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Is it worth forming an LLC and in which state?
July 18, 2011 8:01 PM   Subscribe

I'd been wanting to form a corporaton for a long time. So many benefits it seems:
  • track business expenses for income-tax deductions
  • protect assets against law-suits
  • gain credibility for certain transactions
  • privacy
  • But all the gory details are getting me down...

    Details:
    I pulled the trigger last month and used LegalZoom.com to form a Nevada LLC, even though I live in California. Main reason was that California registration fees are $800 per year, and Nevada is a fraction of that.
    But then I read this article (after the fact) about picking a state at http://sustainableonlinesolutions.com/llc-in-california which has me worried.

    Then, it is starting to come true. I went to a [national bank] branch here in Los Angeles and they refused to open a business checking account for my Nevada LLC corp... said I needed to be registered with California. I asked but did not get a clear answer on if that was just a bank policy, or a state/county/local regulation... Also unclear if "registered with California" means throw away the Nevada one and form a California-based LLC, or if there is some sort of cross-border registration.

    Did I just waste my time & money forming an out-of-state corporation?

    Presumably it wasn't always like this... when did it change?

    Oh, and the other annoyance. Using LegalZoom puts you on lots of referral lists and there are now all sorts of "service" companies soliciting me. I feel like a miner being sold picks and shovels and pans.... and maybe thats really where the money is in servicing the dreamers rather than trying to execute a new dream.
    posted by markhu to Law & Government (20 answers total) 5 users marked this as a favorite
     
    Your bank probably means you need to register your LLC with the state of CA. Where the LLC is formed likely does not matter.
    posted by dfriedman at 8:05 PM on July 18, 2011 [1 favorite]


    The site you link to is borderline-spam SEO nonsense. I think you should speak with an attorney with experience in California business corporations law (who will by necessity know a significant amount about the law of Delaware and other competitive jurisdictions). All the benefits you list can be lost (in some jurisdictions) by failure to comply with things that appear to be mere formalities. If you're serious about doing this, you need to make sure you're doing it by the letter.
    posted by Inspector.Gadget at 8:05 PM on July 18, 2011


    You need to start a relationship with an accountant. They'll answer these questions for you. You're going to need them anyway when it comes time to file your first tax return for the corporation.
    posted by Paquda at 8:06 PM on July 18, 2011


    Thanks for the cool answers so far. This brings up another question regarding accountants and/or lawyers. Not sure which scares me more. Are the pre-paid services viable? Or do I shop around for a nice local firm to work with?
    posted by markhu at 8:10 PM on July 18, 2011


    I think you are a bit confused about the benefits you get with an LLC.

    1. Business expenses: you track those yourself whether or not you've got an LLC.
    2. An LLC limits your financial liability. It doesn't necessarily protect you against personal liability. You can't run up and punch someone and they hide behind your LLC.
    3. Maybe you get some credibility, but that's a pretty low bar.
    4. You file your LLC paperwork with the state, so you lose privacy.
    posted by b1tr0t at 8:10 PM on July 18, 2011


    "Is it worth forming an LLC ...

    That is a question whose answer is highly dependent on facts, such as what the business purpose of the LLC is. If you're trying simply to insulate your personal assets against potentially hostile 3rd parties of all possible stripes, so that you can personally act badly, it's unlikely. In other words, if you're trying to setup an LLC to circumvent your responsibilities under a non-compete clause in a previous shareholder's agreement for another LLC or sub-chapter S corporation, no. Etc., ad nauseum, until we hit upon the fact set you've failed to give us.

    Lawyer up. Get an accountant. Get a business banker. Get a SCORE advisor. Take some business courses at a local community college.

    Come back with the specifics of your situation, and we'll try to be more precise with advice tailored to your issues.
    posted by paulsc at 8:30 PM on July 18, 2011


    Ok, wow. First of all, I'm not trying to "get away" with anything. I just want to operate most efficiently within the tax code and be a smart investor and land-lord. I've been reading some books and training materials about real estate investing, and they all say start an LLC. In some ways, I feel like I may be putting the cart before the horse in the sense that I don't yet have a fully operational business.

    I've signed up at www.Score.org and registered at the local city college.
    posted by markhu at 9:32 PM on July 18, 2011


    Those are all great steps. But the formation of a business entity is a highly fact-specific undertaking. Maybe you want an LLC. Maybe you want a traditional corporation. Maybe you want something else, like an LLP or LLLP. Making that decision is going to involve a lengthy conversation with a business attorney licensed in your jurisdiction and will require a discussion about your assets and goals. LLCs are increasingly popular, but they are not one-size-fits-all entities. They are appropriate in some cases and not in others. Figuring out whether or not you've got the former or the latter will require the input of a California attorney.

    You may even want to start more than one, depending on the nature of your business. A lot of landlords with multiple properties will set up a holding corp. with a different wholly-owned subsidiary for each property. This not only helps them keep better track of the profitability of each individual property, but insulates the properties from each other for liability purposes. Others find this too much hassle and just use the one. You'll need to decide which approach is better for you, and that means getting professional advice.

    That fact that you're in California makes this all the more interesting, as California has some of the most rigorous landlord/tenant law in the country. You don't want to inadvertently screw yourself over there, or on taxes either.
    posted by valkyryn at 9:50 PM on July 18, 2011


    The question is why do you feel the need to form a corporation? It is the most complex and expensive form of business you could choose and entirely unnecessary in many cases.

    Many times people seem to get caught up in the facade of business formalities and forget that their primary objective should be earn money. They think that they need to put on the trappings of looking business-like so people will take them seriously. No, people take you seriously if you run a successful business that make money. The heck will appearances.

    You can accomplish all of your stated goals with a simple sole proprietorship registered as an LLC (limited liability company). You likely do not need to have a corporation. This makes your taxes and management of your business much simpler so you can spend time running your business instead of getting balled up in bureaucracy.
    posted by JackFlash at 9:57 PM on July 18, 2011


    You can accomplish all of your stated goals with a simple sole proprietorship registered as an LLC (limited liability company).

    That's not how that works. An LLC isn't something you just register for, and a sole proprietorship, by definition, is a business without an entity.

    This is bad advice.
    posted by valkyryn at 2:54 AM on July 19, 2011


    In the first place, I think you are mostly doing the right thing. It's much easier to buy assets into a corp that already exists, rather than forming the corp later and moving stuff around.

    If you are going to be a landlord, it's a good idea to put the assets of the building into some form of corporation. If something awful happens that isn't your fault, your personal assets are mostly protected. If everything is in your name, you may not be.

    Third, for the tax advantage, you need the type of corporation that files and pays its own taxes. The idea there is that you take advantage of having two "sets" of progressive rates to deal with. Very simply: if you did it all in your name, you might net $250k a year. You'd pay the standard progressive rates on that, topping out at (made up threshold) 38%. However, and again, I'm making up the thresholds here, you'll have to look it up, if you split the operation into a separate corp, and pay yourself $125k and leave $125k in the company, the corp pays 25% on its $125k and you pay 25% on your $125k. That's where the tax advantage exists.

    Because even if you run everything through your own name, you can pretty much deduct the same things. If you do the deductions by the books, it works out pretty much the same.
    posted by gjc at 6:39 AM on July 19, 2011


    That's not how that works. An LLC isn't something you just register for, and a sole proprietorship, by definition, is a business without an entity.

    That's just nonsense and the type of advice that gets people into a more complicated business form than necessary in many cases. Here you can see that the IRS identifies a sole proprietorship as a business entity. "A business without an entity?" That's just gobbledegook. And here you can see how the state of California registers an LLC. A sole proprietorship is a perfectly valid and simple form of business and can be registered as an LLC to provide liability protection, if really necessary.

    As for using a corporation to reduce taxes, in many cases a corporation can increase your taxes. We don't even know if you have profits yet, or how much, so jumping into a corporation may be an unnecessary complication. Concentrate on getting your business up and running. Too many people get tangled up in business formalities when they should be spending more time running their business.

    As gjc says, you can make all of the same expense deductions whether you are a corporation or not.

    Going through your list again, you don't need a corporation to accomplish your goals. Check if the complications and expense are really necessary.
    posted by JackFlash at 7:52 AM on July 19, 2011


    OP, JackFlash is completely incorrect. Suffice it to say that IRS rules and regulations do not control for the type of liability purposes you may be worried about. You need to speak with a California attorney with experience in structuring business entities, as valkyryn and I have both suggested. I am an attorney licensed in New York (though I am not your attorney, nor am I licensed to practice law in California, and I will refrain from giving you legal advice in favor of suggesting you seek it from someone with deep experience in the relevant area of law) and I will tell you it is easy to screw this sort of thing up without good legal advice.
    posted by Inspector.Gadget at 9:34 AM on July 19, 2011


    Inspector.Gadget does not know what he is talking about. Go back and read what I said. I never said that IRS regulations have anything to do with liability. I was responding to valkyryn's claim that a sole proprietorship is not a business entity. That is completely false as shown by my link. I'm surprised you could pass a bar exam by making such an ignorant claim. You might say that a sole proprietorship is not a separate entity, but you simply tossed out some invalid gobbledegook about not being an entity as if that was supposed to shame you into incorporating.

    Second, valkyryn claimed that you don't register an LLC and I pointed the very page that you register an LLC in California.

    As for liability, an LLC, which is registered at the state level may be sufficient for your purposes. You do not necessarily require the complications of a separate corporation.

    Inspector.Gadget says I am completely incorrect, yet my statements as shown were correct.

    Beware of legal advice on the internet. You have no idea of the competence of those lawyers giving legal advice.

    What I am pointing out is that is that a corporation is not necessary for all businesses.

    Here are your goals. Can they be accomplished without incorporation?:

    1. Deduct expenses. Absolutely.
    2. Liability. An LLC may be sufficient. An LLC does not require incorporation.
    3. Credibility. You gain credibility by running a good business. Having .INC after your name demonstrates nothing and in most cases, nobody cares.
    4. Privacy. You can call your business anything you want, Galaxy Mega Company, if you like. No one needs to know your name, although it will be registered with the state the same as for a corporation.

    I'm not opposed to consulting a local attorney who knows about business and your state laws. Only by explaining your particular situation can he/she give you valid advice. I'm simply pointing out that the common belief that the first step to starting a business is to incorporate is false. It may not be necessary, regardless of what internet lawyers tell you.
    posted by JackFlash at 10:12 AM on July 19, 2011


    You have no idea of the competence of those lawyers giving legal advice.

    Nobody here is giving legal advice but you. Everybody with relevant knowledge and experience is encouraging the OP to seek advice from the appropriate party and taking great pains to deflate misconceptions that could get the OP into a bad situation.

    valkyryn claimed that you don't register an LLC

    No. Valkyryn claimed that registration alone does not an LLC make. That is certainly a correct statement.

    I was responding to valkyryn's claim that a sole proprietorship is not a business entity. That is completely false as shown by my link.

    You are not talking about an "entity" in the legal sense, "entities" to include both natural persons and distinct legal devices. A sole proprietorship is an "entity" in the sense that it is a "thing" or "capable of indentification", sure, but that's not the relevant concept of "entity" for either liability or tax purposes.

    You do not necessarily require the complications of a separate corporation.

    And again, you reveal that you are conflating by implication two meanings of the term "entity".

    I'm simply pointing out that the common belief that the first step to starting a business is to incorporate is false.

    That's fine, but that's not what anyone else is saying. What I have been pointing out is that the OP shouldn't go into this trusting in parties without the relevant qualifications to assure him/her that they are covered on the type of legal issues mentioned in the OP.

    I'm surprised you could pass a bar exam by making such an ignorant claim.....It may not be necessary, regardless of what internet lawyers tell you.

    Denigrating others is a classic response to being called out on a load of bullshit. Additionally, you're now veering into playing a lawyer on the internet for the fun you get out of arguing/staking your claim, which always leads to giving people bad advice.

    OP, I think this series of posts speaks for itself.
    posted by Inspector.Gadget at 10:23 AM on July 19, 2011


    LegalZoom is to legal advice as gas station ketchup is to marinara. If you can't figure out how to open a bank account other than in a personal capacity, yes, you should consult a lawyer and an accountant about business formation issues, even if you're savvy with the internet and business and taxes and getting and giving advice about the internet and business and taxes on the internet.
    posted by iknowizbirfmark at 10:24 PM on July 19, 2011


    [OP is not anon, feel free to MeMail them if you just want to rant about lawyers, it's not on topic for this thread.]
    posted by jessamyn at 6:13 AM on July 21, 2011


    The IRS link lists sole proprietorships as one kind of business structure. That's certainly true. But as soon as one creates an LLC (which according to the California Secretary of State site requires filing organization papers, not simply "registering"), which is a matter of state law, not federal law, one's business ceases to be a sole proprietorship, because the definition of "sole proprietorship" is "a business without legal personality." It does not mean "a business with only one owner."

    And I never actually recommended incorporation. I suggested that choosing a business entity is a fact-intensive analysis, and both LLCs and corporations are possibilities, but that figuring out which would be best requires more facts than we've got here.

    The answer marked "Best" is a good summary of what's going on here.
    posted by valkyryn at 6:39 AM on July 21, 2011


    [Sigh. Sometimes I wish this site simply had down-vote capability.]

    I appreciate all your varied input, and I do mean every one of you, including JackFlash. But I'm afraid I'm going to have to come down a little against him since he ruins his otherwise common-sensical argument by repeatedly saying stuff like, "An LLC does not require incorporation" which sounds jarring because the C in LLC means Corporation. I hope I'm not wrong in using the terms "LLC" and "corporation" interchangeably.

    I'd also like to mention that there is this procedure known as Entity Classification Election (ECE) whereby a corporation chooses (elects) how they want to be taxed:
  • http://en.wikipedia.org/wiki/Entity_classification_election#Default_classification

  • http://biztaxlaw.about.com/od/taxesonbusinesstypes/f/llc8832elect.htm


  • To answer one of my most pertinent questions (buried in my wordy OP)...it sounds like I might need to file something like a "Certification of Qualification" and or "Certification of Foreign Corporation" with the State of California in order to open up a business checking account in California. Depending on the fees, it might be worth a trip across the state border.

    Finally, in answer to the question, "Why don't you just dire a lawyer/accountant?" I guess the contrarian streak in me comes from being fleeced by financial professionals, hurt by medical professionals, and misled by religious professionals. Is it any wonder that I am wary of professionals and am trying to slug it out on my own?
    posted by markhu at 11:48 AM on July 29, 2011


    Actually, let me apologize to JackFlash since apparently it is common to differentiate between LLC and corporations as per --despite this being confusing to the lay-person attempting to understand words and phrases at face value.

    Maybe this article sums it up best:
    http://taxes.about.com/od/taxplanning/a/incorporating_2.htm --in short, differentiating between state and federal classifications.
    posted by markhu at 11:56 AM on July 29, 2011


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