I Fix Broken LLCs Every Week — Most Make These Mistakes

There's a real chance the LLC you're counting on right now is broken, and you won't find out until the exact moment you really need it to work for you. A lawsuit, an audit, a partner falling out, death in the family. Here's what scares me, it won't look broken. You got the articles that you filed when you formed the LLC. You maybe paid a service a few hundred bucks and got a nice PDF back that you never signed, and you've got a book collecting dust in the corner. You feel protected, but having an LLC and having one that actually holds up are two completely different things. And I've had people sit across from me thinking they're okay and they're covered, and I have to break them the bad news that the LLC they actually thought was protecting their house and investments has a hole in it. I'm Mark J. Kohler, CPA, attorney, bestselling author, and my law firm has set up and repaired tens of thousands of LLCs over the last 3 decades. I own LLCs myself and several businesses. And the problem is they weren't careless, it's just they got generic one-size-fits-all advice and set up an LLC off the internet and didn't really tailor it to their situation in business. So this isn't how How to form an LLC video. This is a diagnostic. I'm going to walk you through 7 mistakes that quietly destroy an LLC. They break down the protection you thought you had, and we're going to look at your own setup and answer one question: is mine one of them? So stay to the end and I'll give you a checklist you can screenshot and run against your own company in about 60 seconds. Let's find out if yours is broken and get to it. Mistake number 1: you formed the LLC in the wrong state because the internet, AI, or some guru told you to. This is actually the single most common broken LLC I see, period. And actually it's easily fixed, but it happens when someone watches a video, sees an ad, some service says, "Form in Wyoming, that's the best state, and that's where all the rich people go and the successful business owners," or go to Nevada or go to Delaware. It sounds great and they do it, but without asking the one question that actually matters most. Where are you doing business? That's the first question. Here's an example of the trap. You live in Arizona, you work in Arizona, your clients are in Arizona, and you form an LLC in Wyoming for $300 because it sounded great, it was a better price, it was simpler, it was easier, someone told you to do it. Then Arizona says, "Great, now register here too as a foreign LLC because this is where you're doing business." Maybe you're surprised and then you say, "Okay, so now I've got two state filings, two annual fees, two registered agents, two layers of compliance." And what did it get me? Now there's a reason to set up in Wyoming, but it's not for what I just described. It's to maybe protect an asset, not run a business. So that $300 hack quietly becomes a $500, $800, $1,200 mistake and a lot of paperwork for zero extra protection. See, when you're forming a business, the LLC should follow your actual life. Where is your business? Where do you live and work and are doing business? Now, if we're trying to protect an asset, then we might look at a Wyoming situation as a second layer of protection. But that's going to cost more. But we're trying to protect an asset. But if you're running a business, then we've got to look at that LLC through an entirely different lens, not where an influencer earns an affiliate commission. There are times it makes sense, like I said, for an asset, but for most people starting out, it doesn't. So gut check number 1: did you form an estate you don't actually live or operate your business in because someone online or someone told you to? And if that's the case, we need to fix it. Mistake number 2, the one LLC is doing every job. Now, this one might be the most dangerous mistake on the list because it might sound normal to set up an LLC and use it for consulting income. Oh, I bought a rental property. I'm going to put it in that LLC. I already have one. Oh, I'm going to sell some product on an Amazon store. Oh, I've already got an LLC. Perfect. Oh, I'm going to do some coaching and oh, I'm going to buy a truck. I should have my LLC own it. And throw in a family cabin, other property. It makes sense that you have this LLC and you're just going to use it for everything, but then it becomes the basket all of the operations and all of the assets are in. That's kind of scary. All your eggs are in one basket. Regrettably, it's not that simple. So picture a box and let's say everything you own and your operations of your business are all in that one box and there's a lawsuit. And that lawsuit now puts everything in the box at the same risk. It puts it all on the table. Your marketing business catches a client dispute, fine. But why is your rental property sitting in the same business where you're doing coaching or consulting? It exposes the rental property to the operational business. Now, I'm not going to teach the full build on how to pull this off with my Masterful Trifecta. Please check it out. I've got other videos on structuring it the right way. You can watch it there. But here's gut check number 2. Is your LLC doing more than one business or holding other assets mixed in with your business. Now, before I go on, if you're already stressed out a little, a little bit of anxiety or freaking out, don't worry. Main Street Business Services, a support company to our law firm, can be of help immediately. And I'm going to have links down below and explain more of how you can make a call to them and immediately get some help on those first two problems that could be besetting you. Mistake number 3, the wrong people are listed as owners. Now, this gets personal. So many people hand out ownership like a party favor. Well, I'm going to add my spouse or I'm going to put the kids on as ownership. Or maybe my parents. Well, my buddy's going to help manage this, or I'll give them 10% or 5% and we'll see how it goes. Stop. Putting your spouse and your kids on as an owner may seem really straightforward, but it can mess up an entire amount of tax planning that is going to come down the road and bite you in the butt. Now you're filing a 1065 partnership return that can be quite expensive compared to a Schedule C a small business, or Schedule E, a rental property. They're going to be easier schedules to fill out for tax reporting. And once you put your kids on as ownership, they're on as an owner. You can't just take that away. Very tricky. One extra owner creates a whole extra tax return every single year. That's why the cleaner move is to usually keep it owned by yourself first. And you can still employ your family members and get them involved, but they don't have to have ownership. And the reality is, I want your revocable living trust to own the LLC. 'cause we want everything coordinated where if your family does need to take over and something happens to you, they can. That's where the trifecta comes into play as well. But let's get the LLC owned by the right entity, which would be your family trust. Now I think it goes without saying, but I'll say it anyway, giving ownership to that friend or that manager or kind of pseudo employee 'cause you want them to have a feeling of more ownership, we can accomplish that with a better employment agreement than just giving ownership of the LLC. Another big topic, but be careful giving away ownership. Ownership is a legal decision, not a love language. Loving someone, wanting them to be motivated, all those things is not a reason to make them a part owner of your company. So gut check number 3, is anyone on the ownership of your LLC for emotional reasons or maybe a reason you don't even really understand? Let's review it. Mistake number 4, you picked the wrong management structure or one got chosen for you. This is one almost nobody thinks about, and it really can expose your personal life to the public more than you realize. And it can quietly decide who's actually also in control of your business. When you formed an LLC, you had to choose between member-managed or manager-managed. Again, intuitively, it may seem simple to say, well, I'm going to be the owner or member, and obviously the manager, so I'm going to go with member-managed. It seems like the right choice. And also, most people go in and check whichever box was already selected for them and don't even think about it again. In plain English, however, a member-managed LLC means the members are going to be listed on the public record as the owner and manager so everybody can see who owns your LLC. Number 2, the member-managed means every owner now has a hand on the steering wheel or a say in how the business is run. But a manager-managed LLC means that one person is designated to run the operations and no one knows who the owners actually are. Which could still be you, but you may not want the public to know that. 'Cause again, you might have your family trust as the owner while you're the manager. And actually you can be in charge of the LLC with other owners if you do choose to go that route. Every LLC we set up is manager-managed. It just makes so much sense and easier to run the business down the road. It matters for control, privacy, who can legally sign the documents, and especially when there's a threat and people start to look at who's the real owner of this company and they can find it easily when and it's member managed. Let me give you an example that might make more sense of this too. Let's say 3 siblings, a brother and 2 sisters, own a rental portfolio, an LLC, and they designate it as member managed. Well, now the world all knows who really owns the LLC. Number 2, if they go to sign any document, all 3 of them have got to sign it. Go down to the title company and have fun with that one. Now, does that take away their real ability to own and control and make decisions for the company? No, but it's behind the scenes. One person could be designated to run the business, but everybody's there to decide if we want to sell or refinance or work out problems. So it's just a real simple way to run the company efficiently but still give everybody their decision-making ability, but again, behind the scenes. So gut check number 4, do you actually know whether your LLC is member-managed or manager-managed? And was that a decision you intentionally made or an accident. Mistake number 5, you have a filing, not an operating agreement. The hard truth is if all you have is a stamped certificate or the articles of organization from the state, you don't have a complete LLC. You have a receipt. A real LLC has an operating agreement, and that's where the actual rules live. It's kind of like the bylaws of a corporation. It's the Bible of how the business is supposed to be ran. Who owns it? Who can make decision? What happens if someone wants out? What happens if someone dies? How are the profits distributed? When do we have to contribute more money. You may say, well, Mark, I'm the only owner, so it doesn't matter. Well, without it, you're stuck with the state's default rules if you're unable to make a decision or if something happens to you, or if you're in a lawsuit and you're trying to show you really treated the LLC like a legit company and you don't even have an operating agreement. I've watched businesses worth $300,000, $500,000, over $1 million get frozen in a dispute because No one wrote down the basics and had an operating agreement. And try to go get a loan at the bank with just one sheet of paper. They're going to want to see all these documents. You need the guts of an LLC to have a real LLC. Now, if it was a partnership, everyone gets along until there's no money in the bank or on the table or a death or divorce or disability. Oh my gosh, so many things can go wrong. That's the day the operating agreement comes out of the drawer, becomes the most important piece of paper you own for that business. And the day people realize they don't have an operating agreement, can become one of the worst days of their business. Gut check number 5, could you get ahold of or put your hands on your operating agreement? Do you think you even have one? Well, if you don't, let's get on it. Mistake number 6, you have an LLC, but you don't treat it like one. This is where protection is actually won or lost. It's the little things. And it has nothing to do with the filing and everything to do with your behavior after you form the LLC. People tell me they have an LLC and we go to start working on their taxes and then come to find out all the income is landing in their personal account. They've got bills paid out of how many different credit cards or bank accounts? They pay personal bills out of the business. They pay business bills out of their personal account. They even Venmo themselves randomly. No separate bank account even sometimes. No books, no line between where the company ends and begins. Let me be blunt. If you don't treat the LLC like a separate person, a separate entity with its own bank account and transactions, why on the earth is a court going to uphold your LLC when you don't treat it like an LLC? That's the exact moment a lawyer starts saying, "Pierce the veil." And if they win that argument, that's when a creditor can start going into your personal life and taking assets or money off the table because the LLC isn't protecting you anymore. You didn't treat it like an LLC. And it's not just banking, it's the upkeep. An LLC is not like your Crock-Pot with the Sunday roast. You don't just set it and forget about it. You've got to maintain it with the annual renewals with the state, staying in good standing. Some of you may have an LLC that's out of good standing and you don't even know it. Have you been documenting the big decisions, holding annual minutes? It's not that complicated. It's not that hard. And it's a great time for a tax write-off to have a board meeting and involve other family members without, again, giving them ownership. Because if you get sued or audited and can't show you respected the entity and have all these minutes and the paperwork of an ongoing entity, they're going to think you just treated it like your personal piggy bank and that LLC does you no good at all. I've said it for years, minutes aren't paperwork, they're proof. So gut check number 6, it's a big one. Do you have a separate bank account? Do you have clean books? Is your entity in good standing? Do you have a corporate book with minutes? And if you can't answer yes to all of those, we've got to get working on this right away. And mistake number 7, drum roll, please. You put your home address on all the documents for your LLC. Now, at the time, that may have made sense. It was simple and easy. You didn't have a mail forwarding address. You didn't have a PO box. You didn't have an office. Again, you did what was easy. You put your home address on as the address of the company, and you may have put yourself down as the registered agent with your home address because you have to have a street address for that. Now, at the time, it probably didn't mean anything, but now you've been running your business for how long? 6 months, 6 years. And your home address is out there where a tenant that's disgruntled or upset, all they have to do is go online. They can be at your front doorstep and who knows how long. Not good. Clients, customers, tenants, vendors. We do want to have a little privacy, and putting your home address out there on all the LLC documents, not a good privacy move. But the solution isn't that expensive, and it's quite simple. You restate the LLC with a different registered agent than you, with the proper address that's not your home, and maybe even a mailing address for the company. Lots of options, and it can be very affordable. Let's reset your LLC and fix some of those other problems maybe, and also set up more privacy for your personal life and your family. So gut check number 7, what address is laid out all over your LLC like a cheap suit? Let's look at that. Now, if you remember at the beginning, I promised you a checklist, something that you could even take a screenshot of. So I'm going to run through this checklist, if you will, of how to tell if your LLC is broken and You can take that screenshot whenever it's convenient for you. Number 1, did I form the LLC in the right state for where I actually am doing business or the property is located? Number 2, is the LLC doing only one clear job and I'm not mixing operations with an asset? Number 3, are the owners of the LLC the correct owners or have I muddied the waters and made it more of a legal nightmare? Number 4, is my LLC manager-managed, keeping the actual ownership private from the public record Number 5, do I have a real signed operating agreement I could rely on and find today? Number 6, do I have a separate bank account? Do I have clean books? Am I in good standing with the state? Have I been doing minutes? Do I have a corporate book? All those pieces and parts. And number 7, what address is all over this LLC for the public to find out and come visit if they'd like to? Now, if you've got a problem in one of those 7 areas, the good news is almost every broken LLC can be fixed.. But the earlier you catch it, the cheaper, cleaner, and safer the fix, and the more protection you actually keep. So bottom line, an LLC is not a magic shield. It's a tool. And a tool only works when it's chosen right, set up correctly, and maintained. The real strategy was always supposed to start after the filing, not end there. Now, after going through that checklist, if you realize you need help, we're here for you. Main Street Business Services and our law firm has been helping clients for over 20 years. We've been helping clients stay compliant, organized, protected, and without the stress of managing it all yourself. You can learn more and get started using the link in the description below. And if this made you look at your own LLC a little differently, drop a comment with the mistake below. Maybe something that hit close to home. I read them and they shape what I may cover next. And of course, hit the like button, subscribe, and turn on notifications so you don't miss future videos. I'm Mark J. Kohler. Thanks for watching, and I'll see you in the next one.