Limited liability is created by state law when your state accepts your formation filing. Until that happens, there is no LLC to protect you, and anything you sign or owe is yours personally. This is why the order of steps matters. The IRS says to form the entity with your state before applying for an Employer Identification Number, because the IRS will issue an EIN to a business the state has not yet approved. If the filing is then rejected, or the name changes, the number is attached to something that never came into existence.
Once the LLC exists, the protection holds only as long as the company behaves like a separate entity. The U.S. Small Business Administration advises keeping business finances and records separate from personal ones. Courts can "pierce the veil" and hold owners personally liable when the separation breaks down. The legal encyclopedia published by Cornell Law School's Legal Information Institute describes commingling of funds and undercapitalization as factors courts weigh. Veil piercing is decided case by case, so no single mistake guarantees it. But every one of those factors is something you control, and every one is avoidable once you know it exists.
The facts in one table
| Item | Figure or requirement | Official source |
|---|---|---|
| EIN from the IRS | $0 (free) | IRS, Get an Employer Identification Number |
| EIN through a paid third party | Not necessary; the IRS says never pay for one | IRS, Get an Employer Identification Number |
| Order of steps | Form the entity with the state before applying for an EIN | IRS, Get an Employer Identification Number |
| Federal BOI reporting | U.S.-formed companies are exempt | FinCEN, Beneficial Ownership Information Reporting |
| State formation fee | Varies by state; not stated here | Your Secretary of State's published fee schedule |
| Business and personal finances | Keep them separate | SBA, Choose a business structure |
Mistake one: acting before the LLC exists
The most direct way to have no liability protection is to never actually have an LLC. People often apply for an EIN, open accounts and sign contracts the same day they submit their state filing. If the state rejects the filing (a name conflict is a common reason), those actions belong to you personally, and the EIN you already obtained points to an entity that does not exist.
The fix costs nothing but patience. Wait for the state's approval, then get the EIN directly from the IRS, where it is free. Any site charging for an EIN is charging for a form you can file yourself at no cost, which the IRS explicitly warns against.
Mistake two: treating the LLC's money as your money
This is the failure behind most veil-piercing cases. Paying a personal bill from the business account, depositing client payments into your personal account, or running everything through one card makes it hard to argue that the LLC is a separate person. The SBA's guidance on business structures ties liability protection to keeping finances and records separate, and Cornell's Legal Information Institute lists commingling among the factors courts consider when deciding whether to disregard the entity.
The practical steps are unglamorous: a business bank account used only for business, records of what you put in and took out, and contracts signed in the LLC's name rather than your own.
Mistake three: starting with nothing in the company
Undercapitalization means forming an LLC with so little money or insurance that it could never meet its foreseeable obligations. Cornell's Legal Information Institute names it as another veil-piercing factor. The question a court asks is whether the business was set up to be able to pay its way, or set up so that creditors would find nothing there.
Setup choices that cost money or privacy, not protection
Some common setup decisions do not affect your liability shield but do create recurring costs or exposure.
Acting as your own registered agent is permitted in every state where you meet the address requirement, and it saves a recurring fee. What it also does is put a physical address, often your home, into a public, permanently searchable record.
Delaware, Wyoming and Nevada get recommended to people who have no reason to be there. If you operate from your own state, you will generally need to register there as well, which means two sets of fees, two registered agents and two annual reports.
According to FinCEN, companies formed in the United States are exempt from federal beneficial ownership reporting. New York's own LLC Transparency Act likewise applies only to LLCs formed under the law of a foreign country.
Doing it yourself versus using a service
Doing it yourself works well if you read your state's instructions carefully, wait for approval before getting your EIN, and are comfortable listing your own address as the registered agent. You pay the state fee and nothing else.
A formation service does not protect you from veil piercing. No service can keep your finances separate for you or capitalize your business. What a service does well is handle the filing mechanics and, more usefully, provide a registered agent address so yours stays off the public record. If that privacy risk is the one that concerns you, ZenBusiness's registered agent service is $199 a year, discounted to $99 for the first year when you form through them. It is billed separately from whichever formation plan you choose.
This site earns a commission on some links, including that one. That does not change the advice: if you are happy with your address being public and you follow the steps above, the DIY route costs less.
FAQ
Do I risk losing liability protection if I set up my LLC wrong?
Only in specific ways. If the state never approved your LLC, you had no protection to begin with. If it was approved, the bigger risk is how you run it, particularly mixing personal and business money.
What does the SBA say about LLC limited liability protection, separate finances and records?
The SBA advises keeping business finances and records separate from personal ones, which is the foundation of preserving the liability protection an LLC provides.
What does the IRS say about LLC business structure and personal liability?
The IRS deals with how an LLC is taxed and how it gets an EIN, not with liability, which comes from state law. Its relevant guidance for this topic is to form the entity with the state first and to get the EIN free, directly from the IRS.
What is veil piercing for an LLC, and how do commingling and undercapitalization lead to it?
Veil piercing is when a court disregards the LLC and holds owners personally liable. Cornell's Legal Information Institute identifies commingling funds and inadequate capitalization among the factors courts weigh. Outcomes depend on the facts of each case.
Sources
- Internal Revenue Service, “Get an employer identification number”
- Financial Crimes Enforcement Network, “Beneficial Ownership Information Reporting”
- U.S. Small Business Administration, “Launch your business”
- Legal Information Institute, Cornell Law School, Wex: “Piercing the corporate veil”
This is general information, not legal advice, and requirements vary by state and change over time.