Why I’m Applying To Become An LLC on December 17th

crispydoc Uncategorized 8 Comments

One of the eye-opening realizations I took away from attending FinCon18 was that I need to form a Limited Liability Corporation (LLC) before I try my hand at consulting.

The benefits of an LLC are that your assets and the corporation’s assets are separate. This is theoretically a barrier preventing a client who goes after your business from going after your personal assets.

How are my personal assets protected through formation of an LLC?

The protections offered to you  as the owner of an LLC include:

You will not be held personally liable for your LLC’s debts. Creditors can pursue LLC assets, LLC bank accounts, and attempt to get a payout from business insurance but not your personal assets.

You will be protected if an LLC employee or co-owner is found liable for negligence or wrongdoing.

As with any prophylactic, effectiveness is not guaranteed to be 100%.

The smiling faces of many of our children attest to this fact.

How might my personal assets remain vulnerable despite formation of an LLC?

You remain personally liable for your own actions.

  • Personal and direct injury due to negligence.
  • Failure to deposit taxes withheld from an LLC employee’s wages.
  • Intentional fraud, illegal activity or recklessness harming an individual or a company.
  • Failure to treat the LLC as a separate legal entity.

Your LLC may be held liable for a member’s debts.

  • Instead of taking property directly, creditors of an LLC owner can obtain a “charging order” where a court order is obtained forcing the LLC owner to pay the creditor all money that the LLC was planning to pay the LLC owner.
  • A creditor can foreclose on the owner’s interest in the LLC.
  • A creditor can obtain a court order to dissolve the LLC.

So why December 17th?

In California, all corporations (including LLCs) must pay an annual fee (currently $800) to the Franchise Tax Board for the privilege of doing business in the state within the calendar year of formation.

A loophole exists where corporations including LLCs  need not pay this tax if:

  1. They incorporate in the final 15 days of the year, AND
  2. They conduct no business during those 15 days

In other words, I save $800 by postponing opening day of my consulting business by a couple of weeks. That’s a coupon I plan to clip.

Online articles to read if you are considering forming an LLC

LLCs and Limited LIability Protection

How To Fom A Single-Member LLC In California

Pros And Cons Of A Limited Liability Company

10 Key Issues In Setting Up An LLC

The image at the top is the first big swell of the winter. The waves in the distance are 20 foot faces. I don’t go out in those conditions, but I enjoy the spectacle.

Comments 8

  1. I must have missed this, but what kind of consulting business are you going to be doing? I’d love to hear more about the idea.

    I formed an LLC for my website. Gotta remember to pay my annual fee and perform my annual filings here in my southern state when that time comes due in the New Year.

    I did all of the paperwork on my own, though. I imagine I’ll probably hire a lawyer to make sure I didn’t goof anything up after the business becomes a little more profitable.

    TPP

    1. Post
      Author

      All to be revealed in good time, my friend.

      Also doing all the LLC filing on my own (which is another way of saying I reserve the right to make my own mistakes and figure out how to correct them).

  2. I also hold my personal finances in tenets by entirety accounts. In FL they can’t go after conjoined money. I recently moved everything into a trust to control the disbursement to my kids if we die. To age 30 a trustee controls payout (my brother) at age 30 they get 25% and at 37 the rest. Cars are titled separately so if you have an wreck they can only sue the title holder who has no separated assets. I’ve had C corp and LLC as well. The C corp ended when I sold the practice and went to work for big medicine. For the LLC corporate compliance and it’s cost became too much of a hassle for a shoe string level business so I closed my LLC but between TBE and Trust I’m pretty good.

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      Author

      Unfortunately we don’t have tenancy by entirety in the state of California, I looked into that as well. That tiny phrase is the equivalent of knowing the magic words to asset protection if you live in the right state.

      We also have a family trust, but I have to admit I struggle with the trustee disbursement over time. Although we chose something similar, I ask myself: is it enough to raise your kids with a strong moral compass and assume it will point them in the right direction, or do you also need to regulate the payout so that they a) develop the experience of earning their own nest egg and b) you protect against the frontal disinhibition of youth?

      LLC is fairly straightforward in CA, but still an opportunity for me to learn how to manage a new business entity (at least I plan to frame it as something new I get to learn, in order to avoid feeling like it’s one more regulatory burden).

      1. It’s enough to love your kids, trust your kids, teach your kids as they move to adulthood. Like everything I did with them when it came to money I set up boundaries safe enough until they were old enough to penetrate the boundaries, let them penetrate and then set up new boundaries to penetrate. I didn’t trick them but told them exactly what I was doing so they could experiment and learn. Kids will do what you expect them to do if you give them some respect, some freedom and tools to do it in their own way, and/or incentivize it correctly. My main goal in the trust was to protect them and their children from unscrupulous mates and so the money’s ownership was not ambiguous when it came to my grandchildren.

  3. Very mysterious. Well congratulations on taking a big step on entrepreneurship.

    Now you have my curiosity. You mentioned you learned the necessity for a LLC at FinCon. I presumed they were referring to blogs. Any suggestion for that? I asked white coat and he said too early and he didn’t do it until 2 yrs in I believe

    1. There’s soooooooooooo many tax benefits to having an LLC! It’s part of a great tax mitigation plan. We’ve recently set up our business as well…it’s time consuming though, to say the least. Luckily we were able to break it down into small steps and were fortunate we had some great contacts advise/help us. But wow, CD, California’s price is eye-popping (compared to FL at least). Glad you clipped that coupon! Smart move.

      Xrayvsn—we got a bunch of small business books from the library first. That helped out a lot.

  4. So, most of my investments are in my name.
    Only my individual rental properties are in LLCs. Those are potentially toxic assets.
    I am grateful that things are cheap in my state. I think the annual filing fee is only $75. Everything can be done online without an attorney. Then you just need to go to the IRS website and get a Tax ID so things aren’t in your Soc #. Then make a separate bank account for the LLC. That about sums it all up. Not too hard, but important risk mitigation steps.

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