What kind of business can be an LLC?

Dear Alex:

I am an acupuncturist and I own a small acupuncture clinic. I would like to protect myself from the liability of my business. I want to form an LLC or a corporation, but I was told that acupuncturists and other licensed professions can’t operate as LLCs. Is that true?

Strangely, it is true that acupuncturists cannot operate as LLCs. In fact, acupuncturists are among dozens of business types that cannot operate as LLCs, among them real estate brokers, and barbers.

Meanwhile, contractors, private investigators and alcoholic beverage licensees may all operate as LLCs. These lists may seem arbitrary, and in many ways they are. The legal history of LLCs has led to a very unusual distribution of which business types may or may not operate as LLCs under California law today.

California’s LLC laws prohibit any business rendering “professional services” from operating as an LLC; however, the specific scope of what is included within “professional services,” is often unclear.

In general, any business that requires extensive education, training, testing, and a license, certification and registration under the Business and Professions Code renders “professional services” as the term applies to LLCs.

There are many businesses in California that require licensure under the Business and Professions Code, but which may not also require the education, training and testing which might classify that business as a “professional service.”

There is no comprehensive list that itemizes which trained and licensed businesses are “professional services” providers and which are not. While both contractors and acupuncturists require training, testing and licensing, contractors may now operate via LLCs, while acupuncturists may not.

The 2014 Revised Uniform Limited Liability Company Act was drafted in an attempt to add more clarity and flexibility to these rules.

The traditional professions such as lawyers, accountants and doctors remain excluded from operation under LLCs, but the revised law now states that if the specific code that regulates your industry (the Business and Professions Code, Chiropractic Act, Osteopathic Act, or Yacht & Shipbuilders Act) expressly permits your business to operate as an LLC, then as far as the Limited Liability Company Act is concerned, you may operate as an LLC.

This has resulted in a mishmash of licensed activities that are permitted or prohibited from operating as LLCs. While the more easily identifiable professions remain excluded, many educated and licensed activities governed by the Business and Professions Code (and the other laws described above) are regulated in a piecemeal fashion, depending upon whether your industry’s law has specifically granted permission to operate as an LLC.

If your business is not permitted to operate as an LLC, but you want the limited liability protection of a corporate entity, there are other entity choices. Those may include Professional Corporations, Limited Liability Partnerships or ordinary S-Corporations.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on March 15th, 2016. You can read it on the Register's website here: "What kind of business can be an LLC?"

The accidental LLC and 'dying on the vine'

Dear Alex:

Four years ago, I formed an LLC with the secretary of state because I was planning to start a business. Plans changed and I never started conducting business. I forgot all about the LLC until recently when I received notice of delinquent franchise taxes.

What do I do?

This happens more frequently than you might think.

In the excitement of planning for a new business, people will often form their LLC or corporation before they are ready for the entity to start conducting business, and the business plans may never come together.

Plans change, people change their minds, perhaps the owners realize another company has already cornered their target market, and the business idea never germinates into an operating business.

The business entity is forgotten, annual fees are never paid, and seemingly out of nowhere years later the Franchise Tax Board starts to send demand letters to the entity’s registered address. Demand letters from a tax collector can be distressing.

The California minimum franchise tax for corporations and LLCs is $800 per year. A neglected business entity can quickly accrue thousands of dollars in franchise taxes. It may then be too late to dissolve the entity without substantial tax cost, as the secretary of state will not allow dissolution until the Franchise Tax Board has been satisfied.

Many people will simply pay the tax to avoid complication and stress. Others cannot afford the payment or do not believe that they should be required to do so.

In the case of limited liability entities such as corporations and LLCs, one of the primary benefits of forming the entity is that the liabilities of the entity (excluding personally guaranteed debt and certain payroll taxes) generally do not extend to the owner’s home and other personal assets.

As long as the liability protection has not been terminated by the owner’s conduct, the franchise tax liability should not extend to the individual members or shareholders of the company. At this stage, some owners make the business decision to let the entity “die on the vine.”

This means they allow the entity to remain in existence until its standing with the secretary of state’s office is suspended, and by time and neglect it ceases to exist for all other intents and purposes.

The Franchise Tax Board is likely to continue its collection efforts and may eventually send demand letters to the individual owners. At that point it is up to the owners themselves to assert the defense of corporate liability protection.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on March 1st, 2016. You can read it on the Register's website here: "The accidental LLC and 'dying on the vine'"