Avoid These 10 LLC Mistakes in 2025

 Are you starting an LLC? 

A Limited Liability Company (LLC) is a business structure that combines the flexibility of a sole proprietorship or partnership with the legal protection of a corporation. Basically, it helps separate and protect your personal assets from your business liabilities, which can be a huge advantage if something goes wrong.

Here’s the thing—if you don’t set up your LLC properly and run it correctly, you could be making costly mistakes that lead to IRS penalties, legal risks, or even losing your liability protection.

If you own an LLC or are thinking about forming one, avoid these 10 mistakes to protect your business and your money.

1. Mixing Personal and Business Finances

This is the biggest mistake I see with new business owners. If you’re using the same bank account for business and personal expenses, you’re setting yourself up for problems.

Here’s why it’s a bad idea:

• The IRS could deny your deductions if they can’t clearly tell which expenses are for business.

• It creates messy bookkeeping, making tax season a nightmare.

• If your LLC gets sued, your personal assets could be at risk because you didn’t separate them from your business.

How to fix it:

Open a dedicated business bank account and only use it for business transactions. Keep things clean from the start.

2. Forgetting to File Your Annual Report

Every state requires LLCs to file an annual report to keep the business legally active. If you forget, your LLC can be dissolved without you even realizing it.

Many business owners think this is handled automatically with their tax return, but it’s not. The annual report is a separate filing with your state and often comes with a small fee.

If you fail to submit this on time, your business can be labeled as "inactive," which could result in fines or, worse, losing your LLC status altogether.

How to fix it:

Set a recurring reminder to check and file your annual report each year. Mark your calendar and don’t let this small but crucial step slip through the cracks.

3. Not Using Your LLC Name on Contracts

Your LLC exists to protect you from personal liability. However, if you sign contracts with just your personal name instead of using your full LLC name, that protection goes out the window.

Why is this a problem?

• If a client or vendor sues you and your LLC is not clearly stated in the agreement, the lawsuit could be directed at you personally instead of your business.

• It weakens the legal separation between you and your LLC, putting your personal assets like your home and savings at risk.

How to fix it:

Always include your LLC’s full legal name on contracts, invoices, and tax documents. If you’re signing a contract, make sure it says "[Your Business Name] LLC, by [Your Name], Managing Member."

4. Registering Your LLC in Another State to Avoid Taxes

Some business owners think registering an LLC in a “tax-friendly” state like Wyoming, Delaware, or Nevada will save them money. It won’t.

If you’re running your business in a different state, you’ll still owe taxes there. And if you don’t register your LLC as a “foreign entity” in your home state, you’re technically operating illegally.

For Example:

Sarah lives and works in California but registers her LLC in Wyoming, thinking she can skip California state taxes. She’s wrong. Since Sarah physically runs her business in California, signs contracts there, and earns income from California clients, she is legally required to report her income and pay taxes in California—regardless of where her LLC is registered.

Here’s what will happen:

• California will still require Sarah to pay state income taxes on her business profits.

• She will have to register her Wyoming LLC as a “foreign LLC” in California, which means paying additional registration fees and compliance costs in both states.

• If Sarah fails to register properly, she could face fines, penalties, and even risk losing her right to operate in California.

How to fix it:

Register your LLC in the state where you’re actually doing business. This will save you compliance headaches and extra fees in the long run.

5. Not Keeping Meeting Minutes and Operating Records

LLCs need to maintain certain records to stay compliant. This includes an operating agreement and meeting minutes (especially if you have partners).

Why it matters:

• It keeps your business in good legal standing.

• It allows you to take advantage of tax deductions for board meetings and business discussions.

• If you get audited, having thorough records proves that your LLC is being run properly.

How to fix it:

Schedule regular LLC meetings and keep documentation of major business decisions. Even if you're a single-member LLC, keeping organized records can be beneficial.

6. Making Business Decisions Without Consulting All LLC Members

If you have multiple owners, everyone should be on the same page when making major business decisions. I’ve seen partnerships fall apart because one owner made big decisions without consulting the others.

How to fix it:

Draft a clear operating agreement that outlines how decisions should be made. This prevents future disputes and keeps the business running smoothly.

7. Skipping Out on Professional Liability Insurance

An LLC provides some liability protection, but it doesn’t mean you’re fully covered in a lawsuit. If your business gets sued, your LLC’s protection may not be enough to protect you from lawsuits.

Why?

• If your LLC is sued for negligence, fraud, or breach of contract, the court can pierce the corporate veil, meaning your personal assets could still be at risk.

• Your LLC doesn’t protect you from lawsuits related to professional errors or customer disputes.

• If an employee, contractor, or vendor sues your business, your LLC structure alone won’t cover legal costs or settlement fees.

How to fix it:

Get professional liability insurance to protect against claims of negligence, mistakes, or financial loss caused by your services. If you have employees, consider general liability and workers' compensation insurance as well.

8. Forgetting to Update Your Registered Agent and Address

Your registered agent is the official point of contact between your LLC and the state. If you move, change your business location, or switch registered agents, you have to update this information with the state.

How to fix it:

Make sure to update your registered agent and address whenever changes occur.

9. Not Getting the Right Business Licenses and Permits

An LLC gives you legal structure, but some industries require additional licenses or permits to operate legally. If you skip this step, you could face heavy fines or even business shutdowns.

How to fix it:

Check your state, county, and city regulations to make sure your business has all required licenses and permits before you begin operations.

10. Not Having a Tax Strategy

You might assume your tax obligations are simple, but without a plan, you could be overpaying thousands in taxes each year. Tax laws change frequently, and not staying informed could result in unexpected liabilities.

How to fix it:

Work with a tax strategist to determine if your LLC should be taxed as a Sole Proprietor, S-Corp, or C-Corp, which deductions you qualify for, and how to legally minimize your tax burden and keep more of your profits.

Want to make sure your LLC is set up for success? Book a free demo call with my team at TaxElm.com and get a personalized tax strategy to keep more of your money.