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:
- They incorporate in the final 15 days of the year, AND
- 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
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.