Three Dumb LLC Formation Mistakes

The Three Dumbest LLC Formation Mistakes

by Stephen L. Nelson, CPA

Mistake #1: Forgetting about Foreign LLC Registration Rules
Read those tempting advertisements for Delaware or Nevada limited liability companies? The advertisements sound pretty good, but most small businesses shouldn’t use out-of-state LLCs or for that matter out-of-state corporations.

Mistake #2: Electing to be Treated as a C Corporation
An LLC is a chameleon for tax purposes. Which is great. An LLC with a single owner can be treated as a sole proprietorship, a C corporation or an S corporation (assuming eligibility requirements are met.) An LLC with multiple owners can be treated as a partnership, a C corporation or an S corporation (again, assuming eligibility requirements are met.)

Mistake #3: Electing to be Treated as an S Corporation Too Early
LLCs can also elect to be treated as S corporations-as noted in the preceding paragraphs. And once a business generates profits well in excess of the amounts paid to owners for salaries, an S corporation election saves the owners big money.