Elizabeth Barrett Browning wrote the poem “How Do I Love Thee? (Sonnet 43).” It begins, “How do I love thee? Let me count the ways.” While I am rather sure she was not writing about the limited liability company (LLC) form of business entity, she might as well have. Why? Let’s face it; we have fallen in love with them. We are smitten. They are irresistible. They seem to have become the entity of choice for just about any kind of business you can imagine. Why? Well, to use the words of Ms. Browning, let us count the ways …
Reason No 1: They are easy, fast and quick to form. Just download, fill out, and file the one page form from the Secretary of State’s website along with the requisite minimal filing fee and voila, your LLC is formed.
Reason No 2: You do not need to hold meetings (unless you elect to) in order to “observe corporate formalities.” As a general rule, corporations require more in the way of holding and documenting meetings, at least annually, than LLC’s do, in order to “observe corporate formalities.” This means it may be harder to “pierce the corporate veil” of an LLC, and just generally allows more “informality” in terms of management.
Reason No 3: Like people who do a lot of yoga, LLC’s are oh so flexible. Flexible how you ask? Well, first, unlike “S” Corporations, you can have different “classes” of equity holders (i. e., owners) so that you are virtually only limited by your imagination when it comes to how you (the owners) want to carve up the ownership pie. Furthermore, when it comes to how you want to divide up items of income, gain, loss, deduction and credit, you once again can get very creative. That said, you must be mindful of the impact of the Internal Revenue Laws of the United States. Notwithstanding how you have “structured” your LLC under “State Law,” remember that the Internal Revenue Laws are federal laws and must be complied with as well. So, if your LLC is taxed as a partnership, then you must comply with federal tax laws concerning partnerships which can be very complex. Oh well, nothing is perfect.
Now, like any love object, if we are not careful, we can be hurt by our lover. Having fallen in love with our LLC, how might our LLC hurt us?
Hurtful possibility No 1: In California, you still need to pay the $800 minimum franchise tax each year if you want to keep your LLC in good standing. It does not matter whether your LLC does business, does no business, made money or lost money … you still have to pay the $800 to the state.
Hurtful possibility No 2: An owner’s creditor can still try to “pierce the corporate veil” of the LLC in an attempt to hold the individual owner liable for the debts of the LLC, or to otherwise reach the assets of the LLC to satisfy alleged debts of the owner. Television commercials seem to suggest that all you have to do is form your LLC and presto – all of the assets of the LLC are absolutely unreachable by any of your creditors. They seem to imply that the LLC will be “bullet proof” from your creditors. You might want to familiarize yourself with your jurisdiction’s “Fraudulent Conveyance” laws. There is an awful lot that goes into a successful asset protection plan and you don’t know how strong your plan is until it is tested by an aggressive, clever and well paid creditor’s attorney.
Hurtful possibility No 3: For those of you who have partners in your LLC (called “Members”), the role of the Operating Agreement is very important. The Operating Agreement is the agreement between the owners as to their respective rights, duties and obligations. Please, please, please show it to your attorney before you sign. It is worth an hour or two of the attorney’s time to make sure you know what the Operating Agreement says. If you do not, you may have a very mistaken impression of how your LLC is going to work and what your rights are.
So feel free to fall in love, but make sure to read the prenup (spelled Operating Agreement). If you are setting up your LLC as an asset protection plan, make sure you know what a fraudulent conveyance is. And don’t forget to pay the state to keep your LLC in good standing.