What not to do with an LLC?
Asked by: Ariel Jacobson Jr. | Last update: January 31, 2026Score: 4.9/5 (23 votes)
When running an LLC, avoid commingling funds, neglecting paperwork (like operating agreements, annual reports, and meeting minutes), failing to get proper licenses, and treating it like a personal piggy bank, as these mistakes can lead to piercing the corporate veil and losing personal liability protection. Don't forget to document transactions, keep finances separate, and maintain compliance with state requirements to ensure your LLC offers the asset protection it promises.
What can you not do with an LLC?
10 Things to Avoid Doing with an LLC
- Fraudulent conveyance of assets. ...
- Evading taxes. ...
- Choosing a bad partner. ...
- Ignoring the bureaucratic paperwork. ...
- Trademark infringement. ...
- Not creating an operating agreement. ...
- Not documenting company activities. ...
- Treating your LLC like a personal piggy-bank.
What are the negatives of having an LLC?
Disadvantages of an LLC include self-employment taxes on all profits (unless taxed as a corporation), higher costs and paperwork than sole proprietorships, difficulty attracting outside investors (like VCs), limited life (can dissolve with member changes), potential for personal liability if formalities aren't followed, complex ownership transfers, and state-specific rules that can add fees (like franchise taxes in California).
What are typical LLC mistakes?
Typical LLC mistakes include mixing personal and business finances, failing to create an operating agreement, not separating assets, ignoring ongoing compliance (like annual reports and taxes), choosing the wrong state for registration, and failing to get proper business insurance, all of which can lead to losing the liability protection an LLC offers.
What happens if you start an LLC and do nothing?
If you start an LLC and do nothing, it can remain inactive, but you'll likely face state requirements like annual fees and reports, potentially leading to suspension or penalties, and still need to handle federal taxes (like reporting expenses on Schedule C for single-member LLCs) or file corporate returns (if elected as C or S corp), even with no income, while risking loss of liability protection and business credit if you ignore compliance, says LegalZoom, BetterLegal, Law 4 Small Business, Imani Law, and Northwest Registered Agent.
Avoid These MISTAKES BEFORE Starting an LLC!
What is the $600 rule in the IRS?
The IRS $600 rule refers to the reporting threshold for third-party payment apps (like PayPal, Venmo, Cash App) for income from goods/services, where they send Form 1099-K to you and the IRS for payments over $600 in a year. While the American Rescue Plan initially set this lower threshold for 2022 and beyond, the IRS delayed implementation, keeping the old rule ($20,000 and 200+ transactions) for 2022 and 2023, then phasing in a $5,000 threshold for 2024, before recent legislation reverted the federal threshold back to the old $20,000 and 200+ transactions for 2023 and future years (as of late 2025/early 2026), aiming to reduce confusion.
How does an LLC avoid paying taxes?
An LLC helps avoid double taxation by acting as a pass-through entity, where profits flow to owners' personal taxes, but you can further reduce taxes by electing S-Corp status, allowing you to pay yourself a reasonable salary (subject to payroll taxes) and take remaining profits as distributions (not subject to self-employment tax). Deducting business expenses, like home office costs, is crucial for lowering taxable income, but simply forming an LLC doesn't magically create write-offs; you must have ordinary and necessary business costs.
What is the 6 month rule in business?
Simply put, if the decision were to go south, could your business afford to 'burn' cash for six months without going under? This is a critical safety net that protects your business's longevity. It's about acknowledging that not every investment will yield immediate returns and preparing for that reality.
Why would I not want an LLC?
LLCs Can Complicate Investor Tax Situations
Investors frequently do not want to complicate their personal tax situation by becoming a member in an entity taxed as a partnership, and LLCs are most frequently taxed as partnerships.
Why do 90% of small businesses fail?
Most small businesses fail due to a combination of poor financial management (cash flow, undercapitalization), lack of market need for their product/service, weak business planning, ineffective marketing, and flawed management/operations, with many founders underestimating the "boring" business side or failing to adapt to market changes. While competition plays a role, self-inflicted wounds from poor fundamentals are often the primary culprits, leading to issues like running out of cash or creating something nobody wants to buy.
How much can an LLC write off?
New LLCs can deduct up to $5,000 of startup costs and $5,000 of organizational costs in the first year if total costs don't exceed $50,000. Qualifying expenses include state registration fees, legal fees to form the LLC, initial marketing, market research, business plan development, and accounting software setup.
What does an LLC not protect you against?
If an LLC member personally guarantees a business's loans or obligations, he or she will be held liable for any default. An LLC won't protect a member who commits a wrongful act or is negligent in a way that results in harm to another person, such as fraud or assault.
Does an LLC need a separate bank account?
Yes, you absolutely need a separate bank account for your LLC; it's crucial for maintaining the liability protection that separates your personal assets from business debts, simplifies taxes and bookkeeping by keeping finances distinct, and builds credibility, as commingling funds can put your personal assets at risk and void your LLC's legal separation.
At what income is an LLC worth it?
There's no magic income number for an LLC; it's more about risk, credibility, and potential tax benefits, but many experts suggest considering one when your business net profit hits $30,000-$60,000, or sooner if you have high personal assets or liability exposure (like selling products that could cause harm). An LLC protects personal assets from business debts and lawsuits, offers tax flexibility (like S-corp election), and boosts professionalism, making it valuable even before substantial income, especially with high risk or significant assets to shield.
What is the new rule for LLC owners?
The main new rule for LLC owners in the U.S. is the Corporate Transparency Act (CTA), requiring most LLCs to report Beneficial Ownership Information (BOI) to the FinCEN (Financial Crimes Enforcement Network) starting January 1, 2024, to disclose who ultimately owns or controls the company, with strict deadlines (Jan 1, 2025, for existing firms, 90 days for new ones) and severe penalties for non-compliance, focusing on combating financial crime.
What happens if my LLC makes no money?
An LLC may be disregarded as an entity for tax purposes, or it may be taxed as a partnership or a corporation. Even if your LLC has no income, you may be legally required to file taxes. There are other reasons besides legal compliance that you may want to file a tax return for an LLC with no income.
What are 5 disadvantages of LLC?
Five disadvantages of an LLC include higher taxes (self-employment tax), difficulty attracting investors, increased compliance/fees (state filings), complex equity/ownership transfers, and potential for personal liability if formalities aren't followed ("piercing the corporate veil"). Owners must also be diligent about separating business and personal finances, which adds administrative work.
What happens if I make an LLC and never use it?
California: LLCs in California are required to pay an annual minimum franchise tax of $800, even if they have no income or activity. This tax is due by the 15th day of the fourth month after the LLC is filed.
Do I pay more taxes with an LLC?
Your LLC profits are taxed at your individual income tax rates—just like when your LLC is taxed like a sole proprietorship. No double taxation and you can qualify for the qualified business income deduction.
What is the golden rule for every business?
Orison Swett Marden, a pioneer of the New Thought movement and a significant influence in the realm of personal development, once said, “The Golden Rule for Every Business is this: Put Yourself in your Customer's Place.” This simple yet profound statement underscores a timeless principle that can transform how ...
How many months of expenses should a business have?
Here's the truth—the amount of cash your business should really have tucked away is more than you might expect. The goal is to save about six months' worth of operating expenses in cash. That may sound like a lot, but with consistency and a plan, you'll get there one step at a time.
What does 5 to 13 business days mean?
A “business day” is typically defined as any day when standard businesses are open, excluding weekends and public holidays. This means that business days generally refer to Monday through Friday, with exceptions for national or local holidays like New Year's Day, Independence Day, or Thanksgiving.
What are common LLC tax mistakes?
Common LLC tax mistakes include mixing business and personal finances, failing to make estimated tax payments, poor record-keeping, misclassifying workers (employees vs. contractors), not understanding or choosing the correct tax classification (like S-Corp vs. default), ignoring self-employment taxes, missing deadlines, and neglecting state/local tax obligations, all leading to penalties and lost deductions.
Why do rich people buy houses under LLC?
Buying a house under an LLC can shield your personal assets from potential lawsuits or debts related to the property, offering an extra layer of liability protection. LLCs may provide benefits, such as pass-through taxation, which help avoid double taxation seen in corporations.
How to avoid 40% tax?
To avoid paying a 40% tax rate (or higher rates), focus on reducing your taxable income through tax-advantaged accounts like 401(k)s, IRAs, HSAs, and salary sacrifice, maximizing deductions and credits, using strategies like tax-loss harvesting, deferring income if self-employed, making charitable donations, and seeking professional advice to utilize tax loopholes and credits effectively, as paying taxes is legally required but managing your liability is strategic.