have an adequate understanding of the different business designations that allows you to know if your company should be an LLC, S corp, C corp, or other? If you don’t, use a business registration service. They can help you with that decision. If you register incorrectly, it will take a lot of time and money to change it later.
2.) Co mingling Accounts
In the early stages of your business, there may not be a lot of money coming in so starting a business account at a local bank will seem silly but it’s quite important. If you mix business money with personal money, attorneys could argue that your LLC or other corporate structure is invalid since you’re mixing funds.
3.) Failing to write a Founders Agreement
A founders Agreement stipulates how the company is divided between partners, who serves as CEO, how the company would be dissolved should it cease to operate and how another person could be appointed as CEO or founder. Many states require this document as part of the registration procedure but without an agreement, should these questions arise, they could be subject to an expensive legal battle.
4.) Failure to Check your Name
You have an idea for catchy and trendy name for your business. You make a website, business cards, stationary, and an expensive sign for the front of your business. The problem? You failed to make sure that another company hasn’t already trademarked that name. You receive a letter from a law firm demanding you now longer use that name and they want you to pay a half of a million dollars for damages. Check your business name before putting it in to use.
5.) Too Many Handshakes
Although we would all like to do business without a contract, that may be a bad idea. Although you may trust that person or company, courts are full of pending litigation where trust was broken and some of those lawsuits are between best friends and family members. Make sure you have a written agreement for all arrangements.
Don’t rush in to the formation of your business and ask for help when needed. A business registration service can help you navigate through these legal pitfalls when forming your LLC or other corporate structure.