converting to LLC

[Pants]

If I have IT insurance, from what I've read, the insurance company will defend me if sued, but if I were to add "LLC" status to my business, would that help any more?

I'm trying to figure out the options to minimize chance of getting sued. I know good customer service is a good minimizing factor, however.

 

[frederick]

Ignoring insurance....

As a sole proprietor, if I sue your business, I sue you.

If you are an LLC, if I sue your business, I sue your business. Chances are, your money is tied up in the business pretty good, so I'd empty your wallet because you are your business. But, I'd be suing your business, not you.

Putting insurance back in...

Regardless of the type of business, insurance is there to protect either the sole proprietor or the business. If you are a sole proprietor, and you switch to an LLC, confirm with your insurance if you need to create a new policy or just do a change over. Also, consult with a lawyer if you have any more questions concerning this. It can most likely vary by state, and I'm not a certified legal consultant.

 

[Pants]

So if my business got sued, instead of ME, what would be the benefit of that? Would the law suite not show up on my credit report if it was my BUSINESS that got sued?

 

[frederick]

Uh...thats a question for a lawyer.

Edit: Shop staff says google it.

 

[mraikes]

So if my business got sued, instead of ME, what would be the benefit of that? Would the law suite not show up on my credit report if it was my BUSINESS that got sued?

The usual reason a small business owner creates an LLC is to protect personal assets.

If a sole proprietor is sued and loses, all their personal assets may be available to satisfy the judgement. The person and the business are one, so personal bank accounts, homes, cars, anything the person owns may be seized and sold to satisfy the judgement.

If an LLC or other form of corporation is sued and loses, assets belonging to the business may be taken to satisfy the settlement, but the owner's personal assets are not. If the business doesn't have enough assets and declares bankruptcy - too bad, personal assets are still off limits.

That's assuming the owner kept their business and personal affairs properly separated. What's termed the "corporate veil" between personal and business assets must be preserved - if that veil is "pierced" the person suing you can argue that there is no separation between personal and business and go after your personal assets even if a corporation exists.

 

[Pants]

Profoundly insightful. Thanks!

 

[ZPR]

I'm agreeing with mraikes, that was the main reason I switched to a LLC in 2012. The one thing that I've always ran into is the personal guarantee, where it's in the LLC's name but if the LLC is unable to pay it then it's as if the LLC never existed.

The corporate veil can be a big gotcha to, as the others have said talk to a lawyer and find out what the requirements are to keep it. Which depending upon your state laws it can include keeping minutes, making sure you sign everything "on behalf" of the LLC and several other items to keep in mind.

 

[redmon]

That's assuming the owner kept their business and personal affairs properly separated. What's termed the "corporate veil" between personal and business assets must be preserved - if that veil is "pierced" the person suing you can argue that there is no separation between personal and business and go after your personal assets even if a corporation exists.

Thanks for that clarification. I Googled "corporate veil", and it gave me a lot to think about in regards to how we are doing things. I suspect alot of people(myself included) are not protected by their LLC as they thought.

Factors for courts to consider(these factors could negate your protection):

Absence or inaccuracy of corporate records;
Concealment or misrepresentation of members;
Failure to maintain arm's length relationships with related entities;
Failure to observe corporate formalities in terms of behavior and documentation;
Failure to pay dividends;
Intermingling of assets of the corporation and of the shareholder;
Manipulation of assets or liabilities to concentrate the assets or liabilities;
Non-functioning corporate officers and/or directors;
Significant undercapitalization of the business entity (capitalization requirements vary based on industry, location, and specific company circumstances);
Siphoning of corporate funds by the dominant shareholder(s);
Treatment by an individual of the assets of corporation as his/her own;
Was the corporation being used as a "façade" for dominant shareholder(s) personal dealings;

 

[nlinecomputers]

An LLC has it's own credit ratings separate from the owners. It is a legally separate entity.

Frankly the taxes, especially in California, are going to kill you. You don't need to be an LLC unless you are highly at risk of lawsuits. Computer places as a rule generally don't get sued. If they did the insurance, like medical malpractice, would be astronomical.

Pants, don't take this the wrong way but GROW a SET. You are constantly posting question after question about how you going to **** up. You have imagined more disasters and problems then you ever are going to have.

Stop worrying and start doing. That will do more for your business then all the insurance and other **** you think you need.

 

[aweston]

A lot of misinformation here. An LLC doesn't protect you from anything if you are a sole proprietor. What matters is who stands to benefit? If it's only one person, that person is not protected by an LLC.

Further, if it's one person making all the decisions and you're trying to hide behind an LLC, it won't work. You'll still be held personally liable.

On top of that, even if you have a Board or several employees, if it can be proven in Court that the decisions you made aren't in the best interest of the third entity, that being the LLC, the Plaintiff can pierce the Corporate Veil and nail you to a wall anyways.

So why LLC? Well, that depends on several things, but it does become it's own living, breathing organism which has it's own rights and privileges. It can also be advantageous for tax reasons.

Long and short, I agree. Grow a set and start delivering. You're asking these questions because you know you're not. Sit down with an accountant and see if there are benefits to switching to an LLC. Sit down with a psychotherapist and find out what blocks you have in place that are sabotaging you.

 

[Markverhyden]

There is no form of incorporation that will completely shield someone from being sued. As mentioned if they can prove a principle/employee willfully engaged in the activity in question with malice aforethought they can be personally targeted.

Even matters that are not clear cut can be problematic is the Inc. is basically a one person operation. Since there is only one decision maker it is easier to pierce that corporate veil. Where a lot of the interest in Inc'ing comes from is in monetary liability. In the case of a bankruptcy personal property is generally shielded as long as there is a proper separation of activities and accounts.

 

[Karlin High]

In my opinion, two principles called "The Golden Rule" and "The Second Mile" are the best way to minimize the chances of getting sued. Once I saw a USA Today story quoting a highly-respected product liability lawyer; the reporter asked him how a business can keep from getting sued. Response: "The only way to not get sued would be to stay in bed all day. But you could get sued for that, too."

Things like liability insurance and business entities can help. Only an attorney could tell you exactly how much, though; see prior "corporate veil" discussion.

And insurance? I have friends in the dairy processing industry. (Which IS a whole 'nother world, I admit.) The can get insurance to cover product recalls and liability issues, which for them are inevitable in today's marketplace - a question of "when," not "if." But others in their industry tell them that if a lawsuit gets bad enough, the insurance company will find a way to back out.

You ever have users convinced they'll never get malware because of they have their favorite (old, expired) antivirus program running? Sort of "rabbit's foot" thinking? Legal liability questions can get the same way. Another quote I once saw: "Accept risk. Accept responsibility. Put an attorney out of business."

PS - For US Federal tax purposes, if an LLC has only one owner it's usually called a "disregarded entity" and taxed no different than a sole proprietorship. None of my tax clients are from California, so I've never studied their state tax system. But it does look some of their state taxes would apply. https://www.ftb.ca.gov/businesses/bus_structures/LLcompany.shtml

 

[codegreen]

Uh...thats a question for a lawyer.

Best advice so far. Schedule a little time with a local lawyer that specializes in small business. Normally they'll have an initial conversation with you for free, and give you a quick overview of the legal advantages and disadvantages of incorporation.

 

[mraikes]

A lot of misinformation here. An LLC doesn't protect you from anything if you are a sole proprietor. What matters is who stands to benefit? If it's only one person, that person is not protected by an LLC.

Further, if it's one person making all the decisions and you're trying to hide behind an LLC, it won't work. You'll still be held personally liable.
..... Snipped..

Particularly in that post.

A business cannot be both a sole proprietorship and an LLC. And yes, an LLC can be just one person. And yes an llc properly maintained can provide the same liability protections of other corporations.

"Limited Liability Company"

http://www.sba.gov/content/limited-liability-company-llc

 

[Pants]

Pants, don't take this the wrong way but GROW a SET. .

That does it. I can't stand it anymore

 

[frederick]

Why I chose LLC, and awestom needs do some research...

Day to day business is conducted by the business. Yes, I head it. But the company has its assets, I have mine. They are separate. I can ne classified as a sole proprietor in some eyes, but legally I'm not. The company makes the agreements, they are in the companoes name. Yes, I signed the contract, but that is because someone has to sign for the company. There is a line between what is mine, and what is the companies. This is where having a lawyer really comes in handy. If the company os sued, the company is sued, not me.

For tax purposes only, when I file for taxes, I do a schedule c. This is the only time where me and the business are one and the same. There isn't a way around it, or another way of doing it. I've looked and my accountant says for tax purposes this is how it is.

 

[aweston]

Particularly in that post.

A business cannot be both a sole proprietorship and an LLC. And yes, an LLC can be just one person. And yes an llc properly maintained can provide the same liability protections of other corporations.

"Limited Liability Company"

http://www.sba.gov/content/limited-liability-company-llc

What I meant by that is that if you're a sole practitioner that converts to an LLC you're not as protected as you think you are. It's much easier to pierce the corporate veil because of who stands to gain, etc. When you're the only decision maker and the only benefactor it's very easy to get at you directly.

I do recommend getting a lawyer. I've personally investigated this with a lawyer so it's not coming from my own head.

 

[aweston]

Why I chose LLC, and awestom needs do some research...

Day to day business is conducted by the business. Yes, I head it. But the company has its assets, I have mine. They are separate. I can ne classified as a sole proprietor in some eyes, but legally I'm not. The company makes the agreements, they are in the companoes name. Yes, I signed the contract, but that is because someone has to sign for the company. There is a line between what is mine, and what is the companies. This is where having a lawyer really comes in handy. If the company os sued, the company is sued, not me.

For tax purposes only, when I file for taxes, I do a schedule c. This is the only time where me and the business are one and the same. There isn't a way around it, or another way of doing it. I've looked and my accountant says for tax purposes this is how it is.

Let me give you a scenario (this is real by the way). I do business with you. You deliver a product that was not what you promised it was. I lose money due to your actions on the transaction and you make an unfair gain. You refuse to make it right. I sue not just the LLC, but also you. I win on unjust enrichment. There's only one person that was unjustly enriched and that's you.

I get a judgement not only against the LLC, but also you personally because nobody else was involved. I then obtain an order and a writ of possession against your personal assets if you fail to pay. There's nothing that LLC can do to protect you.

 

[redmon]

Let me give you a scenario (this is real by the way). I do business with you. You deliver a product that was not what you promised it was. I lose money due to your actions on the transaction and you make an unfair gain. You refuse to make it right. I sue not just the LLC, but also you. I win on unjust enrichment. There's only one person that was unjustly enriched and that's you.

I get a judgement not only against the LLC, but also you personally because nobody else was involved. I then obtain an order and a writ of possession against your personal assets if you fail to pay. There's nothing that LLC can do to protect you.

But if his employee makes a mistake, it may give him some protection. Assuming the corporate veil is not pierced, his personal assets may be protected(more likely could only successfully sue the employee or llc, but not him directly) the llc does give some protection of personal liability in some situations.

 

[aweston]

But if his employee makes a mistake, it may give him some protection. Assuming the corporate veil is not pierced, his personal assets may be protected(more likely could only successfully sue the employee or llc, but not him directly) the llc does give some protection of personal liability in some situations.

I agree. That's not the scenario here though. It's one person who converts to an LLC. In the event that there's multiple employees and an employee makes a mistake it's a little harder, but actually the same does hold true. You wouldn't sue the employee, you'd sue the sole board member and share holder.

Of course there's more to it. You'd have to prove an egregious act, etc. But now we're getting complicated, out of the context of the posts here and well into $400/hour lawyer territory.