Your LLC Won’t Protect You If You Make These 5 Mistakes

You paid $50 to file and you're like, "I'm in business, baby. I've got an LLC." You got the right thing, but you got it in the wrong place.

Did you place yourself as registered agent and your home address? Maybe you don't want that on a public record.

If you get in a lawsuit and you don't have a business bank account, it's going to be very easy for the plaintiff suing your LLC to go right through it and after you personally.

Do you even understand why you did this LLC? Or do you just do it because the influencer said to do it? And all these LLCs you paid for to set up are worthless. These are easy things. Just do it freaking right.

Welcome everyone to the Main Street Business Podcast. This is Matt Sorenson joined by the great and powerful Mark J. Kohler.

Well, they say that after he just had to lower his chair because I had the lower chair. So I was looking, I was like the kid at the Thanksgiving dinner.

I didn't want you to feel, you know, I need you to feel big. Yeah, I need you to come in with a ton of confidence today.

So you come out with the great and powerful. Yeah, I was trying to pump you up.

A little kid's chair.

Yeah.

I was trying to pump you up.

Yeah, well, I'm excited for today 'cause this LLC mistakes are so rampant.

This is— Yeah, and I think the LLC's the most common business entity out there. You're going into business, main hustle, side hustle, investing in real estate. You've probably heard about the LLC. You're listening to this, I'll bet you have one, but did you do it right? 'Cause we do thousands of 'em every year setting up for clients who are actually real lawyers instead of this ChatGPT lawyer you're talking to that doesn't know what the hell they're doing or this online site or these people you talk to that aren't real lawyers. We're real lawyers, we've been in the trenches. We want to make sure you know what to clean up, probably.

[Speaker:MARK KOHLER] Yeah, and I'm just going to say out of the 5, only the 2 are did you do it right? The other 3 are once your LLC is up and going mistakes. So you may say, oh yeah, I set it up right, I'm going to go to a different podcast.

Whoa, whoa, whoa.

Little bit more to know here. We're trying to help you out. And it's not just an infomercial sales pitch. These are easy things. You don't have to spend more money, just do it freaking right. So, all right, let's get into it. Matt, I will let you go first here, 'cause I'm a giver.

Thank you.

You're welcome. What is your number one mistake?

Well, number one mistake is you've got this one piece of paper from the state that you did online in 15 minutes and you paid $50 to file and you're like, "I'm in business, baby. I've got an LLC." And you know what? I'll bet you set up that LLC, one of the reasons you set it up was you wanted Asset protection. You wanted to make sure that whatever's happening in that business, something goes wrong in it, you get a lawsuit with a customer, someone you're working with, an employee, whatever, you don't want them to sue you, all of your personal assets. You want to force them to have to sue the LLC and they can only get to that LLC. That's one of the main reasons you set up an LLC. But does that one piece of paper get me there?

[Speaker:MARK KOHLER] Okay, so what are all the parts I need?

Rattle them off. [Speaker:JOHN DEL VECCHIO] All right, you're going to need an operating agreement for your LLC.

Operating— I'm writing these down because I mean, this is a revelation.

Operating agreement is critical. And by the way, when you go to set up a bank account, I just set up a bank account for one of my new LLCs for a real estate deal. And what they asked for? Operating agreement. Like they won't even set up the bank account. They're like, we know you got this piece of paper from the state that says that LLC XYZ Holdings LLC is approved, but we're not going to even let bank you unless you have an operating agreement.

Okay. So, and you alluded to the first one, articles.

Okay.

Because you filed your articles.

Sometimes it's called certificate of organization. Organization. There's 50 states and 50 different names for that. Operating agreement, okay? And then you want to have minutes. These can be organizational minutes, typically to say who your key people are. Yeah, keep things in there.

Tax elections people need to be in there. Accountable plan provisions. Oh, you wanted to take some extra expenses for home office auto, maybe some healthcare strategies. Those better be in your minutes. "Oh, well, my accountant will just do it later." They gotta be in your minutes. Under audit, you will fail. Okay, so minutes. Sorry, that was the accountant in me getting a little irate.

Okay, next thing you brought up, the IRS. You want to get an EIN for the business. Even if this is just a sole proprietorship or there's no S election or partnership separate tax return, you still want to get an EIN for the LLC that's separate from your social.

Yeah, and you're gonna go, "Oh, well, Mark Kohler, under the instructions for the SS-4, if it's a sole proprietorship, I don't need an EIN." you might get it because I just had to go get a sales tax exemption number for one of my LLCs this last week. It was one of the ranch entities 'cause I wanted to go into Tractor Supply and not pay sales and tax. Of course you did. You probably already have your Tractor Supply.

Yeah, I've already got this.

You got it already, that's great. They're like, "What's your EIN?" Now I could have said, "Well, I'm a sole prop. I don't need an EIN." But to go to the state and get a sales tax exemption number, you have to have an EIN even with a single-member LLC. You could have payroll things. You could have sales tax issues. You could have a property tax issue. Get a freaking EIN. You know, I hate it when people say, well, I don't have to floss. Well, 4 out of 5 dentists recommend you floss.

Yeah, yeah, yeah. Also that EIN, by the way, you want to start building, establishing some business credit. You want to get a line of credit in the business. It needs to start getting separation from you personally. You're going to grow and add employees. You're going to need it. There's not a cost to it. All right. It's like, why are you skipping it? It's not requiring more tax filings than you'd otherwise be doing.

So the bank will love it too.

Sometimes called a tax ID, by the way. We're talking about the same thing. There's more.

What else do you want in your little beautiful package?

Well, I'd like a corporate book, you know, to have it all organized. We actually do a corporate book and you can have membership certificates with it. You could— doesn't have to be certificated for an LLC. Corporations need to be certificated, but your LLC does not. So you could You know, there's different ways to go on that, but we want a corporate book with all these documents organized. Now this could be electronically kept too. You know, when we're setting up entities for clients, we have an electronic corporate book on our end that we're maintaining for you as well, at least in terms of like what was set up. Once you get the thing, you got to figure out what to do. We'll talk about next.

And folks, if you did not do it right, we are not going to throw the baby out with the bathwater. We're going to let the bathwater go down the drain, save the baby, Bring it with us. That's an important parallel precaution I would like to make. If you, some of you weren't thinking about that. We want to keep your LLC. We don't want to throw it away if you didn't do it right. We can clean it up. Let's get all the pieces and parts done. So at our law firm, we've been doing that for years. We have a cleanup special on a regular basis. I think maybe we go now, we'll talk about it later, but we want to clean up the entity, keep the EIN, keep the company name, It's all good. Just get it done right. That's number one. [Speaker:MARK KOHLER] Yeah.

And I'll just say a couple things, and this is something you, you know, if you haven't been operating that LLC much or maybe you're new, you might have not been asked for these documents yet. But if you're for real, when you start having real customers, real vendors, real property management companies.

[Speaker:RYAN ESTES] A real lawsuit.

A real audit. [Speaker:MARK KOHLER] Yeah. A real deed that you're going to title into that LLC for the rental property. Someone's going to ask you for this stuff. The title company, the vendor you're trying to onboard, the line of credit you're trying to get, the employee you're trying to hire. Somebody, your lawyer when you get sued, is going to be hoping when that LLC gets sued for something that you have this stuff.

All right, now some of you are like, hurry and get to number 2 because I've got things to do. I paid this company to take care of my LLC. In fact, the influencer I follow charged me quite a bit for a really cool LLC. I did all this stuff, guys. So obviously I did not make mistake number 1 'cause this influencer was amazing. I've got this special crypto LLC. I've got this special LLC for the type of real estate deals I do because this influencer knows what they're doing. And I paid a grand or a couple grand for this LLC. So pray tell what I could have done wrong. Well, mistake number 2 is it wasn't structured properly. Because maybe the influencer that told you to do this, or the cubicle in Nevada that was doing these high-speed LLCs for you, did not take the time to understand your situation or what some of your priorities were or some of the structural issues. For example, did you place yourself as registered agent and your home address? Maybe you don't want that on a public record. Who is your registered agent? And by the way, are you paying out the butt for so— that? Is it too expensive? Maybe you could do it more affordably. So registered agent is a common mistake see clients make with the wrong entity, person, or address. Number 2, did you make the right tax election? Is this supposed to be an S corp? Should have it been an S corp? Did you make an S corp and it shouldn't be? Oh, heaven forbid you're doing a C corporation. Are you the member? Who's the member? Is your trust the member? Are you the member? Oh, you did member-managed? Oh my gosh, now the whole world knows who owns this. Don't want that. Did you— wow. So we've got address issues, privacy issues, manager members? Is your structure proper in the big scheme of things? Do you have a trifecta? Do you even understand why you did this LLC, or do you just do it because the influencer said to do it? So, and I'm not trying to be demeaning here, we're all trying to build wealth and grow and all that, but there's some things that could be structured.

Yeah, do you understand the difference between an operational LLC and an asset holding LLC? Those are different. How are they structured? What's the ownership of them? How is the tax— how are they taxed? Okay, and so, and, and also, if you just have you have one entity, what we know with entrepreneurs is over time, we're going to end up doing more things. You're going to start acquiring assets, you're going to do other businesses, you might have a partnership, and making sure all those entities are coordinated properly is about the structure. So, and then here's what, here's why this matters. The structure that you have is the way that you maximize the asset protection you're hoping you have from an LLC. Okay, you have to have it structured properly. You also want to minimize the taxes you have to pay. Those are the whole structuring points here. Setting up an LLC is not going to necessarily get you that. You have to have the structure of the LLC properly to get that.

I love it. Okay. Number 3. What do you got? What's your favorite number 3?

Number 3 is you got the right thing, but you got it in the wrong place.

Mm-hmm.

Okay. You needed an LLC for what you're doing, You might have even gotten the right documents and maybe even you structured it properly for specifically your situation.

I love it. So you're saying I probably should have set it up in Wyoming? I— I screwed up. I didn't set it up in Wyoming.

Yes. So Wyoming is the state we put every LLC for all of our clients, no matter what state you're in or what type of business you are.

I wonder if they can— can they feel the sarcasm here?

Yes.

So, so please don't. We're wrong. We're joking.

Yeah.

No.

Yeah.

Not every LLC should be set up in Wyoming. Where should I set up my LLCs?

Well, this is the piece that an influencer can't tell you 'cause they don't freaking know because the answer is actually a little nuanced.

It depends.

Here's the basics though. We are going to set up the LLC in the state where the LLC is doing business. If you, I live in Arizona and I got a rental property in Indiana, I'm going to have an Indiana LLC because I'm doing business there. I need the LLC in that state. Could I go to Wyoming? Sure. But if I want to then have that property deeded into an LLC in Indiana, I've got to register that Wyoming LLC for an Indiana now.

Oh, Mark, I mean, Matt, you're so— you really don't know what you're talking about because Wyoming is so good. You want to pay for it in Wyoming, then register in Indiana. Haven't you read up on this? I mean, these influencers, they know know so much more than you. How could you be a lawyer and not know that you should do it in Wyoming first, then in Indiana? Why don't you sell me on that? Are you— are you— you're incompetent, aren't you?

Yeah, I just— I just, you know, I got to be on TikTok more to learn how to be a lawyer, I guess. So, um, here's the— this is the thing with a lot of legal strategy, um, is it works for some people in some instances, but it doesn't work for everyone in all instances. And the Wyoming LLC has been sold to everyone for everything.

Oh, because people make money doing it.

Exactly. And they'll tell you, well, this is what the wealthy do. Not really. This is what some of them do in certain situations. And, and it's, it's very nuanced. So, so the Wyoming LLC, we set them up. We like that strategy for 1 out of 10 clients.

You know, I'm going to do a big reveal here. I haven't, I haven't said this on the podcast before. This is going to be good. I want to look you in the eye when I say this. This is Mark Kohler with, honestly, I probably have over 20 or 30 entities, multiple states, multiple real estate holdings, multiple companies, great law partner sitting right here next to me on our podcast. I have, I can't even count how many different employees in different organizations and paralegals and attorneys working for me. I, Mark Kohler, do not have a Wyoming LLC anywhere in my structure, and I could make a call right now and get one for free done for me in my law firm, done correctly. I don't even have a Wyoming LLC because, people, I don't need one right now. I don't need to have it. It's— the juice is not worth the squeeze.

That's how we say it. Yeah. Mm-hmm. Yeah, so if you've got a Wyoming LLC, is it providing benefit to you? Probably not. Can it be helpful?

Maybe.

Do we need to kill it?

No.

Can we live with the structure?

Yes.

Would I have set one up for you from the get-go? Likely not. So again, most of our clients, even Mark J. Kohler, do not even have a Wyoming LLC. I do not have a Wyoming LLC.

I didn't know. I was waiting to see if you're going to— Is this our—

I probably got 20 to 30 of these too. And I don't have a Wyoming LLC. I know what they are. I know the benefit of them. There are some privacy benefits. There's some outside liability protection benefits to it. But in my own structure and everything with all the LLCs and businesses, assets and things I've got going on, I'm not even utilizing that.

That's interesting. Well, we had to come on the podcast to have a little confession session.

Yeah, there you go. So do you need one? Probably not. But maybe, yeah, I'm just saying it's—

so I'm going to throw this out. If some of you are a little frustrated hearing that, going, well, what the hell, if Mark and Matt is— I would hope you would feel major tax and legal influencers in America with all the resources to do it right and study this every day— if we're not doing it, oh no, maybe I should get an evaluation, a second opinion. Please, I beg of you, down in the description below, there's a link to KKOS Lawyers. You can have a phone call for free with one of our new client advisors. They're going to offer different options for you to get what I would recommend, a comprehensive trifecta consultation. We will, for under $2,000, you're going to be able to meet with a real lawyer on a call, looking at your structure, all your entities, your tax returns, your structure, and we will give you our opinion as to how it could be most efficient for you and will be there for you moving forward with attorney-client representation affordably to do it right. Please do it. We want to save you taxes. We want to make your life easier. We want to give you better asset protection. Please get that call done, scheduled at least once a year to have an evaluation.

Yeah. There we go.

Our work is done. All right. We have 4 and 5.

Yeah, we still got to get to 4.

All right.

You want me to hit 4?

Yeah, I was talking a lot there.

Yeah, you tell us number 4. And then, you know, you kind of—

I kind of piggybacked it.

I know. I was hoping you had a lot on your mind. Yeah, I know.

You had something to say.

You had a confession to make and, you know. All right.

Number 4.

Number 4. You need to be operating this LLC properly. Let me go over some common things.

I can't just— I set it up right in the right place with all the repeats of the parts. I'm done.

You actually need to use it.

Okay, examples.

Okay, first thing everyone will need: this, a bank account. Not your personal bank account, a bank account in the name of the LLC. This is an LLC business checking account. You're going to receive your income in that business from it. We're going to pay your expenses from it. 2 reasons why you need to do that. They're critical. First, if you get in a lawsuit and you don't have a business bank account, it's going to be very easy for the plaintiff suing your LLC to go right through it and after you personally by saying the alter ego of this LLC is you personally. This LLC, you didn't respect it as an LLC. You treated it like your personal bank account. If you ran all the income and expense out of a personally owned business bank— sorry, out of a personal bank account, A court is not going to treat you personally as separate from the LLC because you didn't.

Yep.

And so they're going to blow right through it, and you're— the whole asset protection benefits, the LLC are out.

You know, Matt, again, you're showing your incompetence because didn't you know you can set up a management LLC to run all of my other LLCs? Didn't you know that? Didn't you know I could set up all these LLCs to hold the property but actually use one LLC to manage all of them. Boy, Matt, you need to go back to school or something, because wrong. You cannot have one LLC run the affairs of all the other LLCs. That's the same thing as the alter ego of the one LLC. You have all these pieces of paper, it's smoke and mirrors. You don't think a judge can see through that? You don't think a plaintiff can see through that? Let's say you're suing someone that's playing this game. And they ran over one of your kids, or they had a crappy slumlord, uh, rental property that your kid went to college in, and your child got hurt, or someone got hurt, and you're pissed, and you're gonna go after them. And come to find out, they have all these smoke-and-mirror LLCs, but one LLC runs them all. It's all going to end up back in the same bucket, and all these LLCs you paid for to set up are worthless. You have to respect all of them with And I'm just on the banking issue.

Yeah. Yeah, if you want separate liability treatment, you need to treat the entities as separate. And that starts with the bank account, money coming in, money coming out. The second thing in terms of operating is you need to be conducting business in the name of the LLC. If this is a rental property LLC, the deed to the property better be in the LLC's name, not in yours. And if that's fine, you bought the property in your name, you can deed it over to the LLC.

There's no due-on-sale clause.

Don't worry about the due-on-sale clause. The banks don't care about that as long as you're still paying the mortgage. But also, what about the lease? Is that in the name of the LLC? Is that in your name? If you're a business selling goods or services, are you invoicing clients in the name of LLC? Do you have a service agreement in the name of the LLC? Are you, are you emailing them in your capacity as an owner of an LLC or as the LLC in business rather than just your personal email and blurring the lines? Are they dealing with you personally or are they dealing with the LLC? So you got to operate in the name of the LLC.

Yeah. And I'm— that was a great rental property example. I'll just say a couple of things about an operating LLC that you might be making an S election on someday. Is the merchant account in the name of the LLC? Do you have employees and vendors that are paid out of the LLC? Do you have copy machine agreements or do you, you know, like all the lease agreements, the equipment, your marketing, or does your website reflect the name, proper name of the LLC? Do you have all the disclaimers and contracts? And I mean, I just, the list goes on and on. I'm sorry, but that's how you make money. You set up a structure and respect it and build upon it. And guys, let's be honest. Let's talk about a good thing here. You're going to want to exit at some point. You're going to want to sell this business. You want to create a stream of income. You want to have an operational unit that's got value in and of itself. If you're blending all these lines during your scaling, you're, you're not creating a value of something that someone's going to want to buy. Make it easy for them. Make— let me Help you. Help me. Help you. One might have—

Good, Jerry. All right, here we go. All right. Number 5.

Number 5. I can say number 5.

Yes. Yeah, you get it.

This is one of my favorites, too. Number 5 is maintaining the LLC. We just talked about operating the LLC. Now we got to go back to maintaining the entity itself. Are you paying the annual fee to the state? Is there an annual fee? Is there an annual filing? Have you checked on it recently? Is your LLC in good standing or has it been administratively dissolved by the state? Because I haven't heard from you. You ghosted them after setting up your LLC. Have you held your annual minutes? Well, Mark, I don't have to do that. It's an LLC. Gosh, you guys are stupid. Didn't you know that LLCs don't have to do minutes? Yeah, you don't have to floss either. See you next year when you're getting that root canal. People, You want to maintain the LLC by having your annual meeting minutes, and it's a great tax write-off opportunity. You want to make special tax elections in those minutes. You want to have a board meeting with your family when you're having Thanksgiving dinner. I want to write that trip off. I want to go on an annual trip with my family and talk about business, leaving a legacy, talking about business. The board meeting should be one of your most special times. Literally, Patty and I, my wife and I, we love to have our board meeting with our kids. And we have a company for this—Main Street Business Services—we have a portal where you can actually do your meeting minutes online on your laptop or on your iPad at your board meeting in the mountains looking out the window and oh, how did the business do? Check check check check check block block go go! And then your minutes are printed for you. They're organized. It's super expensive though. I'm sorry. Buckle up—it's $200 bucks a year. I know! Highway robbery.

But anyway, yeah, I'd say the other big thing about it is we get a lot of clients that they're like, man, I just got to focus on my business every day, handling my customers, getting new sales, growing that business, doing the marketing, the ops, all the things that you're good at. The thing you got to get stuff off your list. You don't want to be like, like remembering, did I renew this year with the state? Did I file that renewal to keep it active? Is my entity in good standing? Is it administratively dissolved because I didn't pay the annual fee to the state to keep I didn't fill out the one piece of paper I got to do to keep it active. Do you really need that on your to-do list? Get it off your to-do list. Okay, that's part of that whole service that we're talking about here. And this is the maintenance. So whatever the process is, you got someone on your team, you're dedicating the time for it. I just say outsource it. It's what Mark and I do with our own entities too, to Main Street Business, is get someone that can handle that for you. Make sure you're doing it. But we got to make sure that entity stays active. So that we have the— so that— and I've had clients call me up being like, "My entity's got dissolved with the state. What do I do?" And it was a customer of theirs, and it was a very embarrassing moment for them to be like, "I looked you up, bro. Your entity's dissolved." And they had no idea because they weren't paying attention to it. They get busy with everything else. So we get that taken care of, get the minutes done, making sure you're ensuring asset protection. So we want to make sure it's maintained and we've got that corporate veil 100% intact. Did you go to the dentist, by the way, recently? Why is all these dental examples? You know, it is kind of funny.

I— maybe isn't it subliminal? I guess I did cancel my dentist appointment last week. I'm sorry, I'm going to take a shot at Dennis. I'm going to— one more. I would say I was telling Dennis all the good things of flossing. You were kind of— I was on your bandwagon a moment ago. But I will say this, the dentist— I like— I cannot come in Thursday at 2 o'clock. I've got a life. Sorry, can't go to the dentist at Thursday at 2. I can come in Friday afternoon. Oh, I'm sorry, the dentist doesn't work on Fridays. Do you know a dentist that works on Fridays?

Yeah, I think, um, was that a class in dental school? There, you know, I think that's just like the thing of being a dentist. They're— that's just like, that's like they get to get away with that, I guess.

I said I'll come in when he's open on Friday. I literally said that. Patty was kind of mad at me. She's like, you don't say that. I'm like, why? I work on Fridays. How did Dennis get away with that?

You have the right to go somewhere else.

Yeah, I do. So anyway, um, sorry, you brought up something. No, I— teeth are great. I never had a cavity my whole life. I'm super lucky. But I do need to go in, just, you know, get good teeth cleaning.

You never have a cavity your whole life? Wow.

Yeah, I've gotten blessed with good teeth, I guess. Anyway, okay, so what's our 5? Set it up with all the right documents. Number 2, make sure the structure is correct. Number 3, did I set it up in the right place? Number 4, am I operating the LLC properly? Number 5, am I doing the correct maintenance so that my LLC gives me the tax and legal benefits I dreamed of? Those are the 5. They're not that hard. They're not that expensive. It's just, yeah, following the procedures. Asset protection is actually very easy and affordable. We get sold this concept it has to be this big deal.

Right, and it's a bunch of BS you don't need. So if you've got your entity and you've got your LLC, you've done those 5 things, let's turn this around. I'll bet your entity's doing great. I'll bet you've got everything dialed in and you're setting yourself up for success. So think of those 5 things. Hopefully some of them were helpful to you. We're here if you need us to be a resource to help you. Reach out at KQS Lawyers. Links, KQS Lawyers. That's our law firm, helping clients across the country for 20+ years. A team of 60+ amazing people you get to work with. We love to help you. And, uh, thank you for tuning into the Main Street Business Podcast. Please share this with your friends and family. Give it a thumbs up, 5 stars. I, I don't know the other ways you can do it. Yeah, yeah.

Send, send, you know, send up a smoke signal, put it on a balloon, send, send, send vibes, send it. Whatever. That's kind of young people say that. Send it. Send it. Okay.

All right. All right. Thanks everyone. We'll see you next time.