A single member LLC in California is treated exactly like a sole proprietorship for tax purposes, except it costs you $800 per year. Unless you know you need it, you probably don’t need it. It won’t protect you from lawsuits, you’ll still have to provide personal guarantees on loans, etc.
Source: had single member CA LLC and wasted $800/year for a few years on it.
> A single member LLC in California is treated exactly like a sole proprietorship for tax purposes,
No, it's not; both for federal and California tax purposes, a single-member LLC chooses whether to be taxed as a corporation (i.e., separately) or as a “disregarded entity” (directly on the owners taxes as for sole proprietorship of the single member is an individual, on the owners taxes as a corporate subsidiary or division if the single member is itself a corporation.)
> It won’t protect you from lawsuits
Yes, it does mean that, absent the conditions for piercing the veil which apply just as they would to any corporation, you are protected from liability for the liabilities of the company. That's the LL in LLC. If you properly observed the formalities of LLC operation, it does protect you.
> you’ll still have to provide personal guarantees on loans, etc.
Well, yeah, if you have a baby business that has no evidence of being credit worthy and no way to secure it's debts, it'll need some guarantee of payment before people will extend it credit. That's kid of obvious—why would someone extend credit to an entity with no demonstrated ability to pay with no one else on the hook?
An example of where you do need a SMLLC is my dentist's LLC was a SMLLC twice in his career due to various partnerships forming and dissolving in the normal course of careers.
Apparently the process of adding or removing partners is, at least in my state, very simple.
My dentist and I don't have much in common so we talk about things like this. Well, he talks, I kinda mumble, under the circumstances. Are LLCs normal for dentists in general or dentists in your state or dentists in my state? I donno, I should ask him next time.
I would imagine all sorts of small service businesses with multiple partners would benefit from this situation, ranging from lawn care to IT field service to law offices. I wonder how this situation interacts with long term inherited family businesses?
This sounds misinformed. The point of an LLC as far as I have always understood it is that if someone sues your company they cannot take your personal assets as collateral but only that which belongs to the company. If someone sues you, you can lose a crappy small LLC or would you rather lose your home as part of a settlement cause somebody is a monster.
Feel free to correct me if I am wrong on this or if this is a misconception.
I am not a lawyer, but I've been in business long enough and have been through enough legal issues to know that forming an LLC isn't sufficient to keep you from getting sued personally or having the corporate veil pierced if someone wants to come after you. In this regard, the parent posters are correct - there may be good reasons for you to form an LLC, but legal protection is a grey area.
> having the corporate veil pierced if someone wants to come after you.
The creditor wanting to pierce the veil is, unsurprisingly, not a sufficient legal condition for piercing the corporate veil, otherwise corporations and LLCs (not just California and not just single-member) would be worthless.
Of course, a sloppily-run LLC is more likely to result in piercing the veil, and a single member LLC that the owner views as a maintenance free magic shield is particularly likely to be sloppily run.
It still doesn't stop someone from suing you personally. Anyone can sue anyone for any reason. You can try to claim "it was the business's fault" but if you're a single member LLC (with no employees) this is very difficult -- but not impossible -- to prove.
I'm not a lawyer, but this happened to my dad a couple of times in his life. The first time, he lost control of his business and had to declare bankruptcy. The second time, it was dismissed.
Edit: For those curious. Having "policies" written down and following those policies to the letter will save you if you are ever personally sued for something your business does.
> It still doesn't stop someone from suing you personally.
It vastly reduces the expected value to them, and thus the incentive, and the expected cost (legal and liability) to you, but no, it's not an absolute shield.
> . You can try to claim "it was the business's fault" but if you're a single member LLC (with no employees) this is very difficult
Well, yes, but the problem with that isn't “single-member LLC” (for which the standard is pretty much the same as any other limited liability entity) but the “you’re” part: a key requirement of maintaining limited liability is that the entity is operated as a distinct thing from the principals. If you view yourself as not distinct from the LLC—that the LLC is something you are and not something you have or operate—that's a pretty good sign that you are thinking about it wrong from the start.
>Of course, a sloppily-run LLC is more likely to result in piercing the veil,
And unless you happen into some money tree-esque line of work it is going to be damn near impossible for a one person LLC to not do things that will get the veil pierced, especially in a business unfriendly regulatory environment where the small businesses are already spread thing by other requirements. The plumber who is unwilling to use his van as a personal vehicle and use his personal checking account as his slush fund is going to get out competed by the plumber who is. The vast majority of single person LLCs simply do not have the luxury of having enough cash on hand to separate things to the extent necessary to be protected.
> The vast majority of single person LLCs simply do not have the luxury of having enough cash on hand to separate things to the extent necessary to be protected.
If you don't have the ability to operate a distinct entity, you shouldn't choose the business form designed for that express purpose and offering benefits conditioned on doing so.
I don't know that the vast majority of single-individual LLCs are actually doing it wrong, though, especially in California where the required cost at least encourages some thought about what you are going to get out of it that justifies it.
Unless you're especially sloppy, it's virtually impossible to "pierce" the corporate veil. It almost never happens. However, if you have a business that could be sued (ie AirBNB rental), and you have a lot of personal assets, then an LLC is a good idea IMO.
If you’re at the level you’re just starting out, there’s a good chance your home is your biggest asset. Forming an LLC won’t let you borrow money with no collateral, so there’s a good chance your gonna have to expose yourself to personal risk. If you have to put your home up as collateral, an LLC may not give you much.
My personal experience was that banks will start treating your LLC as an entity that isn’t an extension of you when you start getting up to a few million USD in revenue. Then you are likely to have assets like accounts receivable, signed contracts, inventory, etc. I may be wrong here, as I didn’t get to that level, but I remember conversations ending with “we can help you when you’re making 3 to 5 million.”
Well if you sign over your home as collateral that's another story entirely. I think we're discussing something else from what I'm more concerned about, which is in regards to lawsuits.
Just for the record, California is way off the curve here. Most states have an LLC fee of $50/yr or less (and 9 have none) making it a more reasonable proposition in those places.
I'm not sure I'd pay that much for the benefits of an LLC in California, but I'd certainly pay $8 in NY or $0 in Texas.
- This depends what you are doing with your business. Doing some software consulting on the side and making 10-20k/year from that? You probably don't need it. You have to decide for yourself what your chances of getting sued fare, but for many people, they are zero to negligible. The chances of getting sued go up quite a bit once you start to employ people though.
- IANAL, but I get the impression that if you do everything right, then piercing that corporate veil isn't so simple. If you start treating the LLC like an extension of yourself, then you run a risk. So don't buy cars or vacations (or any non-business expenses) on the company if you want to maintain that separation. Also, don't commit fraud or other things where the court might find it unreasonable to let you hide behind a corporate veil (if you sell $100,000 in counterfeit prada purses to an unknowing buyer, and then take that money and transfer it from the LLC to yourself, the court probably won't look favorably on that). Also, make sure the company is well capitalized enough. If you open up an LLC and put $10,000 on the credit card without any reasonable expectation that you'd be able to pay that expense, and the court agrees, you might see the corporate veil pierced. But in general, if what you are running is an actual business, there's probably a fairly good chance that piercing the corporate veil will be hard (doesn't mean people can't sue you personally... the question is whether they will be successful in doing so).
- For some people, paying $800/year is worth it for having something that sounds more official. Telling a customer that you are Acme LLC sounds more official, which is worth something.
- I do some side consulting and live in a state where LLC fees are much lower (~130-ish/year). I don't really need the legal protections (the most my customers would reasonably do is ask for their money back, which I would probably do anyway if they were unhappy, rather than deal with a lawsuit). But I like having an LLC with it's own bank account and credit card for tax purposes. It gives me piece of mind that i have completely separate accounts for business expenditures that I can point to in case I were audited, even though my risks of audit are pretty low. That said, I probably wouldn't do it if I were paying $800/year.
> "A court will pierce the veil only if a failure to do so will result in an injustice. This requires more than evidence that a creditor will not get paid. It requires evidence that the corporation or LLC was used in some way to perpetrate a fraud or accomplish some other wrongful purpose. For example, if the shareholders or members formed the entity knowing that they were not providing enough start-up capital to satisfy its contractual obligations, or intentionally moved the company’s assets out of a known creditor’s reach so that the debt could not be paid.
Actions such as those may be considered by courts as abusing the corporate or LLC form. For example, an Alabama court pierced the veil of a solely owned corporation that was hired to do construction work on a house. The shareholder testified that the corporation had no money when the contract was made, that she made no attempt to make sure the corporation had enough money to complete the project, and that she and a friend used the corporation’s bank account – which consisted only of the funds from the plaintiff - for personal purchases at jewelry and sporting goods stores, car services, restaurants, and more."
Source: had single member CA LLC and wasted $800/year for a few years on it.