Do I need to form an LLC?

Dear Alex:

I am starting a blog and podcast to talk about sports.

I haven’t started publishing any material yet, and do not expect to generate any revenue from these activities. A friend of mine told me that I should form an LLC in case I get sued for defamation.

What do you think?

It sounds like you are starting a great hobby. At this stage, it is probably too early to worry about forming a business entity.

In the future, an LLC might be a good idea. While it goes without saying that I hope you don’t say anything that would constitute defamation, here are three more reasons why you probably don’t need a business entity:

First, your risk is very low at this stage.

If you have readership and podcast subscribers, the number of subscribers is probably very small. Even if you accidentally defamed a famous sports star, there is almost no risk that the individual would find out or care. Even if the person did find out, there is not likely to be any measurable harm to that sports star.

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An LLC costs $800 per year in state franchise taxes, as well as initial costs of formation. Due to your very low-risk exposure, the annual cost of the entity does not appear to be worth the protection that it might offer you.

Second, while an LLC is an effective business entity type for insulating the individual owners against liability of the business, your activities at this point have no business purpose.

The business’s liability protection would probably fail if you were sued, leaving you personally exposed. With no revenue or chance of revenue, the only assets of the entity will be the money that you contribute, and all of the activities conducted through the entity will be drawn off of those personal funds. Any expenses of the LLC will serve no real business purpose.

This means all spending of the LLC would be for your personal use of LLC’s assets. Spending entity assets on personal activities may be called “commingling” of funds, and commingling of funds is one method of “piercing the corporate veil,” which is a legal term for holding the owners of a business liable for activities conducted by the business.

The third reason is that you can always be held accountable for your own negligence.

If the LLC did make money, the main activity driving the revenue would be your own personal commentary in the blog and radio. If you were negligent and accidentally committed defamation on a podcast or blog posting, that writing would be a personal act of negligence that the LLC may not protect you against.

As your hobby grows in subscribers and you start to gain paid sponsorships, then you might want to revisit the idea of forming an LLC or other limited liability entity from which to conduct your activities.

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 August 16th, 2016. You can read it on the Register's website here: "Do I need to form an LLC?"

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'"

Should I Create an LLC for Real Property?

"I own a personal residence and a rental property. I was told to put the rental property into an LLC to protect my personal residence from the liability of the rental property. Is this a good idea?”

This is probably good advice. There are benefits and drawbacks to LLCs (limited-liability companies), but if you are planning to put your rental property into a limited-liability entity to protect your other personal assets, an LLC is usually the best choice. There are other entities that offer limited liability, such as C-corporations and S-corporations, but the tax consequences of putting real estate into a corporate entity like those can be disastrous.

When you contribute real property into an LLC, the liabilities associated with that real property and its business activities are cut off from the personal assets of the owners (called “members”) of the LLC. People who have multiple properties or other assets (for example, investment accounts or ownership of a business) can benefit greatly from separating their rental properties from their other assets by use of LLCs.

Of course, the property within the LLC is still subject to the liabilities of the LLC. If there is a lawsuit related to the property held in the LLC, the property itself can still be subject to any judgment associated with that lawsuit.

While the principles of liability protection by an LLC are appealing, they aren’t without limitations. Individuals can always be held responsible for their own acts of negligence, so keeping property in an LLC is does not always protect the members from their own bad or negligent actions. Additionally, much of the financial protection that LLCs offer can be accomplished through insurance.

Not only will lenders require minimum insurance coverage, but in the event of a lawsuit or claim, it is better to have cash paid out of an insurance policy than be forced to sell the property to pay for money damages.

A problem with relying solely on insurance as a protection from liabilities is that insurance policies have limits in the amount of damages they cover, and exceptions and limitations on the types of damages that are covered. Best practices call for property owners to both hold the property in an LLC, and to carry adequate insurance.

There are other drawbacks to an LLC. One of those drawbacks is the annual minimum Franchise Tax that the state of California assesses against LLCs and other corporate entities, which is currently $800 per year. For some, the Franchise Tax may make the LLC not worth the cost. Additionally, many lenders won’t lend to an LLC directly and at minimum will require LLC members to personally guarantee the debt.

Alex Myers is an attorney with Myers & Associates in Napa, and can be reached at alex@myers-associates.com or at 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 you should contact an attorney.

This column originally ran in the Napa Valley Register on March 3rd, 2015. You can read it on the Register's website here: http://napavalleyregister.com/business/should-i-create-llc-for-rental-property/article_21e4c0ce-5cf3-5875-a9e8-7e3477beea82.html