5 ms·

Can I Set Up An LLC To Avoid Personal Liability In A Lawsuit?

95 points by brlewis 17y ago

alain94040 17y ago
Hopefully, liability never becomes an issue in your startup, but hope is not an acceptable plan :-) So it's good to debunk the myth of the fake LLC. I just think the article goes a bit far (but the author is a lawyer and I'm not). Either way, it matches my experience: in the US, you can get sued pretty much no matter what steps you have taken not to get sued...
- dkokelley 17y ago
  Well, from what I understand, anyone can sue anyone for any reason. It's whether or not they will win, and more importantly what they will win that people go to great lengths to protect against.
  - FooBarWidget 17y ago
    If their goal is to bankrupt you, then doesn't starting a lawsuit fulfill that goal, regardless of whether they win?
    - irinotecan 17y ago
      There are "anti-SLAPP" laws to deal with people filing frivolous lawsuits whose sole purpose is to bankrupt or silence you (or your business)
torr 17y ago
Setting up and keeping up an LLC is a bit of a pain in the neck. Also working out how to pay yourself, keeping accounts separate, and so on takes extra time. One benefit of an LLC might be a somewhat more professional image (for some customers anyway). Also, my guess is that corporate customers may not want to do business with you unless you're an LLC (though I wouldn't know for sure as I have no corporate customers). Anyone here go from having your own LLC to dissolving it and going sole proprietership?
- bonsaitree 17y ago
  "A pain in the neck" You've got to be kidding. 1. Trivial law work is required. 2. Annual total business license fees range from ($20-$1,000) depending on location 3. Trivial bank account setup All of this can be accomplished literally in the span of a few hours. I would argue the biggest maintenance costs are related to tax filings and accounting, but they're more than offset by all the available expense write-offs. It's really a no-brainer decision with today's streamlined systems and litigious society. Additionally, having an LLC operating agreement (even a generic one) in place, usually makes converting to a C-corp (to be available for VC financing) much easier.
  - blurry 17y ago
    Not so in New York. You have your UBT (over $3,000 per year), your publication requirements (over $1,500 per registration), and more. Considering that generally your clients cannot sue you for more than the contract was worth in the first place (excepting rare cases of willful negligence etc.) it is far from a no-brainer.
    - bonsaitree 17y ago
      Willful negligence indeed. That's why it's a good idea to carry E&O insurance in most states--despite the costs. Nah, the tax write-offs alone make those costs more than manageable.
- jey 17y ago
  LLCs are simple. Maybe you're thinking of C-corps and the mountain of paperwork involved with that? I have an LLC for my consulting business, mostly so I don't get qualified as an employee of my clients, have "limited liability", etc. It's simple in terms of paperwork because it's treated by the IRS just like a sole proprietorship as long as the LLC only has one employee. The biggest downside is that I have to pay an $800/year LLC tax to the state of California.
  - jey 17y ago
    Oops, s/qualified/classified/...
MaxwellKennerly 17y ago
I'm the author; thanks for reading and let me address it "go[ing] a bit far." In the context of Hacker News readers (presumably startups looking for funding and with employees) there are many good reasons for setting up an LLC, including limiting liability if one of those employees gets sued, and limited contractual liability. However, the point I was getting at is that the LLC doesn't totally shield you from liability, a misconception that has brought a lot of trouble to people who played fast and loose with their conduct and ended up staring down the barrel of potential personal liability. The core point is: don't try to "dodge" liability. Instead, take steps to reduce the likelihood of causing harm and get a good insurance policy.
- mattmaroon 17y ago
  That article was very useful. I wish we had more attorneys writing such entries for the rest of us. There are a striking number of legal misperceptions out there among businesspeople.
  - micks56 17y ago
    Do you have any specific topics in mind?
    - bwd 17y ago
      How about asset protection strategies?
      - micks56 17y ago
        Are you looking to protect business versus personal assets, or protecting assets via risk management, or other?
        bwd 17y ago
        Mostly looking to protect personal assets.
- 17y ago
dryicerx 17y ago
Any thoughts on getting sued regarding IP Infringement as a LLC, how does the liability trickle down to the people behind the LLC. For example company X sues a LLC stating that they have violated a patent for example?
- MaxwellKennerly 17y ago
  If by "people behind the LLC," you mean the investors, then, yes, their liability is typically limited. I write "typically" because investors can be liable if either (1) they participated in the infringement or (2) a court decides to "pierce the corporate veil," which is rare, but can happen if an investor abuses an LLC (undercapitalizing it, disregarding corporate forms, etc) for the purpose of avoiding liability.
newsio 17y ago
My umbrella insurance policy includes coverage for defamation-related suits, and it seems to be standard for the insurance company's customers (i.e., I did not have to request it). It's not like I am going out of my way to provoke such suits, but it's nice to have.

95 points by brlewis 17y ago

Hopefully, liability never becomes an issue in your startup, but hope is not an acceptable plan :-) So it's good to debunk the myth of the fake LLC. I just think the article goes a bit far (but the author is a lawyer and I'm not). Either way, it matches my experience: in the US, you can get sued pretty much no matter what steps you have taken not to get sued...

dkokelley 17y ago
Well, from what I understand, anyone can sue anyone for any reason. It's whether or not they will win, and more importantly what they will win that people go to great lengths to protect against.
- FooBarWidget 17y ago
  If their goal is to bankrupt you, then doesn't starting a lawsuit fulfill that goal, regardless of whether they win?
  - irinotecan 17y ago
    There are "anti-SLAPP" laws to deal with people filing frivolous lawsuits whose sole purpose is to bankrupt or silence you (or your business)

torr 17y ago

Setting up and keeping up an LLC is a bit of a pain in the neck. Also working out how to pay yourself, keeping accounts separate, and so on takes extra time. One benefit of an LLC might be a somewhat more professional image (for some customers anyway). Also, my guess is that corporate customers may not want to do business with you unless you're an LLC (though I wouldn't know for sure as I have no corporate customers). Anyone here go from having your own LLC to dissolving it and going sole proprietership?

bonsaitree 17y ago
"A pain in the neck" You've got to be kidding. 1. Trivial law work is required. 2. Annual total business license fees range from ($20-$1,000) depending on location 3. Trivial bank account setup All of this can be accomplished literally in the span of a few hours. I would argue the biggest maintenance costs are related to tax filings and accounting, but they're more than offset by all the available expense write-offs. It's really a no-brainer decision with today's streamlined systems and litigious society. Additionally, having an LLC operating agreement (even a generic one) in place, usually makes converting to a C-corp (to be available for VC financing) much easier.
- blurry 17y ago
  Not so in New York. You have your UBT (over $3,000 per year), your publication requirements (over $1,500 per registration), and more. Considering that generally your clients cannot sue you for more than the contract was worth in the first place (excepting rare cases of willful negligence etc.) it is far from a no-brainer.
  - bonsaitree 17y ago
    Willful negligence indeed. That's why it's a good idea to carry E&O insurance in most states--despite the costs. Nah, the tax write-offs alone make those costs more than manageable.
jey 17y ago
LLCs are simple. Maybe you're thinking of C-corps and the mountain of paperwork involved with that? I have an LLC for my consulting business, mostly so I don't get qualified as an employee of my clients, have "limited liability", etc. It's simple in terms of paperwork because it's treated by the IRS just like a sole proprietorship as long as the LLC only has one employee. The biggest downside is that I have to pay an $800/year LLC tax to the state of California.
- jey 17y ago
  Oops, s/qualified/classified/...

MaxwellKennerly 17y ago

I'm the author; thanks for reading and let me address it "go[ing] a bit far." In the context of Hacker News readers (presumably startups looking for funding and with employees) there are many good reasons for setting up an LLC, including limiting liability if one of those employees gets sued, and limited contractual liability. However, the point I was getting at is that the LLC doesn't totally shield you from liability, a misconception that has brought a lot of trouble to people who played fast and loose with their conduct and ended up staring down the barrel of potential personal liability. The core point is: don't try to "dodge" liability. Instead, take steps to reduce the likelihood of causing harm and get a good insurance policy.

mattmaroon 17y ago
That article was very useful. I wish we had more attorneys writing such entries for the rest of us. There are a striking number of legal misperceptions out there among businesspeople.
- micks56 17y ago
  Do you have any specific topics in mind?
  - bwd 17y ago
    How about asset protection strategies?
    - micks56 17y ago
      Are you looking to protect business versus personal assets, or protecting assets via risk management, or other?
      - bwd 17y ago
        Mostly looking to protect personal assets.
17y ago

dryicerx 17y ago

Any thoughts on getting sued regarding IP Infringement as a LLC, how does the liability trickle down to the people behind the LLC. For example company X sues a LLC stating that they have violated a patent for example?

MaxwellKennerly 17y ago
If by "people behind the LLC," you mean the investors, then, yes, their liability is typically limited. I write "typically" because investors can be liable if either (1) they participated in the infringement or (2) a court decides to "pierce the corporate veil," which is rare, but can happen if an investor abuses an LLC (undercapitalizing it, disregarding corporate forms, etc) for the purpose of avoiding liability.

newsio 17y ago

My umbrella insurance policy includes coverage for defamation-related suits, and it seems to be standard for the insurance company's customers (i.e., I did not have to request it). It's not like I am going out of my way to provoke such suits, but it's nice to have.