The 10 LLC Mistakes That Can Destroy Your Business in 2026
Forming an LLC is easy.
Running it correctly is where most business owners get into trouble.
Every year, we see the same LLC mistakes show up again and again. These LLC mistakes don’t come from bad intentions, they come from missing guidance. These mistakes can quietly break liability protection, trigger audits, and create tax problems that slow growth.
In this guide, we’re breaking down the 10 biggest LLC mistakes business owners make in 2026 and how to fix them before they become expensive.
If you already have an LLC or you’re thinking about forming one, this is the checklist you don’t want to skip.
🚀 TLDR
This guide explains the most common LLC mistakes business owners make in 2026. You’ll learn how these mistakes impact liability protection, taxes, compliance, and long-term growth. You’ll also get a simple action plan to audit your LLC and fix issues before they turn into audits or legal problems.
Why LLC Mistakes Happen After Formation
Most LLC problems don’t come from filing paperwork incorrectly. They come from how the business is operated after formation.
Many business owners assume that once the LLC is formed, the protection is automatic. Unfortunately, that’s not how it works. The IRS and courts look at how the business is actually run, not just how it’s registered. The SBA offers a helpful overview of how LLCs work and how different business structures are treated, but most owners never review it.
Ignoring operational responsibilities is what turns an LLC from protection into risk.
The 10 LLC Mistakes That Cause Real Damage to Business Owners
1. Mixing Personal and Business Finances
One of the most common LLC mistakes is mixing personal and business finances.
When personal expenses run through the business account, or business expenses run through personal accounts, liability protection weakens. Courts and the IRS look closely at whether you’ve kept things separate.
The fix is simple. Open a dedicated business bank account and use it only for business income and expenses. When you need money personally, take an owner draw instead of paying personal bills directly from the business.
2. Failing to Maintain LLC Compliance
Failing to maintain compliance is another major LLC mistake.
Most states require annual reports or renewals. If you miss them, your LLC can become inactive or be administratively dissolved. States don’t send reminders before this happens.
Add renewal deadlines to your calendar and treat them like tax deadlines. Staying compliant is non-negotiable if you want your LLC protection to hold up.
3. Not Having an Operating Agreement
Many business owners skip operating agreements, especially for single-member LLCs.
That’s a mistake.
An operating agreement outlines how your business operates and who owns it. Even if you’re the only owner, this document helps establish legitimacy and structure.
It also becomes important if you ever add a partner, open a new bank account, or face legal scrutiny.
4. Ignoring the S Corporation Election Opportunity
Missing the S Corp election is one of the most expensive LLC mistakes from a tax standpoint.
By default, LLC owners pay self-employment taxes on 100 percent of profits. As profits grow, this often leads to unnecessary tax payments. The IRS explains how S corporations are taxed and why reasonable compensation rules apply when this election is made.
A common benchmark is around $50,000 in annual profit. That’s often when exploring an S Corp election starts to make sense.
5. Misclassifying Owner Compensation
How you pay yourself matters more than most business owners realize.
Single-member LLCs without an S Corp election can’t pay themselves W2 wages. They must take owner draws. LLCs taxed as S corporations are required to pay owners a reasonable salary through payroll.
Misclassifying owner compensation is a common LLC mistake that can trigger audits and penalties. The IRS provides clear guidance on reasonable compensation requirements for S Corp owners.
6. Overlooking Asset Protection Beyond the LLC
An LLC alone isn’t a complete asset protection strategy.
Insurance still matters. Contracts should be signed in the LLC’s name. Business activity shouldn’t be conducted under your personal name.
Many owners form an LLC but keep operating as if it doesn’t exist. That creates gaps that defeat the purpose of the structure.
7. Forming an LLC in the Wrong State
Another common LLC mistake is forming an LLC in a state where you don’t operate.
Some owners form LLCs in states like Wyoming or Nevada to avoid taxes. In most cases, this backfires. If you operate elsewhere, you’ll still need to register as a foreign LLC and comply with both states.
That usually adds cost and complexity without real savings. In most situations, you should form your LLC in the state where you live and operate.
8. Skipping Tax Planning
Skipping tax planning is one of the most damaging small business LLC mistakes.
Taxes are often a business owner’s largest expense. Filing without planning leads to reactive decisions and missed opportunities.
Proactive tax planning helps you legally reduce taxes, improve cash flow, and keep more money in your business.
9. Failing to Update LLC Filings When Things Change
LLC filings need to be updated when key changes happen.
Adding or removing partners, changing addresses, or shifting your business purpose all require updates at the state level. Failing to update filings creates inconsistencies that weaken liability protection.
Make it a habit to review filings annually and update them when changes occur.
10. Treating the LLC Like a Hobby
The IRS makes a clear distinction between businesses and hobbies.
If your LLC consistently produces losses with no clear path to profitability, it may be classified as a hobby. Hobby loss rules limit deductions and increase scrutiny.
Operating like a real business means tracking income, planning for profit, and showing a clear intent to make money.
The LLC Audit Checklist
Here’s a simple checklist to audit your LLC today:
- Confirm your LLC is active with the state
- Verify you have separate business bank accounts
- Review how you’re paying yourself
- Check that contracts and insurance are properly set up
- Confirm filings reflect current operations
Fixing small issues now prevents larger problems later.
Habits That Protect Your LLC Long-Term
Strong habits help prevent LLC mistakes from coming back.
Use the correct card for every transaction.
Keep receipts and note the business purpose.
Maintain a corporate document file.
Review compliance requirements annually.
These habits protect both your liability and tax position.
When an LLC Becomes a Tax Strategy
An LLC becomes more powerful as profits grow.
Once income reaches certain levels, strategies like S corporation elections become available. Having the LLC in place early makes those transitions smoother and less expensive.
That’s why operating your LLC correctly from day one creates flexibility later.
Final Thoughts
LLC protection isn’t automatic. It’s earned through proper operation.
Avoiding common LLC mistakes protects your business today and supports smarter tax planning in the future. Small fixes now can prevent audits, penalties, and lost growth later.
If you want help implementing these strategies, download the free Tax Savings Starter Kit or book a demo call with the TaxElm team to see how proactive tax planning works in practice.
TRANSCRIPT
[00:00:00] Introduction: Avoid These 10 Common LLC Mistakes
Mike J: You formed your lc, good job. But did you know that there are 10 common mistakes out there that can cripple your business, that can trigger audits, that can lose your liability protection, or even wreck your growth? In this video, I’m revealing those 10 mistakes that you must avoid in 2026 so that your business both survives.
And thrives. Let’s dive in before it’s too late.
Mistake 1: Mixing Personal and Business Finances
Mike J: / So the first problem, the first mistake that we see a lot of small business owners and lcs make is mixing personal and business finances. This can break that liability sheet. This can break that, what an attorney will talk to you about as a corporate veo.
So we want always make sure that we have separate business bank accounts from our personal bank accounts. We have to have that separation that our personal life [00:01:00] is here. Our business is here and there is no commingling. Now, that doesn’t mean that we can’t make owner draws or distributions from our business account to our personal account, that’s fine, but just make sure that there’s no business items going on our personal side, and there’s no personal items going inside of our business, have that separation.
Mistake 2: Failing to Maintain Compliance
Mike J: Mistake number two is failing to maintain compliance. This could be annual reports. This could be tax return filings that are required. As a business owner, you have, and as an LLC owner, you have to maintain annual reports. So you have to, at the state level, renew. Your entity every year, and that’s just saying, Hey, we’re still open, we’re still here, we’re still operating.
You need to do that. And then you have tax filings related to that. That too, that’s completely separate. The tax filings are separate, so you need to make sure that we’re staying up to date and maintaining that.
Mistake 3: Not Having an Operating Agreement
Mike J: The third mistake we see is not having an operating agreement or just a poor structure with no kind of foundation for that.
An attorney can talk to you about this, but that operating agreement will tell you how your business is gonna operate and helps solidify that business. [00:02:00]
Mistake 4: Not Exploiting an S Corporation
Mike J: The fourth mistake we see is business owners analysis, not exploiting an S corporation. When it makes sense. So as a single member LLC, you pay self-employment taxes on 100% of the profit from your business, and that’s over and above your normal income tax rate.
So self-employment tax is 15%, so you make a hundred thousand dollars, you’re paying your normal income tax rate, plus self-employment taxes of $15,000. Once you hit certain income limitations, we might wanna look at an S corporation. And an S corporation is just an election. We elect to have your LLC taxed.
As an US corporation, and by doing that, now we can minimize the amount that we pay in self-employment taxes. LLC Owners don’t think about this, don’t know about this. Oftentimes wait until it’s too late, or don’t do it as soon enough, and they miss out on tax saving opportunities.
Mistake 5: Ignoring Tax Obligations
Mike J: The fifth mistake that we see is LLC owners ignoring tax obligations or misclassifying owner compensation.
So depending on how your entity is structured, whether you’re a partnership, whether you’re an S corporation, whether you’re just a single member, LC, no [00:03:00] partnership, no S corporation or anything like that is gonna determine on how you pay yourself as the owner. So you know whether you’re paying yourself as an owner’s draw or W2 payroll if you’re operating as a single member, LC.
No S corp election or a partnership, you cannot pay yourself W2 payroll. It is not required by law. So you take your payment in a form of an owner’s distribution or an owner’s draw, where if we have an LLC that’s elected to be taxed as an S corporation, now we’re required to take ourselves a reasonable salary for ourself, and then we’re gonna have an owner’s draw over and above that reasonable salary as well.
So you need to know based on how your structure is, even though you’re an LLC, there’s different types of LLC and how is that classified and how do you properly pay yourself.
Mistake 6: Overlooking Asset Protection
Mike J: The next mistake that we see is overlooking asset protection. So some people think I have an LLC, so I am perfectly fine and an attorney can talk to you about this.
But what about insurance or proper contracts where, you might be operating contracts, but is it under your LLC name? We see so many business owners, they’re operating in agreements. They’re under their personal name. So even though they have the cell C set up, they’re not actively doing it to create some of that [00:04:00] protection.
And just because your have protection doesn’t mean that insurance is not necessary. You still want to have insurance. On top of that. So it’s important to think about all those different things. Now, real quick, do you wanna save 5,000 to $25,000 or more in taxes like other business owners? Download our free tax savings starter kit deduction list.
We have case studies. We have a discovery call all within our tax savings starter kit. The link is in the description. That’s tax savings podcast.com/starter kit. Alright, let’s get back to some of the mistakes that we’re seeing with LC owners.
Mistake 7: Operating in a Different State
Mike J: The next mistake that I wanna talk about is an lc that’s organized in one state, but it’s operating out of another state.
And some people think this, they think I can organize my business in Florida because there’s no state income tax in Florida, so I’m gonna avoid state income tax. From that, but I’m gonna operate my business outta New York, or I’m gonna operate my business outta Wisconsin, but it’s a Florida LLC so that I don’t have to pay taxes on it.
That’s not true. Even though you have an LLC in Florida or Nevada or wherever it might be that there might be no state income tax, you still need to register that [00:05:00] LLC as a foreign entity. In the end, in the state that you’re operating out of. So if you decided and you got sold to go open up an LC in another state that you are not operating out of, but then you’re operating and have operations in a different area, you’re gonna have to file, take that lc.
And that’s totally fine for that LLC to be formed in another state, but you’re gonna have to do a foreign entity filing in the state that you are operating out of. And that’s just another filing. Another thing that you need to maintain from year to year two, making sure it’s active.
Mistake 8: Neglecting Tax Planning
Mike J: From year to year, the next mistake, and this one’s close to my heart, is not tax planning.
So many business owners get into this idea of business and they’re just so busy with their business. They don’t worry about tax planning, they don’t think about tax planning, or they learn about tax planning, but they never fully implement it. Tax planning and taxes in general are often gonna be a business owner’s biggest expenses.
That’s why we need to plan for it. That’s why we need to think of ways, how can we turn out business expenses and pay the least amount of taxes as legally possible? How do we turn after tax spending into predex spending? We talk about so many different opportunities when it comes to tax planning [00:06:00] for LLC owners.
Mistake 9: Failing to Update Filings
Mike J: Now, number nine is failing to update filings when things change. So maybe you have, a new partner. Or you lost a partner, or maybe you changed addresses, or maybe the whole purpose of your business changed. You started out as a carwash and now you’re operating as a consulting company. Whatever it means, whatever it might be.
You need to update these filings with the state, and that’s part of that annual report. What’s changed, has anything happened since the last time? But make sure that if you have an adjustment, change in members address, different things like that. Make sure you’re updating it at the state level.
Number 10.
Mistake 10: Treating the LLC as a Hobby
Mike J: Biggest mistake that we see is treating the LLC as a hobby and not operating it like a business. Now if you are just creating an LLC to operate a hobby, that’s fine, but there might be limitations on what you can do with that. And basically what they look at as a hobby is a business that just consistently produces losses.
Now this is losses, but it’s operating as a hobby. So you know, you can have major companies that pro provide loss over loss because they’re a startup and they’re in growth mode, and that’s fine. That’s totally fine because you can tell that [00:07:00] is operating as a business. But let’s say you are, you do race car driving just on the side at your local track, and you’re trying to create a business outta that, but it’s just consistently losing money.
There’s no really opportunity or even future for a potential profit from that business. The iris is gonna look at that as a hobby. So if you’re in that state, make sure we start looking at it and operating your business like a business.
How to Fix These Mistakes
Mike J: So I want to go through each of these kind of problems and how do we fix it?
How do we prevent these different mistakes? So the first one is mixing business and personal finances. Easy opportunity. Here. Have a separate business bank account that all business items go through. A separate personal account. So whenever you swiping a card, if it’s business, use the business card.
If it’s personal, use the personal card. Have that separation. Have it clear if you need to make money. If you need money on the personal side for money in the business, take a draw. Move the money from the business to your personal. Take an owner’s draw. And then you pay personally. So make sure to create that separation.
Failing to maintain compliance. What I always say is put an alert on your calendar, or sign up for email alerts where you’re alerted every time that [00:08:00] you need to file a new annual report. Make sure that you’re aware of that. Just like in tax season, everyone knows April 15th is tax season. Have that same date in your mind to file your annual reports with your states having an operating agreement or having a poor structure.
Talk to an attorney, talk to an attorney about making sure you got that buttoned up and make sure you have a solid foundation for your LLC. Mistake number four was not exploring an S corporation when it makes sense. Keep this number in your mind. Typically say once you have profit of rub out $50,000 or more, that’s what we might want to look into an S corporation.
So keep that number in mind. If you’re at that lover or above, start looking into it. Doesn’t S corp make sense to me or does it not start to get into. That realm. Mistake number six was mis fine. Misclassifying owner’s compensation. Make sure that the way you’re paying yourself, whether it’s an owner’s draw, an owner’s draw, distribution, wages, payroll, W2, salary, a guaranteed payment, whatever it is, make sure that it is the right way to pay yourself based on the entity structure you have.
And again, if you’re an S corporation, you’re required. To take W2 payroll reasonable salary, make sure [00:09:00] it’s reasonable. If you are a single member, LC, no S corporation or a partnership as owners, you legally cannot take W2 payroll. So make sure you’re just treating that properly. Overlooking asset protection was another mistake.
Make sure you have proper insurance. Make sure that insurance is up to date. Make sure your contracts are all under the business name. Do a little kind of test to see where everything is in that area organized in one state, but operating out of another. Make sure that, hey, if you’re operating out of Wisconsin, New York, Tennessee, whatever state you’re operating out of, that can be where you have a physical location.
That could be where you have partners, that could be where you have employees. Make sure you’re registered as a foreign entity if that is not the. Original or core location of where you, started that entity. Anyways, not tax planning was another mistake. Start tax planning. Start digging into the opportunities beginning of the year is a perfect time to do that.
Tune into our small business tax savings podcast. Tune into our YouTube channel, tax savings tv.com. Buy my book, which is a great desktop guide for tax planning. Go to tax savings book.com. Start to dig into this stuff and [00:10:00] not only learn, but make a plan of action to start implementing tax strategies. The mistake number nine was failing to update filings.
When things change, just keep a mental note that if anything changes in your business address, people are in a business purpose, things like that. Anything changes that you’re changing. Other things like on your website, those types of things. Make sure, Hey, do I need to check to see if I need to make this update at the state level?
And then finally, treating your LLC as a hobby, not a hobby. But more like an operating business. Just make sure you start to generate some income, that can help break that hobby loss rule in limitation that can help break if you can start to show some income in your business.
Action Plan for LLC Owners
Mike J: So the next thing we wanna do is do an action plan.
I wanna create an action plan for you on what do you do today? Let’s do an audit. Is your business up to date? Go to your state website, type in your business name and see does it show active? Is it up to date? If not, let’s take the actions to fix that. Do you have a separate business bank account set up?
Are you running. Only business activity in that business bank account. Are you looking at your personal [00:11:00] bank account? Is there business items in that personal bank account? If so, let’s change it. Let’s change that auto withdrawal to make sure it’s outta your business account now. So have that separate bank account set up and then make sure you’re actually utilizing it in the right way.
Another odd to do is do you have a corporate file? You have a corporate file that has all the legal docs, your articles of organization, any agreements that you have, your accountable plan, your capitalization policy, do you have a file, whether it’s digital or whether it’s in a filing account, whatever might be, do you have a file that has all of this broken down?
Those are some of the audit that you should do today to see kinda where are you at, where are some of the things that you can do? Next step is what do you want to implement? Let’s take some actions. What can you implement this week? This week? Two things. Start tax planning. Start to learn the tax strategies that are available to you.
Dive into the things that we talk about every single week on our podcast, on our YouTube channel at taxo. Dive into these things and make an action. Make a commitment that you’re not just gonna learn tax strategies. You’re gonna actually implement it and you’re not just gonna implement it, you’re gonna correctly [00:12:00] implement it.
You’re gonna dot your i’s, cross your T’s and implement the strategies the right way. And then the second thing I want you to do this week is button up any legal documents. Make sure that your company’s active. If it is, great, let’s have those documents on file, but it’s not. Get it caught up, have documents on file.
Now is a great time to just go ahead and get caught up, making sure that you have a solid foundation for your business.
Building Good Business Habits
Mike J: Finally, I wanna talk about how to build some habits. One biggest habit that I think is important for business owners is that every time you swipe your card. Ask yourself, is this for business?
If so, I’m using my business card. Am I using the right card while I’m swiping this? We talk so much about this concept of after-tax versus pre-tax spending. How do we take spending that we’re gonna do anyways and turn it from after-tax spending into pre-tax spending? So every time you swipe that card, make sure I’m asking myself, is this business related?
If so, let’s take it through the business. If not, let’s not take it through the business and make sure that we’re using. Our personal card for that. And then finally on that piece, keep receipts. Write directly on the receipt. What is the business purpose? If it’s a meal, [00:13:00] who did you meet with?
Why did you discuss? Write directly on the receipt. Take a picture of it. You may never need that receipt again, but if you do, you have a digital copy of it saved in a file, that’s easy to access, that you can provide that information to The IRS if they keep asking if they ask for it.
Conclusion: Take Action Now
Mike J: Now, just to kinda recap this, I’m a business owner just like you and I started out many years ago making these same exact mistakes.
It’s okay. It’s okay to make these mistakes, but just take the advice now that it took me many years to figure out all these mistakes and fix all the mistakes and do everything else. Take this advice now to make actions, to correct these mistakes. Don’t feel bad if all these mistakes that you’re doing, just make action to correct it.
I was in the same boat. I’ve been in your shoes. Now is the time to take action. So there you go. The 10 biggest mistakes LLC owners make in 2026 and how to avoid them. If you are serious about protecting your business, bookmark this video, share it with any entrepreneur you know, and hit subscribe so that you don’t fall into any of these traps.
Drop in the comments if [00:14:00] we’ve missed one. I’d love to hear your experiences, and if you want help from my team of tax professionals implementing strategies like this along with so many other different tax strategies, visit us at Tax Elm. That’s TAX elm.com, or click the link in the description. For a free discovery call with our team, we are helping small business owners like you legally lower your tax bill every single day.
Thanks for watching, and I’ll see you on the next one.
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