Top 13 Common Mistakes To Avoid When Forming an LLC [2026 Guide]

Key Takeaways:

LLC formation is usually smooth when you follow a clear checklist.

Early choices, like your state and LLC type, can affect taxes and paperwork later.

Keeping business and personal finances separate makes recordkeeping easier.

A basic operating agreement helps everyone stay on the same page.

A calendar and reminders can help you stay current with state filings.

Forming an LLC is an important step, and small details can make a big difference over time. While the process may seem straightforward, small details can influence how smoothly your business operates over time. LLC formation is not only about filing paperwork or choosing a name. It is also about setting up clear structures for taxes, ownership, and ongoing compliance. Business owners can move confidently if these details are addressed early.

Many business owners simply do not get clear guidance early in the process. This may result in additional filings or adjustments later.

That is why some choose to work with LLC formation services for added clarity and support. Below are 13 common LLC formation mistakes to be aware of before getting started.

1. Choosing The Wrong Entity

An LLC can be set up with one or more than one owner.

• Single-member LLCs are common for solo owners and freelancers.
• Multi-member LLCs are common for businesses with partners.

Next Step

Write down:

• Who owns the business today
• Who might join later
• How you want decisions and profit splits to work

If there is more than one owner, plan for an operating agreement early.

2. Forming an LLC in the Wrong State

Many business owners consider forming an LLC outside their home state. This can look appealing online. In many cases, if your business mainly operates in one state, you may still need to register in that state, too. This can mean extra filings and extra fees.

Next Step

Ask:

• Where do you work day to day?
• Where do you meet clients?
• Where do you have an office, workers, or inventory?

If most of your activity is in one state, start by checking that state’s rules first.

3. Mixing Personal and Business Finances

LLCs are designed to separate personal and business activity. Mixing finances can make recordkeeping more difficult and blur that separation. Keeping business transactions separate supports:

• Clearer accounting
• Easier tax preparation

It also helps demonstrate that your business operates independently.

Next Step

• Open a dedicated business account and credit card as soon as your LLC is formed.
• Use accounting software to categorize everything correctly.
• Use simple bookkeeping tools to track spending.

4. Not Creating an Operating Agreement

An operating agreement explains how an LLC is structured and managed. It outlines:

• Ownership percentages
• Decision-making authority
• Profit distributions
• What happens if a member leaves

State default rules may apply without this document. These rules may not reflect how the business actually operates.

NOTE: States like California, New York, Missouri, Delaware, and Maine require or strongly expect operating agreements.

Next Step

You can create an operating agreement shortly after forming your LLC. It is not filed with the state, just signed, and kept with your records (notarized is even better). You can use an attorney-reviewed, state-specific LLC operating agreement template that can keep your LLC shield intact.

5. Forgetting Ongoing Compliance

To verify an LLC’s status, most states require:

• Annual/biennial reports
• Taxes/fees
• Licenses/records
• Registered agent

Staying current helps your LLC remain in good standing and supports uninterrupted operations. For example, Florida charges a$400 late fee and can dissolve your LLC after the third Friday in September. Rules and fees vary by state and can change over time.

Next Step

• Put your deadlines on a calendar
• Set recurring reminders
• Check your state’s business website once a year to confirm due dates and fees

If you manage multiple entities, a compliance dashboard or service can help you stay organized.

6. Choosing the Wrong Registered Agent

A registered agent receives important state and legal documents for your LLC. The right choice of registered agent helps ensure documents are delivered promptly. Missed notices can cause delays in responding to official correspondence. Some owners list themselves. That can work if you are always available during business hours and keep your address updated. If you move often or travel, it can get tricky.

Next Step

Choose what fits your situation:

• Serve as your own agent if you are consistently available
• Use a registered agent service for reliability and privacy

7. DIYing Everything

Trying to do everything yourself can feel smart and cost-effective. In reality, some formation details are easy to overlook without guidance. Understanding filing requirements, state rules, and tax elections upfront often saves time later.

Next Step

Consider using formation services for tasks such as:

• State filings
• Operating agreement templates
• Registered agent setup
• Compliance tracking

8. Tax Oversights

Many LLCs use “pass-through” taxation. That means the business profits are reported on the owners’ tax returns.

Common tax forms include:

• Single-member LLC: often reported on Schedule C
• Multi-member LLC: often files Form 1065 and issues K-1s (a form showing each owner’s share)

Helpful Practices

• Keep business records organized
• Track income by state when applicable
• Use accounting or automation tools

9. Not Getting an EIN

This free 9-digit IRS ID helps identify your business for tax and banking purposes. It is required for multi-member LLCs, businesses with employees, and certain tax elections. Even single-member LLCs often choose to obtain an EIN to help separate business and personal activity.

Why Is It Important To Have an EIN?

• Helps to open bank accounts
• Simplifies payroll and reporting
• Helps maintain clear records

How To Get an EIN (Fast)

You have two main options:

Option 1: Get an EIN Directly From the IRS (Free and Fast)

The IRS lets you apply for an EIN online for free, and most applicants receive it immediately.

Here is what to know before you start:

• You must complete the application in one session
• The session expires after 15 minutes of inactivity
• Once approved, you should print or save your EIN confirmation letter right away
• You can apply for only one EIN per responsible party per day

Who Can Use the IRS Online Tool?

• Your principal place of business is in the U.S. or U.S. territories
• You are the responsible party (or an authorized representative)
• You have the responsible party’s SSN or ITIN

You cannot use the online tool if:

• Your business is based outside of U.S. (you must apply by phone, fax, or mail)
• You are applying using another EIN (only government entities can do that)

What You Will Need:

• Your business entity type (LLC, corporation, partnership, etc.)
• The SSN or ITIN of the responsible party
• Signed authorization if you are applying as a third party

NOTE: The IRS is clear. You never have to pay for an EIN. Be cautious of websites that charge just to submit the IRS application.

Option 2: Get an EIN Through an Authorized Third Party

You can also get your EIN through a third party if you don’t want to deal with IRS forms, time limits, or eligibility rules.

The process is simple:

• Answer a few simple questions online
• Their specialists prepare and submit Form SS-4 for you
• Your application is reviewed for accuracy before filing
• You receive your official EIN without using your SSN on IRS forms

10. Forgetting Annual Reports and Fees

Most states require LLCs to file annual or biennial reports. These filings confirm your business is still active and list basics like:

• Business address
• Registered agent
• Members or managers

They are usually due on your formation anniversary (or a fixed date) and cost anywhere from $50 to $500, depending on the state. Some states also charge franchise taxes, such as California, which charges $800 minimum. [1]

Next Step

Automate everything with the help of filing services. These services:

• Track deadlines across states
• Send alerts or auto-file reports
• Keep your LLC in “good standing” year-round

11. Overlooking Liability Insurance

An LLC protects your personal assets from business debts. Insurance complements your LLC by covering risks that fall outside its structure, including:

• Negligence claims
• Professional mistakes
• Client lawsuits over results, data, or IP

The right insurance depends on your industry and how you work. Common types include:

• General liability insurance: Covers claims for bodily injury, property damage, and personal injury that occur on your business premises.
• Professional liability insurance: It covers legal costs and damages resulting from alleged negligence, errors, or inadequate work.
• Property insurance: Protect your business’s physical assets, such as equipment, inventory, and real estate.
• Worker’s compensation: Legally required in most states if you have employees.
• Cyber liability insurance: Covers costs associated with data breaches or cyberattacks.
• Commercial umbrella policy: Provides an extra layer of liability protection above the limits of your other policies.

Next Step

Treat insurance as part of your setup plan. A licensed insurance professional can help you choose coverage that fits your work.

12. Ignoring Licenses, Permits, and Compliance

Most businesses require a combination of federal, state, and local licenses and permits to operate legally. Having the right licenses helps ensure your business can operate without delays or interruptions.

Common Types of Regulatory Requirements

The specific licenses and permits needed depend heavily on the industry, location, and specific business activities. Here are common ones:

• Professional licenses
• Sales tax permits
• Health and safety permits
• Zoning and land use permits
• Environmental regulations

Next Step

• Research federal, state, county, and municipal requirements. Resources like the Small Business Administration (SBA) business license and permit search tool can help. [2]
• Complete and submit all necessary applications to the relevant government agencies.
• Keep licenses current and ensure the business continues to meet all regulatory standards.

13. Not Seeking Professional Help When Needed

Getting support at the right time can help keep your business plans moving forward. Experts catch errors early, ensure IRS and state compliance, and give you peace of mind. Trying to DIY everything often leads to delays, penalties, and headaches you could have avoided.

This is where you should know when to handle simple tasks yourself and when to call in LLC formation services for:

• Filings
• EINs
• Operating agreements
• Ongoing compliance monitoring

Set Up Your LLC with Swyft Filings

Swyft Filings helps business owners move forward with clear steps and reliable support. Depending on what you need, that can include:

• Specialist-reviewed filings
• Fast-processing
• EIN assistance
• Operating agreements
• Compliance monitoring
• Attorney access
• Privacy protection
• Hassle-free updates
• Live expert support

Swyft Filings helps guide LLC formation with clear steps, accurate filings, and ongoing compliance support.

Frequently Asked Questions (FAQs)

1. What is the best U.S. state to form your LLC?

There is no single best state for an LLC. It depends on your business goals and long-term plans. Most business owners consider these states for forming an LLC, including:

• Wyoming (privacy, low fees)
• Delaware (investor trust, legal precedent)
• Nevada (tax-free, privacy)
• Texas/Florida (No personal income tax, strong economies)
• New Mexico (Very low setup fees and no annual report requirement)
• South Dakota (Strong privacy laws, no state income/corporate tax, and low formation fees)

2. What happens if you mix personal and business finances?

It can lead to missed deductions, overpaying taxes, audits, penalties, and even put personal assets at risk.

3. How does an LLC pay taxes?

An LLC usually uses pass-through taxation, so the business itself doesn't pay federal income tax. Profits and losses pass to the owners and are reported on personal tax returns.

• Single-member LLC: Taxed like a sole proprietorship (Schedule C)
• Multi-member LLC: Taxed like a partnership (Form 1065 with K-1s)

Owners pay income tax and self-employment tax on their share. They often make quarterly estimated payments. An LLC can also choose to be taxed as an S-Corp or C-Corp if that better fits its tax strategy.

4. What taxes do LLC members pay?

It depends on income, state rules, and how the LLC is taxed. Many owners pay income tax on their share of profits. Some also owe self-employment tax. A tax pro can help you confirm what applies to your situation.

5. What taxes does an LLC have to pay in California?

California has state-level fees for LLCs, including a minimum annual amount in many cases. Since rules can change, it is smart to confirm current amounts on the California Franchise Tax Board site. [3]

Bibliography

1. Florida Division of Corporations. File Annual Report. Accessed on January 19, 2026.

2. U.S. Small Business Administration. Apply for Licenses and Permits. Accessed on January 19, 2026.

3. California Franchise Tax Board. Home Page. Accessed on January 19, 2026.