Why representing yourself means you have a fool for a client.
It’s a common story: After years of dreaming and planning, a fledgling entrepreneur finally makes the leap and goes into business.
The young enterprise has some money, but startup funds are limited. The new CEO reads a few articles on the Internet and decides to use an inexpensive Internet service to form a limited liability company (LLC)—saving $2,000 in legal fees!
If this story describes you or somebody you know, please read the rest of this article. While on the one hand a person can appreciate the initiative that entrepreneurs without counsel have, these unrepresented entrepreneurs may be doing themselves more harm than good. Here are merely a few blunders they can make.
Run Afoul of Trademark Law
Entrepreneurs spend a significant amount of time and resources coming up with a creative name for their company. When they finish brainstorming and narrow down the choices to that one, special name, they are ready to move ahead. Soon thereafter, a website is formed, business cards and stationery are created, and an Internet service is used to create the framework of their legal entity.
Unfortunately, these eager entrepreneurs missed a step: They failed to consider whether another person or entity has the exclusive rights to use the name of their newly created business. In the extreme case, these unwary entrepreneurs could find themselves sued for trademark infringement.
Neglect the LLC’s Tax Structure
An LLC can be taxed as a sole proprietorship, a partnership, an S corporation or a C corporation. In order to be taxed under either of the latter two options, the LLC must make a timely election. Earnings of active members of an LLC, taxed as a sole proprietorship or partnership, are generally subject to self-employment tax. By contrast, earnings of active members of an LLC taxed as an S corporation, after paying a reasonable salary to said members, can be passed through as distributions of profits and not be subject to self-employment taxes.
File the LLC in the Wrong State
Many entrepreneurs file their LLCs in Kansas due to legislation that exempts LLC income from state income tax. As it turns out, not all of these people are eligible for the exemption. Moreover, said people now have the burden of filing an annual report with the Kansas Secretary of State’s Office and have precluded their ability to register a DBA or fictitious name.
Furthermore, those same people who are in a rush (to attempt) to take advantage of Kansas’ tax exemption may overlook the fact that there are 49 other states in our Union. States like Nevada offer significant privacy advantages over Kansas, a factor worth considering depending upon the nature of your business.
Fail to Consider Exit Conditions
For single-member LLCs, what happens when the member dies or is divorced? For multi-member LLCs, what happens when one member dies, is divorced, goes bankrupt or becomes hostile to the other member? These issues can be addressed at the outset.
With some things in life, an ounce of prevention is worth a pound of cure. Starting a business is one of those things. Please consider hiring competent counsel and avoid the pains that the DIY attorneys who came before you have suffered.