Seven Risky Mistakes To Avoid When Forming An LLC In New York State
Forming your LLC in New York state is essential to growing your business and being considered a legitimate legal entity. The LLC protects your assets from a lawsuit, creates an enforceable operating framework, enables you to hire employees and contractors, and gives you access to funding.
As you learn how to form an LLC in NY, you’ll find that certain decisions you might make can cause trouble later and force you to make tough decisions. The following is a look at many people’s mistakes when forming their LLC and how you can avoid them.
1. Choosing The Wrong Business Entity Type
Most small businesses start as sole proprietorships due to their simplicity and straightforward handling of finances. However, a sole proprietorship has drawbacks in the form of a lack of personal protection from a lawsuit and a lack of privacy. You need to choose the correct corporate entity that makes the most sense for your business. Selecting the wrong entity can be costly and force you to dissolve the current organization instead of incorporating it into the proper one.
Many look into forming an LLC in NY state to take advantage of the limited protection and pass-through of profits to the members. However, is an LLC right for you? It may or may not depend on your business income and the type of business you’re operating.
Sticking with a sole proprietorship as your business grows doesn’t protect your personal information and assets. An aggrieved party can sue you personally and ask for damages from your pocket. It’s best to incorporate into the appropriate type of business entity when your business sees significant growth and starts to generate profits.
The most common corporate entities include sole proprietorships, LLC, partnerships, S, and C. The LLC has an advantage in that profits are taxed at the personal level. Although, taxes are not necessarily lower since they’re handled on Schedule C of Form 1040, the same as a sole proprietorship. An S corp or C corp may make more sense, and it’s worth talking to a tax professional such as an accountant or attorney to help you avoid making a mistake with your incorporation plans.
2. Incorporating In The Wrong State
You might be wondering how it’s possible to incorporate in the wrong state, mainly since your business is located in New York. This mistake comes from the fact that you can incorporate in another state even though you don’t live there. You can incorporate your business in the state of Delaware to take advantage of its corporate-friendly laws and court system. However, there are drawbacks to going this route.
Incorporating your business in another state only adds more paperwork and causes double taxation and fees for your business. The fees you pay for incorporation in another state also have to be paid in New York state so you can legally operate your business within state lines. You also have to register your LLC in New York state as a foreign business.
Going the route of incorporating in another state makes sense when you do a significant amount of business in that state or require a particular service provided by that state. However, if you’re running a small business that does most of its transactions in New York State, you’re best off learning how to form an LLC in NY, then maintain the corporation according to state laws. You’ll spend less money and have fewer operational concerns.
3. Failing To Keep Your LLC In Good Standing
After you’ve formed your New York LLC, you have to maintain its good standing to comply with state laws. New York state wants to make sure that your business is still in operation at the same address, complying with the regulations that apply to your business, and your registered agent hasn’t changed. To keep your business in good standing, you need to file a biennial statement with the Department of State.
It’s easy to overlook the requirement to file your biennial statement for your LLC as it’s required every other year, but you risk the dissolution of your LLC by the state of New York if you don’t file promptly.
Set up a calendar reminder to file your biennial statement and avoid the inconvenience and expense of getting your corporation reinstated. Alternatively, you can retain a corporate service company and have it file your biennial statement on behalf of your business.
4. Failure To Obtain Proper Permits And Licenses
The federal government, the state of New York, and even your local municipality can require you to carry valid permits and licenses for the operation of your business. These legal instruments show the public that you have undergone proper education to learn your skills and craft have taken the required safety courses for doing your job or handling hazardous materials, and are trustworthy.
Not getting proper permits and licenses can jeopardize the operation of your business with various governing bodies and their agencies, as well as prevent you from keeping your business in good standing with New York state. Don’t risk getting into trouble with the authorities by failing to get your permits and licenses.
5. Working With Vague Operating Agreements
One of the steps involved in forming an LLC in New York state is creating an operating agreement. The operating agreement is a document that lays out member responsibilities for the operation of the LLC. The duties include management, finances, purchases, and other day-to-day duties of the operation. That way, no one can argue about who’s responsible for what, and it also enables enforcement of stated obligations. If a member fails to perform their duties, they can be held accountable for their lack of action through the operating agreement.
A vague or poorly written operating agreement makes it difficult for members to understand their duties and who’s in charge of what, resulting in members taking on responsibilities that weren’t assigned to them. You need to ensure that the operating agreement has clear statements easily understood by members. This also prevents one member from taking over another member’s duties without being asked, something that can cause confusion and make it more challenging to get members to return to their duties.
6. Downloading Operating Agreement Templates From Random Websites
As you search for information on how to form an LLC in NY state, you’ll come across websites that offer an operating agreement template as part of the instructions. These templates can be helpful, but if you don’t have a frame of reference as to what should go into an operating agreement, you might overlook essential elements that can come back to hurt you later.
Randomly downloading an operating agreement sounds like a time-saving idea. Still, if it doesn’t contain the necessary language to hold members responsible, it can create issues if someone decides to abandon their duties or exit the LLC altogether. A poorly written operating agreement isn’t likely to hold up well in court if you choose to sue a member for their failure to perform.
Don’t trust an operating agreement to contain everything you need for your LLC. Contact a professional who can draw up an agreement with all the relevant duties laid out.
7. Not Having A Non-Solicitation Agreement
A non-solicitation agreement is a legally enforceable document that prevents a former employee from pursuing their own business from approaching your competitors for sales and recruiting your employees. The agreement can include a period that prevents the employee from soliciting their co-workers to work for them. This agreement prevents a former employee from taking your employees and customers away from you.
You may think that you’re fine without having a non-solicitation agreement and that you can trust your employees not to turn on you, even if they leave the company. The fact is, business is business, and you have to protect your interests against the machinations of others. Getting a non-solicitation agreement in place and signed by employees isn’t personal, nor is it saying you don’t trust your employees. Instead, it’s just good business.
8. Failure To Create An Intellectual Property Contract
An intellectual property contract states that an employee who creates something for the company can’t claim the intellectual property as their own. This type of contract is essential for businesses to develop products and services. You don’t want an employee to quit and take their work with them without legal recourse.
Ensure an intellectual property contract is drawn up for employees to sign when you hire. It makes employees aware that they’re creating something on your behalf and that you own their work. It also informs the employee that you can hold them liable in court if they break the contract.
Contact Windsor Corporate Services For Help With Forming Your New York LLC
At Windsor Corporate Services, we’re here to help you form an LLC in New York state and avoid these mistakes that can jeopardize your LLC. Contact us today or go to our website to learn more about our services. Our services include the creation of an LLC kit that’s customized for your business and provides the proper documentation that makes it easy for you to maintain your company records and documents. We also offer services that include maintaining the certificate of good standing and retrieving copies of documents filed with the state