LLC Naming Mistakes to Avoid

A name can be one of the most important aspects of a business, particularly an LLC. The right name can help the firm stand out from competitors and appeal to potential customers.

However, the wrong name can spell disaster for a startup. Fortunately, plenty of inventors and entrepreneurs used failure as an opportunity to learn the right way to run a business.

Not Keeping Personal and Business Funds Separate

One of the biggest mistakes that many entrepreneurs make is not keeping their personal and business funds completely separate. Whether it’s physically different accounts or just separate mindsets, it’s crucial to keep your personal and business assets separate to maintain the protections of limited liability status.

This could mean that if you’re sued, a customer sues, or an employee sues, you may not lose your personal assets. However, if you have expensive equipment, software subscriptions, or other assets in your LLC, the legal separation doesn’t necessarily protect you.

In addition, failing to keep your financials separated can result in undercapitalization. This means that you haven’t started your company with enough money to sustain it. This can lead to a lack of income and taxation issues. It also prevents you from getting the credit you need for growth, as banks and lenders look at your financials to determine your business’s strength. You can avoid this mistake by ensuring you have the proper cash flow.

Not Keeping an Up-to-Date Operating Agreement

An operating agreement is a critical document for any LLC, providing essential guidelines for the business and a formal record to refer to in case of any future disputes. While it’s not required in all states, it can help to provide greater credibility for an LLC if it needs to defend its limited liability status in court.

When the business is founded, the agreement should include the business purpose, member contributions and how profits, losses and taxes are handled (such as whether the members get taxed on their share of the profit or if the LLC gets its own tax treatment). The agreement should be amended any time there is a change to these items or any other issue that comes up in the course of running the business.

Amending an LLC operating agreement is a simple procedure that only takes minutes and can be done online. It is also a good idea to amend the Articles of Organization from time to time, especially if the business changes its name or address.

Not Keeping Records Separate

One of the biggest benefits to forming an LLC is that it helps to keep your personal assets separate from your business assets. This can save you from being liable for debts or lawsuits. However, this protection is only effective if you make sure to keep the two sides of your business separate.

This means not only separating your personal assets from those of the company, but also keeping records of the business finances in a separate account and avoiding commingling these accounts. This can be challenging for small businesses, but it is crucial to protect yourself from liability in the event of a lawsuit or bankruptcy.

Another mistake that many entrepreneurs make is declaring an LLC when it might not be the right structure for their business. For example, a marketing consultant may declare an LLC and begin hiring employees. But, they haven’t made a large profit yet and their accountant tells them that they would be better off remaining a sole proprietorship for a while longer, until they have more income.

Not Keeping Records Current

When it comes to the legal separation of your personal and business assets, naming your LLC correctly is one of the most important steps you can take. You want to make sure that the names of the members and managers match the roles that they play in the company, so that any contracts you sign and any debts or liabilities that you incur are properly placed on the shoulders of the entity, rather than your own.

Aside from that, you must comply with your state’s naming guidelines, which typically restrict you from including words such as “bank,” “trust,” “insurance company” or anything else that falsely implies that the LLC is something that it is not (like a corporation).

You will also need to ensure that your chosen LLC name isn’t already taken by running a name availability search. Each state has different rules regarding what makes a name distinguishable from those of existing businesses and corporations, so it’s worth taking the time to check with your Secretary of State or corporate department before proceeding.