When it comes to asset protection for real estate, forming a limited liability company (LLC) is a powerful tool. However, as Clint Coons explains in his latest YouTube video, many real estate investors and business owners make critical mistakes when setting up their LLCs—mistakes that can jeopardize both their legal protection and tax advantages. If you’re investing in real estate, you can’t afford to overlook these potential pitfalls.
Top Mistakes to Avoid When Setting Up Your LLC
1. Delaying Your LLC FormationOne of the most common and dangerous mistakes is waiting to form an LLC until after your rental property has started generating income. This leaves investors exposed to personal liability. The right time to create your structure is before you take action. That means before signing contracts, marketing, or conducting any business. Without an LLC in place, you’re signing agreements in your personal name, which can make you personally liable if anything goes wrong.
2. Choosing the Wrong StateMany people are drawn to states like Wyoming, Delaware, or Nevada because of their favorable laws. But where your business or rental property is physically located is crucial. If you live and operate in Colorado but form your LLC in Wyoming, you still need to register it as a foreign entity in Colorado to do business legally. If you don’t, you might not be able to enforce contracts or sue if someone wrongs your business—a major oversight that can lead to serious consequences.
3. Acting as Your Own Registered AgentWhile it may seem convenient or cost-saving to be your own registered agent, it’s a mistake. Your registered agent’s address becomes public, exposing your personal information. Using a commercial registered agent for professionalism and privacy is recommended. This small investment signals seriousness and helps protect your identity.
4. Using a P.O. Box as a Business AddressMany investors don’t want to list their home address, so they use a P.O. Box. But this can create problems. States typically require a physical address for your registered agent and business. If caught using a P.O. Box, this can jeopardize your entire LLC structure.
5. Failing to Set Up a Proper Business AddressEven if you’re running a virtual or home-based business, you shouldn’t use your personal residence as the business address. This can lead to unwanted attention or harassment. You should setup up a virtual business address that offers mail forwarding while keeping your information private and secure. Anderson Advisors offers this service to help clients protect their privacy.
6. Overlooking Startup Expense ReimbursementMany business owners forget that any money they spent before forming their LLC—filing fees, legal costs, marketing expenses—can be reimbursed. You should formally reimburse yourself once your entity is formed. This helps maintain clean financial records and ensures you benefit from all deductible startup costs. Ideally, this should be included in your operating agreement or documented via a company resolution.
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7. Choosing the Wrong Type of LLCLLCs can be member-managed or manager-managed. This distinction affects your ability to sign contracts and how your company is perceived. If you plan to be the face of the business, manager-managed might be best. But if privacy is your goal—for example, you don’t want tenants to know you’re the owner—you may want a member-managed LLC owned by a holding company like a Wyoming LLC. You want to design your business entity around your specific goals. If you need help identifying the right entity structure for your goals, sign up for a free 45-minute consult with an Anderson Advisor.
8. Selecting the Wrong Tax StatusWhen applying for your EIN, you’re also telling the IRS how you want your LLC taxed. Options include disregarded entity (sole proprietor), partnership, S-Corporation, or C-Corporation. This decision has huge implications. For example, S-Corps can save active business owners on employment taxes, but aren’t ideal for holding real estate. Choosing incorrectly can lead to audits, tax inefficiencies, or the inability to pay yourself through payroll.
9. Failing to Put Yourself on PayrollIf your LLC is taxed as an S-Corporation or C-Corporation, you need to put yourself on payroll. Tax election mistakes are common, and many business owners fail to follow through by setting up proper compensation. This can raise red flags with the IRS. On the flip side, if you’re taxed as a partnership or disregarded entity, you legally can’t put yourself on payroll. Aligning your payroll practices with your tax structure is critical.
10. Skipping the Operating AgreementToo many people assume that once their LLC is formed, they’re ready to go. But your operating agreement is the backbone of your entity. It governs everything from profit distribution to how the company is managed. It’s also often required by banks and lenders when opening accounts or applying for loans. A strong operating agreement provides legal and operational clarity, and is essential for protecting your structure in court.
11. Signing in Your Own Name Instead of the LLCOnce your LLC is formed, you must sign contracts in your representative capacity—as a manager or officer of the company. Signing in your personal name creates ambiguity and potential liability. If you sign as a “member” of a manager-managed LLC, the contract may be invalid, because only managers can bind the company. Understanding your LLC’s structure and signing accordingly is essential to maintaining limited liability.
12. Not Opening a Separate Business Bank AccountCommingling funds is one of the fastest ways to pierce your corporate veil. Using personal accounts for business transactions invites liability and audit risk. A separate business bank account keeps your finances clean and clearly distinguishes your personal and business activities. It’s a non-negotiable if you want to maintain legal protections.
13. Neglecting Proper Books and RecordsFinally, failing to keep accurate financial records can cripple your business. Using accounting software like QuickBooks to track income and expenses, and generate a balance sheet and profit-and-loss statement. Proper bookkeeping isn’t just about organization—it can make or break your ability to secure financing, defend yourself in court, or qualify for tax credits. During events like COVID relief funding, many businesses missed out because they couldn’t prove their financials.
Why Proper LLC Setup MattersYour LLC is the cornerstone of your real estate asset protection strategy. It creates a legal barrier between your personal assets and business liabilities, provides tax planning opportunities, and helps you maintain anonymity in your business dealings.
However, improperly setting up your LLC can lead to devastating consequences, such as:
Losing legal protections in lawsuits.
Having tax elections rejected during audits.
Making your personal information publicly available.
Take Control of Your Asset Protection
Clint Coons shares invaluable insights and practical tips on avoiding these common LLC mistakes in his full video. If you’re serious about protecting your real estate investments and maximizing your tax benefits, this is a must-watch.
➡️ Watch the video here to ensure your LLC is set up for success.
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Do you want to ensure your LLC is set up to protect your real estate investments fully?
At Anderson Business Advisors, we’ve helped thousands of real estate investors avoid costly mistakes and navigate the complexities of asset protection and tax planning. In a free 45-minute consultation, our experts will provide personalized guidance to help you protect your assets, minimize risks, and maximize your financial benefits. Request a free consultation here ➡️ https://aba.link/f1c125
