- Hi everyone.
I'm attorney Aiden Durham with 180 Law Co. in Colorado.
Welcome back to All Up In Yo' Business,
where today I'm gonna tell you
about six pretty common mistakes
that you're gonna want to avoid if you are forming
or already operating as a single-member LLC.
But first, of course, please do subscribe,
if you haven't already.
Be sure to click that little bell
so you get notified anytime I post a new video.
And you can check the description for links
to some additional information and resources.
And while I am a lawyer, I am not your lawyer.
The stuff I talk about in my videos
isn't a substitute for actual legal advice.
If you need help with any legal matter,
you should consult with a lawyer
who's licensed in your state.
Now, before I get into what these mistakes
that you're gonna want to avoid are,
let's talk about, like, why are they mistakes?
What's going to happen if you make some of these mistakes?
- They put you in jail, right away, jail.
- No, of course not.
You're not gonna go to jail,
if you make any of these mistakes.
Really, for most mistakes having to do with your business,
you're probably not going to go to jail
unless you're doing like fraud stuff.
Then you might, if it is so bad that it's criminal.
But I feel like I don't really even have,
I shouldn't have to mention that as a mistake.
Like, no, don't defraud people.
That's a mistake.
And you might end up in jail.
But for the rest of these, what's the worst thing
that could happen probably is piercing the corporate veil
which don't let the corporate part throw you off.
It applies to LLCs as well.
And what that means, if you're not familiar with an LLC,
the idea is that it's limited liability.
The liability is limited to the LLC itself
and kind of what we've put into it.
But our personal liability is protected
from the LLC's liability.
So it's debts, obligations, liabilities are with the LLC
and our personal assets aren't at risk of that.
But on occasion,
a court will decide to pierce the corporate veil
and hold the LLCs members personally liable
for its debts, obligations, et cetera.
Or outside of that,
even if it's not piercing the corporate veil,
some of these mistakes might result
in just unnecessary hassle,
unnecessary money, time being invested
that you really didn't need to.
Now, the first three mistakes I'm gonna talk about
are the ones that are just kind of added hassle.
The next three are the ones that might put you at some risk
of piercing the corporate veil.
So what's the first common mistake
that you're gonna want to avoid in your single-member LLC?
It is forming your LLC in the wrong state.
Please, please, I beg of you,
please, stop forming companies in Delaware, Wyoming, Nevada.
Unless you actually live in those states, in that state,
then it makes sense to form there.
But if you don't live in a state,
it's almost never going to be really beneficial
to register a business, an LLC, in that state.
Let's talk about Nevada, for example.
Nevada doesn't have an individual income tax.
So you might think, "Well, okay,
if I register my LLC in Nevada,
I won't have to pay income tax."
But no, if you live in a state that does have income tax,
you're still gonna have to pay tax in that state.
You don't avoid getting out of taxes
just because you've registered in Nevada.
Delaware, of course, is a really popular state
for people to form in
and it makes sense for many large corporations
to form in Delaware
because Delaware doesn't charge a corporate tax
if you're registered there,
but not actually doing business in the state.
No corporate tax in that instance.
But guess what?
Delaware does charge a pretty hefty franchise tax,
or kind of an annual fee.
Currently, for LLCs, it's going to be at least 300 bucks.
So compare that to, say, Colorado
where our annual fee is $10.
Sure, you may not have a corporate tax in Delaware,
but you're still paying 300
versus the $10 that you would be paying in Colorado.
And then Wyoming, again, is kind of popular
because they permit what's called an anonymous LLC.
You don't have to put your personal information
as the members of the LLC.
It doesn't have to be on the public documents in Wyoming.
So people want to form there
to kind of help protect their privacy.
But if you're operating the business from another state,
again, let's say Colorado,
you're still gonna have to register the LLC
as a foreign entity in Colorado,
or in whatever other state you're actually in,
because you are there operating the business in that state.
So Colorado in this example
is going to want your LLC to be registered
as a foreign entity in Colorado.
And so just because Wyoming
allows this little bit of privacy
doesn't mean that the state that you're in
has that same kind of thing
and you're still going to have to register there anyway.
And for the record,
like, Wyoming isn't the only state
that lets you kind of protect your privacy in this way.
Colorado, at least, again,
has some means of staying private.
The articles of organization in Colorado don't require,
there's no requirement that the members or managers' names
or addresses be on the public documents.
It just requests the name
and address of the persons forming the LLC
which doesn't have to be the members and/or the managers.
Often I have clients who come to me
and they want to kind of protect their privacy too
for one reason or another.
So I will act as the person forming the LLC.
It'll be my information
on the paperwork that's publicly available.
And then, kind of, on the back end,
there's a document and agreement between me and the client
that makes it clear
that I'm just the organizer of the LLC
and they, my client, are actually the owner, the member,
they're the ones that hold all the interests in the LLC.
I'm just the organizer.
So while Colorado doesn't call it an anonymous LLC,
there are also ways
that we can kind of keep you anonymous in Colorado.
And if you're trying to stay anonymous
to protect your privacy for privacy purposes,
that's one thing.
But I talk to people who are, like,
they want it in Wyoming 'cause it's private, anonymous,
and so I won't be able to get sued.
Being anonymous isn't gonna prevent the LLC
or you from being sued because of something the LLC does.
It might make it a little more difficult
for whoever wants to sue you to do so
but it's not gonna prevent it from happening.
It's extremely rare that I suggest to someone
that they form an LLC in a state
other than the one that they're living in.
99 out of a hundred times,
it's gonna make the most sense
and be the most appropriate to form the LLC,
have it registered in the state that you live in,
or that you're domiciled in,
or where you consider to be your home.
All right, moving along to mistake number two,
which is making an S corporation election too early.
You may have heard that by electing to be taxed
as an S corporation,
you can potentially save a significant amount in taxes.
And that is true in a lot of cases,
but just because you might save a little bit in taxes
doesn't always make it worth it
and make sense to do that S corporation election,
because as an S corp,
you're most likely going to have
some added accounting costs.
You or your tax preparer hopefully
will have to prepare an S corp return,
which you wouldn't have to do
if you didn't make that S corp election.
So that's probably gonna cost you a little bit more.
And as the owner of an S corporation,
you have to pay yourself a reasonable salary.
And if that reasonable salary is too low
in the eyes of the IRS,
then you'll probably be subject
to fines and interest and penalties
because you haven't paid yourself enough
through that reasonable salary.
And again, you'll likely have added accounting costs
because, ideally, you'll work with a CPA,
or a tax professional,
to help you determine what that reasonable salary is.
So while an S corporation might be worth it for some,
it's not always going to really make sense for everybody
and particularly in the beginning of a business
when the profits and the income might be kind of low,
it usually makes more sense to hold off
on the S corporation election and do it a few years in.
And the third mistake
that is mainly going to just be a hassle,
but it could potentially also get you
into, like, piercing-the-corporate-veil territory maybe
is using a PO box
for your business's principal office address,
or for the main headquarters
or main office address of the LLC.
This could also potentially apply
to using your home address when you're setting up an LLC.
Most states, when you're forming the LLC,
when you're filing the articles of organization
or whatever form you have to file,
they will want the business's address,
often referred to as the principal office address.
And most states want that to be an actual physical address,
not a PO box.
Again, are you gonna go to jail because of it?
No, you might have some added costs
if, you know, the Secretary of State
or the government gets wind of it.
You could potentially have your LLC
administratively dissolved
because you're not compliant,
because you're not, you know,
following the requirements that you have to be.
And if you're using your home address,
while there's nothing inherently wrong with that,
it should be, you know, pretty legal to do that.
Again, if we're trying to protect privacy,
if we want to not have our home address up there,
or if we move frequently, or maybe you have roommates,
or you live with your parents, or something like that,
you may not want your home address to be publicly available.
And this especially applies if you're using that address
as the registered agent address, too.
That's a big time no-no with a PO box
that you definitely don't wanna use a PO box
for the registered agent address.
And it's not always a good idea to use your home address
as the registered agent address either
because, again, you may have roommates,
other people living in your home
and that's the address where the LLC
will be served with court paperwork
if there's ever like a court proceeding or a legal issue.
So you may not want to be served at your home.
So often, the best way to get around this
is going to be leasing an actual office,
leasing a virtual office,
or getting a virtual office address,
or something where you can get a physical address,
even like a private mailbox through like a UPS.
You still can't do that
for the registered agent address though,
because the registered agent address,
there needs to be someone there,
like, during normal business hours
and they need to consent
to being the registered agent
and accepting service of process on your behalf
and all that stuff.
So even with the, like, private mailbox,
still shouldn't use that for your registered agent address.
Check the description if you want some more info
about virtual offices.
I've got a discount code down there
for Alliance Virtual Office
if you're trying to keep, you know, your home address
or you want to avoid using a PO box.
All right, now we're gonna get
into the three mistakes that could really put you
at some risk and potentially get you
in that piercing-the-corporate-veil situation.
Number one is thinking
you don't have to follow corporate formalities
just because you're a single-member LLC.
Things like having an operating agreement, for example,
which is, like, the kind of internal governing document
for the LLC.
You might think, "I'm the only member,
I can do whatever I want with it,"
which you kind of can to an extent,
but that doesn't mean you get to get out
of needing an operating agreement.
Some states actually require that you have it, some don't.
It's kind of optional in many states,
but even if it's not required, it's still a really good idea
because it helps to uphold that liability protection
that you get from the LLC,
because it's kind of one piece of paperwork,
one documentation that you can show
that yes, I'm operating this LLC legitimately,
I'm doing things that I have to keep it separate from me
and I'm following some of these, you know,
corporate formalities
that may seem kind of silly, but you should do 'em anyway.
What I like to do is pretend you're in a multi-member LLC
and do all the things that you would normally do
in a multi-member LLC.
So again, an operating agreement in a multi-member LLC,
we would typically have, like, meeting minutes
or resolutions or consents to action
if we're making, you know,
big decisions within the business.
Just because you're meeting with yourself,
or you're the only decision maker,
again, doesn't mean you get out
of all those formalities and certain requirements.
The fifth mistake, which is a pretty big one,
is not entering into contracts and agreements
on behalf of the LLC.
If you're about to sign a contract,
somebody gives you a contract,
and in the opening paragraph it says,
"This contract is between such and such,"
and your name, not the LLC's name,
that's gonna be problematic,
because it is you entering into that contract, not the LLC.
We want the LLC to be the party that's named
in that contract.
And the same goes
for when we are signing on behalf of our LLCs.
We don't want to just sign our name
and have the signature line
just say our name there and that's it.
We need to make it clear
that we are signing this contract
on behalf of the LLC
and in our capacity as an agent of the LLC.
So there's no, like, strict way that this has to be,
it doesn't have to look a specific way,
but what I generally recommend
when you're signing a contract
or signing most things that are legally binding
is it should say your company name.
So in my instance, it would say 180 Law Co. LLC,
and then by.
That's where I would sign it, Aiden Durham.
And then under that have my printed name and my title,
so Aiden Durham, member.
That way it's clear that it's the LLC
that's entering into this contract.
I'm signing it in my capacity as a member of the LLC.
And finally, the last mistake
that you definitely, definitely need to avoid
is not keeping personal and business finances separate.
Separate, separate, separate,
separate is the name of the game here,
especially when it comes to single-member LLCs.
We wanna make sure our LLC is separate from ourself
because, otherwise, if it's not separate,
then why shouldn't ourselves be liable for the stuff?
So that means, you know, obviously separate bank accounts,
you need a business bank account, business checking account.
Don't just use your personal account for that.
Not using your business funds or your business money
to pay for personal expenses, or really vice versa.
Have a specific business credit card for business expenses,
if you want a credit card.
Separate, you know, accounting records, if you do.
If you have like personal bookkeeping stuff,
like in QuickBooks or something,
you wanna have separate accounting records for your business
and separate for your personal.
Just keep it all separate,
because if you're co-mingling everything,
if your business and personal stuff
are just kind of mixed together,
not only is it gonna be a headache for you
kind of accounting and tax-wise,
it's also gonna put you at a lot of risk
of piercing the corporate veil
because, again, why should a court honor the separateness
of an LLC if you are not going to honor it?
And so there you have it folks.
Again, if you make these mistakes,
you're probably not gonna go to jail.
It might just be an added hassle
or you put yourself at a little bit of risk personally
of piercing the corporate veil.
If you learned a thing or a two,
please go ahead and give me a thumbs up.
And again, don't forget to subscribe,
if you haven't already done so.
Click the little bell,
so you get notified when I post a new video
and check the description
for links to additional information and resources.
If you're looking for more info about single-member LLCs
and kind of how to properly operate it
and protect yourself personally,
I've got a great video with some tips
on how to pay yourself as a single-member LLC.
I'm gonna put it right here.
I'll meet you over there.
Thank you all so much for watching.
I'm Aiden Durham, and I'll see you next time.