Main Street Business

#592 The 10 Biggest LLC Mistakes (And How to Avoid Them!)

• Mark J Kohler and Mat Sorensen • Episode 592

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Why risk your business and hard-earned money with the wrong setup when you could be protecting yourself and saving on taxes? In this episode of the Main Street Business Podcast, Mark J. Kohler and Mat Sorensen break down the critical steps every small business owner and new LLC owner must take to avoid costly mistakes. From choosing the right entity structure to understanding tax advantages, they reveal the insider strategies that keep more money in your pocket and safeguard your future.

Discover how to set up your LLC the right way, when an S Corp might make sense, and how to keep your business compliant without overspending on fees. Learn practical legal and tax moves that help you reduce liability, maximize deductions, and protect your assets — so you can focus on growing your business with confidence.

If you’re serious about building a strong foundation for your company, this is an episode you can’t afford to miss! Subscribe for more real-world strategies from Mark J. Kohler and Mat Sorensen, and get expert support for your business today through KKOS Lawyers and Main Street Business Services.

You’ll learn:

  • Why setting up your LLC in the wrong state (like Nevada, Delaware, or Wyoming) can cost you extra fees and headaches — and where you really should file
  • How to avoid exposing your home address by properly using a registered agent and company address
  • The critical documents every LLC needs beyond the one-page state filing, including an operating agreement, membership certificates, and minutes
  • Why your LLC must have its own bank account, tax ID, and records to be treated as a separate legal entity
  • How the right tax election (like electing S Corp status) can save business owners thousands in self-employment taxes each year
  • The importance of annual compliance — renewals, meetings, and minutes — and why outsourcing this can save time, stress, and penalties
  • Real-world “cleanup” strategies for fixing LLCs that were set up wrong or neglected, so you can get back on track

Get a comprehensive tax consultation with one of our Main Street tax lawyers that can build a tax strategy plan with an affordable consultation that will leave you speechless!! 

Here’s the link - https://kkoslawyers.com/services/comprehensive-bus-tax-consult/?utm_source=buzzsprout&utm_medium=description&utm_campaign=10-LLC-mistakes

Speaker 1:

You set this up with the state. You waved your flag, you put your stake in the ground and said I'm going to set up this LLC.

Speaker 2:

It's like they, you know, did chat GPT now, or they Googled like what state should I set up my LLC in? And they got the answer If you want to be a fortune 500 company and be listed on the New York stock exchange, what does that have to do with your rental property in Oklahoma?

Speaker 1:

You may think you're saving money. You're like, well, I'm doing it because I'm saving money. No, the penalty and the cost to get back in good graces with the state. It can be three times what it costs to just pay someone to do it in the first place. This is going to be a theme today. Sometimes you just can't polish a turd.

Speaker 2:

Welcome everyone to the Main Street Business Podcast. This is Matt Sorensen. I'm joined by the incredible Mark J Kohler, and we are here, two lawyers wanting to help you not make mistakes with your LLCs.

Speaker 1:

Yeah, top 10 mistakes in setting up your LLC. And all of these are repairable and we are here for you. So do not feel shame, feel guilt. You're're embarrassed, you've got an llc, you are on the right track. We love you, we appreciate you, you're okay. It was you like that, a little more feeling, yeah if you want to, yeah, I like it.

Speaker 2:

We're.

Speaker 1:

Yes, we are here for you, okay all right, but we've got to give you some bad news too. There could be a mistake made, and we want you to rock and roll, so yeah, and it's easy to fix.

Speaker 2:

So we're going to go through some of these things that we see every day. Mark and I have done the 10,000 consults with clients across the country, from business owners to real estate investors. We've seen it all and we see some common things that we want you to get right, cause we want you to have that asset protection you're planning on. We want to make sure you've got the right tax planning in place, because, at the end of the day, it's all about building wealth and protecting it, and your LLC is a great place to start. So, yeah, yeah.

Speaker 1:

One quick example I was at Home Depot last night fixing a mistake. I had to go twice to Home Depot. Now I could have hired a handyman and done it right, paid a little bit more, but I wanted to DIY it. That's cool. So again, we're okay with that and we do have the full service handyman type relationship. That's me.

Speaker 2:

Yeah, you're the guy at Home Depot, twice You're home watching TV.

Speaker 1:

Fair enough, but I enjoyed my experience. I met a new guy on Depot. That was just a wonderful gentleman. Okay, yeah, he shamed me. Okay, now was just a wonderful gentleman. Okay, great, yeah, he shamed me. Okay, now I'm going to go with the setup itself. Let's just go there first. Number one mistake people make and these might be in order of priority. We could even try that. I think number one is people set up in the wrong state. They get sold this Wyoming thing, the Nevada thing, delaware, delaware, yeah, wrong state. Um, they get sold this wyoming thing, that nevada thing, and any delaware, delaware, yeah, but they've been sold this can of goods, ball of wax, what do you call it?

Speaker 2:

I don't know yeah, they've been sold the wrong thing. Yeah, you know, it's like they. They, you know, did chat gpt now. Or they googled like what state should I set up my LLC in? And they got the answer If you want to be a fortune 500 company and be listed on the New York stock exchange or like, what does that have to do with your rental property in Oklahoma? Nothing, yeah, nothing, okay. You're going to pay way too much money, you're going to have a administratively pain in the butt structure when you don't need it and it does nothing to help you at all.

Speaker 1:

And here's the general rule. Now, on these 10 mistakes, we're going to give you a quick answer as to what the proper methodology is, or mindset and we've got other podcasts on this. You may need to consult with one. We have a. We have a cleanup special we do every year where we just help people clean up their entities and we'll give you some resources for that so you can get it done right. But the general approach is you set up an entity where you're doing business as a side hustle, a main street store or a rental property. You set up where you're doing business, where the property is located, where the employees are located, where you're located. Now there can be some additional strategies by adding a layer in Wyoming, nevada, delaware, wherever. But that's level two type stuff and most people don't need that but they get kind of bad information. So the remedy we move the entity. It's called domestication. We can move it to the right state. We could register it foreign. Sometimes you just this is going to be a theme today Sometimes you just can't polish a turd.

Speaker 2:

Yeah, yeah, yeah, they have proven that myth busters actually.

Speaker 1:

All right.

Speaker 2:

So, and when that is the case, what we like to do is just start over and we will just set up a new LLC and do it right. But we can't a lot of times just fix it with the domestication we're removing it from one state to another. And let me just say this like let's say that you're in California and someone told you well, you just set up a Nevada LLC, so you don't have to pay the California $800 fee every year and your butt's sitting in California doing business in California. Yeah, you need to get registered into California and I know it's painful and you're like, but I don't want to send the state of California this franchise tax. That's BS. I know you got to get your butt out of California.

Speaker 2:

Okay, it's not the LLC problem, it's you. You're staying in California, so, or this could be the rental property example we gave. But here's one thing, an option some people think of as well just register the Nevada entity into California. Okay, now you're paying fees to Nevada and California. Let's just start and get the entity in the state it needs to be in.

Speaker 1:

Yep, all right Now. Number two is on the formation process. We're just going to stay there for a moment. When you're setting up your LLC, there's more than just what button you push, if you will. There's a lot to this. The second mistake we see is where people list themselves as their own registered agent. Every state requires that a new entity, new LLC or corporation has a registered agent. Every state requires that a new entity, new LLC or corporation has a registered agent. This is the person that's going to receive mail service of process when it comes to official notices for a potential lawsuit or government interaction of some sort. So you have to put down a registered agent that is public record. You may not want your home, your name, your personal address out there for the world to know where you're at if they're pissed off. I consider that a mistake. I don't think people should do that.

Speaker 2:

Right, yeah, just use a registered agent company. We happen to have one that's in all 50 states. You don't have to use us. But there's a couple other reasons of just that privacy element that Mark talked about is, when you get a legal notice, you need to know what to do with it. Also, do you want some process server serving your kid at your house or your spouse? Do they understand how important that thing is and are they going to make sure that it gets to you properly and timely? Is it going to be sitting on a dresser somewhere? I don't know, it's like this is important stuff, dresser somewhere, or I don't know. I just it's like this is important stuff and so when something happens with the registered agent, you need to know what's happening, um, and you want to make sure it's handled professionally.

Speaker 1:

So and it's something easy to fix we file an amendment with the state and change the registered agent. Now, if I may, number three, I'm feeling it, I'm feeling rolling here. Number three is related to that and that is choosing the wrong registered agent. Not only did you not put yourself you may have put yourself as a registered agent you don't want that privacy exposure but you may have chosen someone to be your registered agent and they are too damn expensive.

Speaker 2:

It is crazy out there, yeah like LegalZoom, will charge you like $300, $400 a year to be a registered agent. Our company, mainstream business services, where we have registered agent service on all 50 States, one, 25 a year. Okay, total bargain compared to the legal zooms. Those are places that you think are the cheaper, discounted version, like like a legal zoom, right? No, it's actually more expensive. So. So you should probably shop that too, because that is an annual cost, and make just make sure it's competitive. It might be worth changing and you can change and no one's going to be offended.

Speaker 1:

Legalzoom is not going to know Until you cancel.

Speaker 2:

Yeah, yeah, I mean they're going to know, but what are they going to do?

Speaker 1:

I mean you know, save some money. So here's our. Obviously I'm going to just summarize it here. If you are the registered agent or you're paying someone too much, it is a simple fix. It's going to save you money and give you privacy. Get a change done Again. We'll have all the resources you need here at the end in the description. You can go there now to get some help there. I'm going to go with this setup still, matt, if I could. Number four mistake is using okay, every company again nationwide not only needs a registered agent, they need a company address.

Speaker 2:

We can screw that one up, yeah, and the states have some different rules on this. Some companies' addresses in a state that address must be a physical address. Some states allow it to be a PO box. This is again like a privacy component. You may not want your personal address. Let's say you're a landlord with LLCs for rental properties. You may not want your personal address. Let's say you're a landlord, okay, with LLCs for rental properties.

Speaker 1:

You may not want your personal address listed on here because you don't want a grumpy tenant showing up at your home. All right, yeah. And you may have thought oh, I was a genius, I'm not my registered agent. And then three lines down what's the company address? Oh, that's mine. Little do you know that that's public record too. So if you're wondering, what address did I freaking use? You can easily go to your state secretary of state website, wherever you set your entity up, and pull up the entity and just see what everybody in the world can see. And you may have made the right move with the registered agent, but made the wrong move with the company address itself. So again, easy fix. You can tidy both those up in one quick change. We have a mail forwarding service.

Speaker 2:

Yeah, we have a privacy address service that you can use our address and our Utah office because the registered agent and the registered address must be in the state of the LLC, but your company address for most states there's a couple exceptions your company address does not have to be in the state where the LLC is located, All right, so, for example, if I have an LLC in Utah, I'm in Arizona, I can use my Arizona address on that. Now, the opposite I can't do. Arizona makes you have an Arizona address for the company address, but for the most part you can use that and that address will work. So then we scan your mail, scan your your mail in, we get the junk out, we scan your mail and as part of that privacy address service and again, we're not meaning to this be like a whole advertisement about our services, but I'm just saying these mistakes we've realized are very common. So we actually have services for them and most lawyers or companies in this space do so. I hate to say it but, like, sometimes the solution is engage a service provider.

Speaker 2:

One thing you might think about on the company address is a PO box Super cheap. Yeah, Not so much as you might think what we found from clients over the years is when they shop a PO box because they're like, well, I'll just use a PO box is particularly in like more metropolitan or suburban areas. It's going to cost you over 500, even a thousand bucks a year. If you're in a more rural area, the postal service, whatever subsidizes those because of the mail delivery system out there. So they're a lot more, they're a lot cheaper. So just know that PO box probably isn't as cheap as you're thinking and you might know what you're paying now and compare that to a privacy address service.

Speaker 1:

But, Matt, it's so fun to have to go to the post office three or four times a week and find parking and go into the post office and deal with those wonderful post office employees that are just the backbone of our country.

Speaker 2:

It really is. It really is Super fun, so they should be paying you to go do that.

Speaker 1:

That's right. Okay Now, where do we go next? I mean, this is kind of the setup mistakes in the online process you may have used if you DIY it now, but there's other pieces of parts. Where would you go next? As in that setup? I think it's going to be maybe the book, the operating agreement, the guts. Yeah, it's going to be maybe the book, the operating agreement, the guts. Yeah, go to the guts.

Speaker 2:

Yeah, let's talk about the documents that you might not have done. If you DIY this or you use someone else to help you set this up that didn't know what they were doing. You mean, you don't just need one sheet of paper. Yeah, you need that one sheet of paper, but just not that one sheet of paper. There's like nine pieces to a good.

Speaker 2:

Yeah, and I and I think it's interesting, just as lawyers where we'll have clients run into this, you know as they'll they'll be like hey, I bought a, I bought a rental property, and the title company says I need an operating agreement. Or I'm trying to set up a bank account and the the bank wants my operating agreement and my tax id. What's that? Like I, I set up the llc online, I used llc filings online and you know, and and there was $99 and I have my piece of paper from the state. I am an LLC. Guys, that's not what the bank thinks, that's not what the title company thinks. That's not what a judge is going to think when you're in court trying to defend yourself and use the asset protection of the LLC. There are other pieces to it.

Speaker 1:

Yeah, I liked that last point you made. I was going to go there If it's not the banker, pieces to it. Yeah, I liked that last point you made. I was going to go there If it's not the banker or just trying to operate with one sheet of paper. It's really.

Speaker 1:

Why are we setting this thing up? It's for asset protection. I don't want to get sued personally if my tenant falls down the stairs or has a brouhaha this weekend and they're going to sue the landlord for some problem. I don't want to be sued personally. So I set up an LLC. Oh, I got my one sheet of paper. Do you have a separate bank account? Do you have separate checking? Has the title been transferred? Oh, big one. Yeah, what are we doing to show that we are respecting the LLC we set up? Well the guts. Do you have a corporate book? Do you have an operating agreement? Do you have membership certificates or stock certificates? Do you have minutes? Do you have an operating agreement? Do you have membership certificates or stock certificates? Do you have minutes? Do you have all those things that go into the setup of the LLC? And you can't just chat GBT that You've got to actually get something mailed to you from a company that's going to create that book. It's an actual paper, a piece of paper. I'm sorry, it's just not digital yet.

Speaker 2:

Yeah, yeah, I mean, you can keep it in a digital record. But, yeah, we're actually setting out a physical book and we can actually keep a digital copy on top of that when our record is, when we're working with you. But that one piece of paper that you get from the state, that is the one piece of paper that you have to file and get approved with the state. But that's not the only piece to having an LLC. That's a piece the one that the state approves and puts their stamp on it to say, hey, no one else using this LLC, you've got this, this is your name, this is your LLC. So make sure you remember to get the operating agreement.

Speaker 2:

This is what says how the LLC operates Really important, particularly if you have partners, because that operates as your partnership agreement too. But even if you don't, you still need to have an operating agreement and then the initial minutes when you set it up, membership certificates and that all comes in a corporate book, and so if you don't have those extra pieces, you can clean up the LLC A lot of times. What you did file with the state is actually okay, it doesn't need to be changed. But you've missed all these other parts and so these other pieces can be added in later on. I love that.

Speaker 1:

And we're going to call that number five, the guts of this LLC, the backbone of the LLC. Number six and you alluded to it and I think is a really good point is the EIN and the banking. If you're going to set up an LLC, it is a separate entity. It is a separate thing and it has to have it be. Kind of you got to wave your flag with the IRS and go, hey, I set up an LLC and so that's called an SS4 form and you're going to get a tax ID number that's important for your digital payment services and the Venmos and the Zells of the world and Apple Pay and all that. You're going to have to fill out a W-9 for vendors that are customers that are going to pay you. So you've got this tax piece. You are creating something that's going to make you money.

Speaker 1:

Well, you've got to setting up the LLC and again, just thinking you're done and shoving that one sheet of paper in the drawer is not enough, and so I know it's just so important. You mentioned the EIN too. What would you have to do?

Speaker 2:

Yeah, and so I know, it's just so important. You mentioned the EIN too. What would you add to it? Yeah, yeah, it's called tax ID EIN. That is the same thing you know. Let's say you're a business, you have payroll, you're going to need to be using that. Obviously, you want to separate this. If you're going to have a sales partnership tax or, yeah, your sales tax reporting, maybe you're going to do an S corp election, this tax ID becomes something that's used for your tax filings and it's what separates your personal return from your company return. Is this EIN? And identifies those things as separate. So really important, even for the rental property or the side hustle. You need to get that at a minimum for your banking and just your vendor management.

Speaker 1:

Yeah, no, I love it and I'd like to go there. I like what you're saying. The S-corp election yeah, no, I love it and you, I think you, I'd like to go there. I like what you're saying. The S-corp election yeah, do you want to explain that? I guess?

Speaker 2:

Yeah, I think one of the biggest mistakes people make with an LLC is having the wrong tax election and not doing an S-election on it. A lot of people, when they set up an LLC, they are a sole proprietorship by default and even if you got a tax ID, if you didn't elect any other tax status and you're just the only owner, you are a sole proprietorship. What does that mean? That means you pay income tax on the income you get. Plus, if this is an operating business, you're providing services or goods, you're driving Uber, you got a storefront consulting commission income, service income whatever that income, you're paying income tax. And you're paying self-employment tax, which is Medicare and Social Security. That's 15.3%. Well, when you're a sole proprietorship because you just set up an LLC and you didn't do anything else, that's all coming down to regular ordinary income rates plus the 15.3%. If you add an S selection to the LLC, you get this S corporation tax treatment on a hundred grand of income. It can save you up to nine grand in tax savings and basically what you're able to do. The gist of it.

Speaker 2:

We've got other stuff on this, but I'll just want to say the gist of it is when you have an S corp. You can pay yourself a salary, which you have to pay a reasonable salary to yourself, and you pay into Medicare and Social Security. The other portion of the income you pay to yourself is just the profit out of an S-corp that is not subject to self-employment tax. It's exempt, meaning I'm not paying that 15.3% on this bucket of money. You're not doing that in a sole prompt, but you can do that in an S-corp. We have other podcast episodes on that and videos on it. But that tax election is one that, if you did that wrong and you're making let's say you're making a hundred grand a year, that's costing you probably $9,000 a year, like every year until you fix that thing.

Speaker 1:

Great point, and you summarized that perfectly. I love it. Common mistake. Now for our last two, and they're somewhat related in. This is the moving forward. You got your LLC set up. Maybe you checked all these other boxes off and you're like, hey, I did all these things, or you call us up and clean up these few things. Am I done forever? No, there's some maintenance things that need to happen, and the first thing is keeping your in good standing with the state. You set this up with the state. You waved your flag, you put your stake in the ground and said I'm going to set up this LLC. Most states are going to require you to pay an annual renewal fee to file a form of some sort to keep you in good standing or registered with the state. It's easy to forget. I mean, this is something that I don't. You know. You can't remember when you set these things up.

Speaker 2:

I know I I have, you know I don't know 15 to 20 companies. I can't tell you which one renews and when, and I don't want to. That's the last thing you should be worrying about as a business owner. Focus on making money and the things that really matter in your business. If you want to play administrative assistant forever, good luck in having any success in your business. So you should sub that out, so to speak. Get someone else to handle it for you. Our company, mainstreet Business Services, which does registered agent by the way, we can be a registered agent. We have that privacy address service. We do our company compliance service called CCS, where we hand you your annual renewal and your annual minutes. It's just something you need to get off your plate there. I do not know a successful business person that is still doing their annual report. That is, their own registered agent. Yeah, like, why are you doing that? Yeah, like, start focusing on making more money in your business and growing it, not being the secretary handling all these administrative things. And here's the important thing.

Speaker 1:

You may think you're saving money. You're like, well, I'm doing it because I'm saving money. No, what happens is, when you miss one of these deadlines, the penalty and the cost to get back in good graces with the state. It can be three times what it costs to just pay someone to do it in the first place, and so it's one of those deceptive things that last night I was at Home Depot, driving there twice, taking time to go figure out this methodology to hang my daughter's TV on the wall, and I could have called Thumbtack or some handyman and been done with it. I spent more time and money doing it. No, I enjoyed it. You were probably doing something.

Speaker 2:

This is where I make fun of Mark for doing this stuff. He's always doing stuff like this, but it's like therapy for me. Yes, it is. This is like Mark's version of yoga. Yes, yes. Put a tool belt on.

Speaker 1:

It's his peaceful place, even if he's going back and forth to Home Depot in 110-degree weather in Phoenix you know you can try to twist it into a miserable experience all you want, but I enjoyed it. I was using my hands making the world a better place. I was hanging a TV on the wall.

Speaker 2:

You're that guy that you know has a calendar and remembers when his renewal hits for the state LLC. I don't want to go that far, I'm just saying if the shoe fits.

Speaker 1:

Yeah, I do not do my own annual maintenance either. Oh my gosh. Well, and it can be super affordable. We're a couple hundred bucks a year to take care of all this and all these BOI rumors of reports that you might have to file with the state and the fed. We're on top of that. You don't have to worry about that crap. And so I'm going to bring it to home all together with number 10, the company maintenance itself, doing that annual meeting.

Speaker 1:

And this is one of my favorite, favorite topics, because when you set up an LLC, you should be setting up your own board of directors, your own board of advisors. You now get to have you don't have to. You get to have an annual meeting. You get to have a meeting with your family, your friends, the people that you mastermind with. This LLC is now your crucible for building your American dream, and so when you go have those meetings, it's a tax write-off.

Speaker 1:

You get to go to dinner, go on a trip, go to Cabo, I don't care have your juggernaut for your company meeting, and so that is a process that actually solidifies the asset protection of your entity. It gives you audit protection with the IRS, it makes your entity more legitimate. So you may look at it as a have to. I look at company maintenance as an opportunity, an opportunity to engage with your family, have this amazing board meeting and we will give you the list of questions to discuss. We will do the minutes. We want you to come, look pretty and, at the same time, double check with the state that you're clean and organized and you're off to the races. That, my friends, is our company maintenance program. We love it and it's just so powerful.

Speaker 2:

Yeah, and I think the impetus for today and hitting these topics was we just see a lot of LLCs, a lot of people doing the DIY, or they're using service providers who don't know what they're doing. They're not thinking about the complexity that they're structuring. Sometimes they've set up too many entities, they got the wrong tax election, they didn't think of the privacy ramifications. They're doing all the maintenance themselves when they should be focusing on the business. Whatever your problem is, we have a solution. Right now we're trying to help you with this, not just with some of this education, but also the services. So at our law firm, organized firm, kqs Lawyers, we have a cleanup special and we help clean up your LLC. If you're like guys, I'm one of those people that set this up. I barely know what the heck I have. I could use some advice on this. A consult with a lawyer. Let's clean up the documents.

Speaker 1:

We've got that for you. Get over to kqslawyerscom. Also, if I may add, main Street Business Services is that ongoing maintenance service where we could be a registered agent or provide those minutes and all that. And in all of these services this month we've got like 25 bucks off here, 100 bucks off there, 200 bucks off there because there's different services. We don't know what you need. Give us a call. Paralegals on the phone will help you figure out what you need. There's no charge for that. Just call, say here's what I got and they'll go. You're set or let's help you. So, whatever the case may be, give us a call. Down below you can set up a discovery call at KKOS, lawyers or Main Street Business Services. We tried to list some of the things you may already know you need and who to call. It's down there below. Check it out and let's get you dialed in so you can get out and live your best life All right.

Speaker 2:

Well, thanks everybody for tuning in the Main Street Business Podcast. Please share this with your friends and family. Give it five stars, thumbs up, I don't know. Subscribe kudos anything, we'll take it Whatever you can give us. That's positive, it's negative.

Speaker 1:

Go do something with that energy.

Speaker 2:

Yeah, send it somewhere else. Go down to the.

Speaker 1:

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Speaker 2:

Either one Did you have a bad experience at.

Speaker 1:

Verizon. Oh my gosh, have you tried to buy a cell phone in the last you know 10 years? It's at least a two-hour process, am I right? I mean I just I could buy a used car faster than get a new cell phone. I swear Interesting.

Speaker 2:

Okay, I'm up for. I'm due for an upgrade, so I might have to test this, no offense.

Speaker 1:

Verizon. It's just streamline this process, yeah yeah, Use promo code MarkJ Kohler.

Speaker 2:

Dude, that means my name. It's code Verizoncom. Verizoncom slash Mark J Kohler to get 10% off. We know that guy Actually we're T-Mobile guys or Sprint.

Speaker 1:

They're all the same.

Speaker 2:

All right, well, thanks everyone, we'll see you next week. See you.

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