8 ms·

Maybe I’m biased but, this is one of those times where the advice is just enough to get you into trouble. No mention of single member vs multi-member LLC, and

Maybe I’m biased but, this is one of those times where the advice is just enough to get you into trouble. No mention of single member vs multi-member LLC, and lack of certain liability protections with single member LLCs. Most people will have expectation of liability protection, and those single member LLCs may be surprised to find the assets of their single member LLC at risk for their personal liabilities. No mention of tax treatment, by default single member LLC is pass through (no need to file separate federal return), but can elect to be taxed as a Corporation or S-Corporation. No mention multi-member is taxed by default as a partnership but can elect tax treatment as Corporation or S-Corporation. No mention of an Operating Agreement, which is the controlling document; therefore, without one the LLC is governed by California Code. These issues are of great importance, example: you may have a partner and the death of the partner may result in dissolution of the LLC or maybe having a new, unwanted partner(s) (spouse and/or heirs of the deceased partner), but without the operating agreement California Law will dictate.

mmckelvy 9y ago
Yeah this article is meant as a simple how-to for someone that has already decided they want to form an LLC in California and understand the pros and cons. I cover some of the issues you cite in another post: https://blog.bookandledger.com/topics/business-formation/intro-to-forming-a-business https://blog.bookandledger.com/topics/business-formation/int...
- jiveturkey 9y ago
  Yeah the original article is almost worthless. The 2nd article you just linked is much better, and usefully informative. However, it still needs: - info about the need for an operating agreement - more detail about piercing the corporate veil - discussion of FTB and IRS reclassifying as hobby business You are advertising to a very technical audience and should address these things at a deep level.
  - theptip 9y ago
    I strongly disagree with "almost worthless"; assuming you've made the decision to form a CA LLC, this post is very useful. You're making some quite strident demands of some random person on the internet here ;) Having said that, I too would be interested in the extra topics that you listed, particularly the operating agreement piece. I looked into this recently and NoLo offers a $100-300 service [1] which comes with options, vs. free Operating Agreements like this random one on UpCounsel[2]. I have no idea what the parameters are on this, and in the past I've just leant on a lawyer friend to do this for me; I'd like to understand the details. [1]: https://store.nolo.com/products/online-california-llc-ptlca-2.html https://store.nolo.com/products/online-california-llc-ptlca-... [2]: https://www.upcounsel.com/single-member-llc-operating-agreement https://www.upcounsel.com/single-member-llc-operating-agreem...
    - jiveturkey 9y ago
      I paid $1000 to a lawyer for an operating agreement. It was fine. For my 2nd LLC I just copied a free template (different than my expensive lawyer'd one) since I now had a really good understanding of what needs to be there. At first yes it's scary to think you might be getting it wrong, but you learn that it's not rocket science. It's basically the agreement between the members of the corporate structure. I haven't read the NOLO one but I bet it's good value for money. You will generally have to present the operating agreement to the bank to open a business account, to get business financing, maybe for insurance, stuff like that. My experience (IANAL) is that for friendly partners, the nolo template is going to be fine. If you're selling shares to folks that you don't have a history with, you may want to have the assurance of expert, personal legal advice from someone you can also go back to with future concerns. And for that kind of bigger LLC anyway, the $1000 or so is a reasonable expense.
      - mikeryan 9y ago
        I’m not sure a template is the way to go with multi member. If you are going multi member you should really both get a lawyer to explain the details and review the docs. I’ve had to unwind a multi member LLC into a single member one and gaps in our operating agreement were suddenly all too relevant.
- IncRnd 9y ago
  > Yeah this article is meant as a simple how-to for someone that has already decided they want to form an LLC and understand the pros and cons. I think you mean "has already decided they want to form an LLC in California "
  - mmckelvy 9y ago
    Yep! Fixed.
- emodendroket 9y ago
  If you're at that point I have to wonder whether you'd be looking at this article.
  - gk1 9y ago
    Why? It's not as though someone goes from no-understanding-whatsoever to complete-mastery. I remember when I decided to form an LLC the next step was do decide which state to do it in--specifically, whether to do it in Delaware or my home state. Cost and convenience (what this article is about) was a consideration. Then after I decided to do it in my home state, I needed to decide whether to a) do it myself, b) use an online service, or c) use a local attorney. That meant more reading on that particular question. And so on...
  - _jal 9y ago
    People do this thing called 'research'. It is a method of finding information that, among other things, allows them to mentally model future possibilities. Accurate overview information is really useful for this - one doesn't need to know that the answer to question 14a on form 6735n has tax implications in order to get an idea of the process, compare to other states, etc.
    - emodendroket 9y ago
      Thanks for the gratuitous condescension, but my point here is that I see the potential audience is quite possibly either too advanced to find the article useful or else not advanced enough to recognize its limitations.
      - _jal 9y ago
        I'm sorry you didn't find my humor funny, I wasn't trying to be mean. But fine then; we disagree. I found the article worth reading - it is exactly the sort of thing I'd want if I found myself with a mostly-idle interest in what the process looks like. Last time I did incorporate, I spent substantially more time and money on the question (and would never do so in CA, but that's a different discussion). But that's because I was actually doing it, not just curious.
candeira 9y ago
Leaving alone tax implications of owning a US corporation and making an income from it if you're a foreign national/tax resident.
- briandear 9y ago
  If you are a foreign national outside the US, forming a California LLC is not generally a recommended course of action.
ericls 9y ago
Wow! why so complicated?
zdware 9y ago
Single Member LLC's also have the downside of being "bullied" by lawsuits. In most States, you will be required to have a lawyer represent yourself. You cannot represent yourself (pro se). So in cases where a lawsuit is frivolous, it can be incredibly expensive, whenever you could of just filed a Motion to Dismiss, etc, yourself.
- 77pt77 9y ago
  But if the LLC can't afford it, no one will come after the owner's assets, right? That is the basic idea of using an entity like an LLC in the first place.
- mark212 9y ago
  I marvel at your “just” in relation to a motion to dismiss. Having practiced as a lawyer for 24 years, I’ve never found that opposing or filing an MTD to be trivial or routine.
mattnewton 9y ago
This is also a good way to lose $800 as the minimum tax for an LLC in California when a simple DBA would work just as well for many cases.
- mark212 9y ago
  And you can form an LLC in South Dakota (annual fee: $50) in about as much time. Florida is also good, well designed web app and it’s all laid out nicely, but the annual is $138 if I remember right.
  - zhobbs 9y ago
    If you do business in CA you're required to file as a foreign corporate entity, and still pay the $800 in taxes. You can't open a bank account in a CA bank without proving that you've made that filing.
    - garmaine 9y ago
      > You can't open a bank account in a CA bank without proving that you've made that filing. I have not found this to be the case, at all.
    - pc86 9y ago
      If your business is headquartered in another state I'm not sure why you'd need a California bank account unless you want to use a bank that only exists in California.
    - mark212 9y ago
      I did it less than a year ago with a Florida LLC. Walked into a California branch of a very large international bank and walked out twenty minutes later with a temporary ATM card and checks.
  - paulie_a 9y ago
    Off topic: but South Dakota has a cottage industry of relatively untraceable companies. I am unsure of the exact term for the type of company, but it seems to be pretty popular to distance yourself from your assets
dpweb 9y ago
Check out registered agent fees as well, which can easily go over $100 first year. I used a ‘service’ about $100 to setup LLC in a low tax state. No complaints.
- nodesocket 9y ago
  If you do business in California, which basically means you live in California you will still have to pay the California LLC $800 flat tax and CA income taxes.
mikekchar 9y ago
I'll commit the cardinal sin of not reading the article before posting, but even if it is written there it's worth repeating. See a tax accountant before you do anything. An hour of the accountant's time will almost certainly save their fee many, many times over. I'm in Japan, but I don't think US tax law is any less complicated ;-) When I started my company I waited until after talking to the lawyer and doing all the legal paperwork to engage an accountant. Big mistake! There were a lot more options than I knew about (and that my lawyer told me about). Even engaging my accountant when I did, he still saved me his yearly fee in about 5 minutes. I think it's not a stretch to say that he's saved me about 10% net year to year.
- tomc1985 9y ago
  For those without much of a network, how do you recommend finding one to talk to?
  - mikekchar 9y ago
    As strange as this sounds, my wife actually found our accountant by googling. That got her to a referral service and they set up an interview with someone in our area. The account pays the referral service and offered to consult with us for an hour or so for free. Based on that, we hired him. I spent quite a long time (probably 20-30 hours) reading Japanese tax law so that I understood the basics. I also spent and equivalent (or probably longer, actually) learning dual entry accounting and practicing it. That way, when I got to speak the the accountant I had at least some idea for judging his competence. I asked to see some examples of his work and also chatted to him about his style, etc. Pretty much like any job interview ;-). It's been 3 years now, and although he was the first and only person we talked with I'm very happy with my choice. However, remember that it's a buyer's market and you do have a choice. Try to make sure that you have plenty of time to set up your company because you don't want to rush through these things. Accounting and taxes is important. Also, I would also advise not to judge primarily on price. Good accountants are worth a lot, so pay them appropriately. However, you can also get accountants that attempt some slimy practices and leave you on the hook if it all goes wrong, so make sure the person isn't over promising. Get them to show you what kinds of actions they will take. It should be pretty clear how they do things.
jjeaff 9y ago
Sounds like a lot of "premature optimization" to me.
dx034 9y ago
> those single member LLCs may be surprised to find the assets of their single member LLC at risk for their personal liabilities Not to discount that but aren't LLCs usually formed to avoid personal liability for company liabilities? Not sure if I misunderstood your comment but it sounds to me that you said personal liabilities (e.g. credit card debt) would have to be paid out of the company. I think the main reason most people form an LLC is the other way around, preventing that a lawsuit not only ruins the company but also you personally. Or is that also easier in a single member LLC?
- maxlybbert 9y ago
  > > those single member LLCs may be surprised to find the assets of their single member LLC at risk for their personal liabilities > Not to discount that but aren't LLCs usually formed to avoid personal liability for company liabilities? That’s officially why they’re formed, but that doesn’t mean they provide what the owner expects. Years ago, when I was a bank teller, I noticed that one of our clients — a CPA — had not incorporated her business, or set up an LLC, LLP, etc. She mentioned that the limited liability wasn’t absolute; people are often able to pierce the veil ( http://lawprofessors.typepad.com/business_law/2017/11/no-need-to-veil-pierce-an-llc-when-direct-liability-is-available-and-llcs-are-still-not-corps.html http://lawprofessors.typepad.com/business_law/2017/11/no-nee... ), so she wasn’t convinced it was worth the trouble. I found out later that courts are willing to pierce the veil in cases that don’t make sense (often, the courts pierce the veil for contract lawsuits where the injured party failed to write in the contract that the LLC’s owners would personally guarantee the performance, but if a car owned by an LLC was in an accident, courts would respect the limited liability; this seems backward since the victim of the accident didn’t pass up a chance to get the owner to personally take liability: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=236967 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=236967 ).
  - mkirklions 9y ago
    If you separate everything, I dont expect lawyers to take your home upon something awful happening. Ive heard the stories of LLCs going bankrupt, but I dont know of people losing their personal assets.
deleted 9y ago
[deleted]
joshuaheard 9y ago
To clear up some misconceptions: An ownership interest in the LLC (and its share of assets) is always at risk for the member's personal liabilities just like any assets of an individual debtor. LLCs merely afford liability protection against personal liability for the company's debts. A pass-through LLC MUST file a tax return and issue Schedule K-1s to the partners (a pass-through LLC is considered a partnership by the IRS) so they can pay their taxes, even though the LLC does not pay taxes itself. You must also file a California state tax return to report payment of the $800 annual minimum franchise tax. It is correct that just filing the papers and paying the fees to the state does not constitute proper LLC formation. An Operating agreement must be executed and other formalities completed. There's something like an 11-point test for disregarding a corporation and any one them can bring personal liability. Forming an LLC can be done yourself, but research it, and follow the rules closely. The key is to keep the LLC as a separate entity and not to overlap or commingle your personal assets and the assets of the company. If you do everything for the company as you would do for another person, such as separate address and phone number, bank account, etc., you should be fine.
- joshuaheard 9y ago
  Actually, I looked into it a little deeper and a single member LLC can report on an individual's tax return without filing its own return.
- mark212 9y ago
  Not to quibble with you, but I don’t recall seeing a requirement for having an operating agreement separate from the certificate of formation in the Uniform Act or anywhere else. As far as piercing the corporate veil, that’s a matter of state law and very fact-dependent, and exceptionally rare.

mmckelvy 9y ago

Yeah this article is meant as a simple how-to for someone that has already decided they want to form an LLC in California and understand the pros and cons. I cover some of the issues you cite in another post: https://blog.bookandledger.com/topics/business-formation/intro-to-forming-a-business https://blog.bookandledger.com/topics/business-formation/int...

jiveturkey 9y ago
Yeah the original article is almost worthless. The 2nd article you just linked is much better, and usefully informative. However, it still needs: - info about the need for an operating agreement - more detail about piercing the corporate veil - discussion of FTB and IRS reclassifying as hobby business You are advertising to a very technical audience and should address these things at a deep level.
- theptip 9y ago
  I strongly disagree with "almost worthless"; assuming you've made the decision to form a CA LLC, this post is very useful. You're making some quite strident demands of some random person on the internet here ;) Having said that, I too would be interested in the extra topics that you listed, particularly the operating agreement piece. I looked into this recently and NoLo offers a $100-300 service [1] which comes with options, vs. free Operating Agreements like this random one on UpCounsel[2]. I have no idea what the parameters are on this, and in the past I've just leant on a lawyer friend to do this for me; I'd like to understand the details. [1]: https://store.nolo.com/products/online-california-llc-ptlca-2.html https://store.nolo.com/products/online-california-llc-ptlca-... [2]: https://www.upcounsel.com/single-member-llc-operating-agreement https://www.upcounsel.com/single-member-llc-operating-agreem...
  - jiveturkey 9y ago
    I paid $1000 to a lawyer for an operating agreement. It was fine. For my 2nd LLC I just copied a free template (different than my expensive lawyer'd one) since I now had a really good understanding of what needs to be there. At first yes it's scary to think you might be getting it wrong, but you learn that it's not rocket science. It's basically the agreement between the members of the corporate structure. I haven't read the NOLO one but I bet it's good value for money. You will generally have to present the operating agreement to the bank to open a business account, to get business financing, maybe for insurance, stuff like that. My experience (IANAL) is that for friendly partners, the nolo template is going to be fine. If you're selling shares to folks that you don't have a history with, you may want to have the assurance of expert, personal legal advice from someone you can also go back to with future concerns. And for that kind of bigger LLC anyway, the $1000 or so is a reasonable expense.
    - mikeryan 9y ago
      I’m not sure a template is the way to go with multi member. If you are going multi member you should really both get a lawyer to explain the details and review the docs. I’ve had to unwind a multi member LLC into a single member one and gaps in our operating agreement were suddenly all too relevant.
IncRnd 9y ago
> Yeah this article is meant as a simple how-to for someone that has already decided they want to form an LLC and understand the pros and cons. I think you mean "has already decided they want to form an LLC in California "
- mmckelvy 9y ago
  Yep! Fixed.
emodendroket 9y ago
If you're at that point I have to wonder whether you'd be looking at this article.
- gk1 9y ago
  Why? It's not as though someone goes from no-understanding-whatsoever to complete-mastery. I remember when I decided to form an LLC the next step was do decide which state to do it in--specifically, whether to do it in Delaware or my home state. Cost and convenience (what this article is about) was a consideration. Then after I decided to do it in my home state, I needed to decide whether to a) do it myself, b) use an online service, or c) use a local attorney. That meant more reading on that particular question. And so on...
- _jal 9y ago
  People do this thing called 'research'. It is a method of finding information that, among other things, allows them to mentally model future possibilities. Accurate overview information is really useful for this - one doesn't need to know that the answer to question 14a on form 6735n has tax implications in order to get an idea of the process, compare to other states, etc.
  - emodendroket 9y ago
    Thanks for the gratuitous condescension, but my point here is that I see the potential audience is quite possibly either too advanced to find the article useful or else not advanced enough to recognize its limitations.
    - _jal 9y ago
      I'm sorry you didn't find my humor funny, I wasn't trying to be mean. But fine then; we disagree. I found the article worth reading - it is exactly the sort of thing I'd want if I found myself with a mostly-idle interest in what the process looks like. Last time I did incorporate, I spent substantially more time and money on the question (and would never do so in CA, but that's a different discussion). But that's because I was actually doing it, not just curious.

candeira 9y ago

Leaving alone tax implications of owning a US corporation and making an income from it if you're a foreign national/tax resident.

briandear 9y ago
If you are a foreign national outside the US, forming a California LLC is not generally a recommended course of action.

ericls 9y ago

Wow! why so complicated?

zdware 9y ago

Single Member LLC's also have the downside of being "bullied" by lawsuits. In most States, you will be required to have a lawyer represent yourself. You cannot represent yourself (pro se). So in cases where a lawsuit is frivolous, it can be incredibly expensive, whenever you could of just filed a Motion to Dismiss, etc, yourself.

77pt77 9y ago
But if the LLC can't afford it, no one will come after the owner's assets, right? That is the basic idea of using an entity like an LLC in the first place.
mark212 9y ago
I marvel at your “just” in relation to a motion to dismiss. Having practiced as a lawyer for 24 years, I’ve never found that opposing or filing an MTD to be trivial or routine.

mattnewton 9y ago

This is also a good way to lose $800 as the minimum tax for an LLC in California when a simple DBA would work just as well for many cases.

mark212 9y ago
And you can form an LLC in South Dakota (annual fee: $50) in about as much time. Florida is also good, well designed web app and it’s all laid out nicely, but the annual is $138 if I remember right.
- zhobbs 9y ago
  If you do business in CA you're required to file as a foreign corporate entity, and still pay the $800 in taxes. You can't open a bank account in a CA bank without proving that you've made that filing.
  - garmaine 9y ago
    > You can't open a bank account in a CA bank without proving that you've made that filing. I have not found this to be the case, at all.
  - pc86 9y ago
    If your business is headquartered in another state I'm not sure why you'd need a California bank account unless you want to use a bank that only exists in California.
  - mark212 9y ago
    I did it less than a year ago with a Florida LLC. Walked into a California branch of a very large international bank and walked out twenty minutes later with a temporary ATM card and checks.
- paulie_a 9y ago
  Off topic: but South Dakota has a cottage industry of relatively untraceable companies. I am unsure of the exact term for the type of company, but it seems to be pretty popular to distance yourself from your assets

dpweb 9y ago

Check out registered agent fees as well, which can easily go over $100 first year. I used a ‘service’ about $100 to setup LLC in a low tax state. No complaints.

nodesocket 9y ago
If you do business in California, which basically means you live in California you will still have to pay the California LLC $800 flat tax and CA income taxes.

mikekchar 9y ago

I'll commit the cardinal sin of not reading the article before posting, but even if it is written there it's worth repeating. See a tax accountant before you do anything. An hour of the accountant's time will almost certainly save their fee many, many times over. I'm in Japan, but I don't think US tax law is any less complicated ;-) When I started my company I waited until after talking to the lawyer and doing all the legal paperwork to engage an accountant. Big mistake! There were a lot more options than I knew about (and that my lawyer told me about). Even engaging my accountant when I did, he still saved me his yearly fee in about 5 minutes. I think it's not a stretch to say that he's saved me about 10% net year to year.

tomc1985 9y ago
For those without much of a network, how do you recommend finding one to talk to?
- mikekchar 9y ago
  As strange as this sounds, my wife actually found our accountant by googling. That got her to a referral service and they set up an interview with someone in our area. The account pays the referral service and offered to consult with us for an hour or so for free. Based on that, we hired him. I spent quite a long time (probably 20-30 hours) reading Japanese tax law so that I understood the basics. I also spent and equivalent (or probably longer, actually) learning dual entry accounting and practicing it. That way, when I got to speak the the accountant I had at least some idea for judging his competence. I asked to see some examples of his work and also chatted to him about his style, etc. Pretty much like any job interview ;-). It's been 3 years now, and although he was the first and only person we talked with I'm very happy with my choice. However, remember that it's a buyer's market and you do have a choice. Try to make sure that you have plenty of time to set up your company because you don't want to rush through these things. Accounting and taxes is important. Also, I would also advise not to judge primarily on price. Good accountants are worth a lot, so pay them appropriately. However, you can also get accountants that attempt some slimy practices and leave you on the hook if it all goes wrong, so make sure the person isn't over promising. Get them to show you what kinds of actions they will take. It should be pretty clear how they do things.

jjeaff 9y ago

Sounds like a lot of "premature optimization" to me.

dx034 9y ago

> those single member LLCs may be surprised to find the assets of their single member LLC at risk for their personal liabilities Not to discount that but aren't LLCs usually formed to avoid personal liability for company liabilities? Not sure if I misunderstood your comment but it sounds to me that you said personal liabilities (e.g. credit card debt) would have to be paid out of the company. I think the main reason most people form an LLC is the other way around, preventing that a lawsuit not only ruins the company but also you personally. Or is that also easier in a single member LLC?

maxlybbert 9y ago
> > those single member LLCs may be surprised to find the assets of their single member LLC at risk for their personal liabilities > Not to discount that but aren't LLCs usually formed to avoid personal liability for company liabilities? That’s officially why they’re formed, but that doesn’t mean they provide what the owner expects. Years ago, when I was a bank teller, I noticed that one of our clients — a CPA — had not incorporated her business, or set up an LLC, LLP, etc. She mentioned that the limited liability wasn’t absolute; people are often able to pierce the veil ( http://lawprofessors.typepad.com/business_law/2017/11/no-need-to-veil-pierce-an-llc-when-direct-liability-is-available-and-llcs-are-still-not-corps.html http://lawprofessors.typepad.com/business_law/2017/11/no-nee... ), so she wasn’t convinced it was worth the trouble. I found out later that courts are willing to pierce the veil in cases that don’t make sense (often, the courts pierce the veil for contract lawsuits where the injured party failed to write in the contract that the LLC’s owners would personally guarantee the performance, but if a car owned by an LLC was in an accident, courts would respect the limited liability; this seems backward since the victim of the accident didn’t pass up a chance to get the owner to personally take liability: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=236967 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=236967 ).
- mkirklions 9y ago
  If you separate everything, I dont expect lawyers to take your home upon something awful happening. Ive heard the stories of LLCs going bankrupt, but I dont know of people losing their personal assets.

deleted 9y ago

[deleted]

joshuaheard 9y ago

To clear up some misconceptions: An ownership interest in the LLC (and its share of assets) is always at risk for the member's personal liabilities just like any assets of an individual debtor. LLCs merely afford liability protection against personal liability for the company's debts. A pass-through LLC MUST file a tax return and issue Schedule K-1s to the partners (a pass-through LLC is considered a partnership by the IRS) so they can pay their taxes, even though the LLC does not pay taxes itself. You must also file a California state tax return to report payment of the $800 annual minimum franchise tax. It is correct that just filing the papers and paying the fees to the state does not constitute proper LLC formation. An Operating agreement must be executed and other formalities completed. There's something like an 11-point test for disregarding a corporation and any one them can bring personal liability. Forming an LLC can be done yourself, but research it, and follow the rules closely. The key is to keep the LLC as a separate entity and not to overlap or commingle your personal assets and the assets of the company. If you do everything for the company as you would do for another person, such as separate address and phone number, bank account, etc., you should be fine.

joshuaheard 9y ago
Actually, I looked into it a little deeper and a single member LLC can report on an individual's tax return without filing its own return.
mark212 9y ago
Not to quibble with you, but I don’t recall seeing a requirement for having an operating agreement separate from the certificate of formation in the Uniform Act or anywhere else. As far as piercing the corporate veil, that’s a matter of state law and very fact-dependent, and exceptionally rare.