Should I become an LLC?
January 23, 2020 10:49 AM Subscribe
I've been a sole proprietor for 20 years without legal incident, and I'd love to stay that way. But I'm in the process of renegotiating my contract with my main client, and it has me considering becoming an LLC. My question is, how much protection would I really get as an LLC, and is it worth the PITA accounting? And yes, I will speak to a CPA and a lawyer, too.
I'm a freelance writer and editor. For the last 20 years, I've had great relationships with clients and no legal issues. For the last 12 years, my main client has been a marketing/advertising agency. Good relationships there, too.
However, we're currently in the process of renegotiating my contract, and they're trying to get me to indemnify them against any damages caused by my actions. Given that *their* clients are large corporations and could sue for megabucks, I'm trying to get that indemnification limited to the dollar amount covered by my insurance. Seems only reasonable to me, particularly given that I have no control over how the agency submits my work to their clients. (They can edit it as they see fit before they send it over.) And if they agree to that dollar limit, I'm protected, right? (Real question.) (Not rhetorical.)
And yet: I own a house, have retirement savings, etc. So I'm pondering whether it'd be worth it to become an LLC. Would becoming an LLC truly protect my house and other assets? I think so, yes?
Fwiw, the chances of the agency getting sued over something I did seem extremely slim to me. Basically, I would have to knowingly infringe on the copyright of somebody else's work, which I won't do; or break an NDA, which I won't do; or commit some kind of fraud, which I won't do. On the other hand, anything is possible, right?
But oh, how I would love to avoid becoming an LLC. I just don't want to have to deal with all the new accounting and taxes, etc.
I'll talk to my CPA and also to a lawyer, but I'd love to get as much information as possible, thanks!
I'm a freelance writer and editor. For the last 20 years, I've had great relationships with clients and no legal issues. For the last 12 years, my main client has been a marketing/advertising agency. Good relationships there, too.
However, we're currently in the process of renegotiating my contract, and they're trying to get me to indemnify them against any damages caused by my actions. Given that *their* clients are large corporations and could sue for megabucks, I'm trying to get that indemnification limited to the dollar amount covered by my insurance. Seems only reasonable to me, particularly given that I have no control over how the agency submits my work to their clients. (They can edit it as they see fit before they send it over.) And if they agree to that dollar limit, I'm protected, right? (Real question.) (Not rhetorical.)
And yet: I own a house, have retirement savings, etc. So I'm pondering whether it'd be worth it to become an LLC. Would becoming an LLC truly protect my house and other assets? I think so, yes?
Fwiw, the chances of the agency getting sued over something I did seem extremely slim to me. Basically, I would have to knowingly infringe on the copyright of somebody else's work, which I won't do; or break an NDA, which I won't do; or commit some kind of fraud, which I won't do. On the other hand, anything is possible, right?
But oh, how I would love to avoid becoming an LLC. I just don't want to have to deal with all the new accounting and taxes, etc.
I'll talk to my CPA and also to a lawyer, but I'd love to get as much information as possible, thanks!
Response by poster: Oooo, if that's true, that is indeed incredibly useful!
posted by MelanieMichelle at 11:08 AM on January 23, 2020
posted by MelanieMichelle at 11:08 AM on January 23, 2020
You need to reply back with the state you would be organizing in, since that makes a big difference.
But, generally, in places like California where you pay $800 a year for the privilege of being an LLC, you'd need at least $30k a year in revenue before the tax benefits makes it close to breaking even over staying a sole prop.
As JackFlash says in that linked thread, the liability protection doesn't really apply since you are treated as just "you" by everyone anyway.
My CPA, because my consulting revenue was lower than the aforementioned $30K, had me dissolve my LLC and had me pick up a $1M umbrella policy.
However, my advice, (and the absolutely all the advice you will receive on AskMe) is horseshit compared to the advice given to you by your lawyer and your CPA. Please listen to them, and not us.
posted by sideshow at 11:13 AM on January 23, 2020 [1 favorite]
But, generally, in places like California where you pay $800 a year for the privilege of being an LLC, you'd need at least $30k a year in revenue before the tax benefits makes it close to breaking even over staying a sole prop.
As JackFlash says in that linked thread, the liability protection doesn't really apply since you are treated as just "you" by everyone anyway.
My CPA, because my consulting revenue was lower than the aforementioned $30K, had me dissolve my LLC and had me pick up a $1M umbrella policy.
However, my advice, (and the absolutely all the advice you will receive on AskMe) is horseshit compared to the advice given to you by your lawyer and your CPA. Please listen to them, and not us.
posted by sideshow at 11:13 AM on January 23, 2020 [1 favorite]
Response by poster: Thanks! California, and my income is well above $30K. (And yes, I will listen to my professionals and weight their counsel accordingly, but I'm seeking as many data points as possible.)
posted by MelanieMichelle at 11:16 AM on January 23, 2020
posted by MelanieMichelle at 11:16 AM on January 23, 2020
I'd recommend adding your insurance agent to the list of contacts, to verify that the insurance company will honor the indemnification clause. If they will not then you can simply reply that you won't sign a contract that is not insurable. If they will, then they can guide you on what will be covered.
posted by meinvt at 11:24 AM on January 23, 2020
posted by meinvt at 11:24 AM on January 23, 2020
In California there are absolutely no tax implications to becoming a single member LLC, other than the fact that you now need to pay the FTB an extra $800/year. The LLC is a "passthrough entity" and the taxes and the paperwork are exactly the same as if you were a sole prop (again with the exception of having to pay the LLC $800/year franchise tax). Technically you’re not even supposed to file taxes using your EIN (you're supposed to use your SSN) which even the lawyer who set up my LLC had trouble believing at first. There is also a minimal amount of paperwork you need to file every two years with the state, unrelated to taxes.
You'd have to talk to a lawyer to see how protected you'd be against the particular type of liability you might incur.
posted by phoenixy at 11:27 AM on January 23, 2020 [2 favorites]
You'd have to talk to a lawyer to see how protected you'd be against the particular type of liability you might incur.
posted by phoenixy at 11:27 AM on January 23, 2020 [2 favorites]
IANAL, TINLA.
I'm trying to get that indemnification limited to the dollar amount covered by my insurance.
I read contracts for an NGO for a living, including many personal services contracts for technical consultations, and I've never seen an indemnification clause that does this, reasonable as it sounds at first blush. Often there is an additional clause that stipulates a minimum liability insurance coverage, but the indemnification clause itself is pretty absolute - we aren't liable for things you are liable for, you aren't liable for things we are liable for. And honestly that makes sense to me - like, if your act of gross negligence costs us $1 million, and you only hold insurance for $100,000? We'll try to recover what we can, and regardless of the contract language we'll have to absorb the loss of whatever we can't recover, but why would we also contractually agree that the damages in the amount we couldn't recover were actually our fault? (Of course, there do end up being situations where two entities are held jointly liable for something, but that's going to be determined after the fact according to the specifics of the situation, the contract simply cannot contain language for every possible scenario, and this language gives each entity the chance to makes its case to protect itself against the other's negligent or intentionally inappropriate actions.)
On the other hand, anything is possible, right?
Anything is possible, everything is possible, but there's a risk calculation here when you are thinking of spending money to protect yourself against all possibilities, as you allude to - and which JackFlash's comment, linked above, also touches on: For most small sole proprietors working as contractors, for example a coder or web designer or a copy writer or tech writer, you really don't need either. Nobody is going to take away you home. Like yeah, a corp. could come after you on spurious charges, but a) what is the likelihood of that happening at all, and b) what is the likelihood that even if they do, they could present a winning case for damages above what your insurance covers? For instance my example above was entirely ridiculous; no one in the course of rendering technical assistance services to us has ever come close to causing damages in excess of $100,000, much less $1 million. Like maybe a construction consultant could, but a writer? Nah.
posted by solotoro at 12:21 PM on January 23, 2020
I'm trying to get that indemnification limited to the dollar amount covered by my insurance.
I read contracts for an NGO for a living, including many personal services contracts for technical consultations, and I've never seen an indemnification clause that does this, reasonable as it sounds at first blush. Often there is an additional clause that stipulates a minimum liability insurance coverage, but the indemnification clause itself is pretty absolute - we aren't liable for things you are liable for, you aren't liable for things we are liable for. And honestly that makes sense to me - like, if your act of gross negligence costs us $1 million, and you only hold insurance for $100,000? We'll try to recover what we can, and regardless of the contract language we'll have to absorb the loss of whatever we can't recover, but why would we also contractually agree that the damages in the amount we couldn't recover were actually our fault? (Of course, there do end up being situations where two entities are held jointly liable for something, but that's going to be determined after the fact according to the specifics of the situation, the contract simply cannot contain language for every possible scenario, and this language gives each entity the chance to makes its case to protect itself against the other's negligent or intentionally inappropriate actions.)
On the other hand, anything is possible, right?
Anything is possible, everything is possible, but there's a risk calculation here when you are thinking of spending money to protect yourself against all possibilities, as you allude to - and which JackFlash's comment, linked above, also touches on: For most small sole proprietors working as contractors, for example a coder or web designer or a copy writer or tech writer, you really don't need either. Nobody is going to take away you home. Like yeah, a corp. could come after you on spurious charges, but a) what is the likelihood of that happening at all, and b) what is the likelihood that even if they do, they could present a winning case for damages above what your insurance covers? For instance my example above was entirely ridiculous; no one in the course of rendering technical assistance services to us has ever come close to causing damages in excess of $100,000, much less $1 million. Like maybe a construction consultant could, but a writer? Nah.
posted by solotoro at 12:21 PM on January 23, 2020
And so as not to abuse the edit window, I will add separately - if you ARE worried about someone bringing spurious charges, neither your corporate structure nor your contract is going to go far in helping protect you against the legal costs of proving they are spurious.
posted by solotoro at 12:24 PM on January 23, 2020
posted by solotoro at 12:24 PM on January 23, 2020
On any indemnity issues your position should be that indemnity is capped at fees payed in the past X months (12 or 24) or at maximum Y times that (e.g. 2 times what you've billed over past 2 years). Also, need to state that indemnity is reflected in your rates, i.e. rates have to go up if coverage goes up.
posted by zeikka at 12:55 PM on January 23, 2020
posted by zeikka at 12:55 PM on January 23, 2020
If you live in CA and work as a freelance writer, you may need to get an LLC in order to get around AB5, regardless.
posted by Countess Sandwich at 12:55 PM on January 23, 2020 [1 favorite]
posted by Countess Sandwich at 12:55 PM on January 23, 2020 [1 favorite]
I am a lawyer, but I am not your lawyer. I have seen indemnification limited to insurance actually carried.
posted by joyceanmachine at 1:28 PM on January 23, 2020 [1 favorite]
posted by joyceanmachine at 1:28 PM on January 23, 2020 [1 favorite]
On any indemnity issues your position should be that indemnity is capped at fees payed in the past X months (12 or 24) or at maximum Y times that (e.g. 2 times what you've billed over past 2 years).
This is a not-uncommon sort of provision. You're not insane not to want to expose yourself contractually to unlimited liability.
posted by praemunire at 2:43 PM on January 23, 2020
This is a not-uncommon sort of provision. You're not insane not to want to expose yourself contractually to unlimited liability.
posted by praemunire at 2:43 PM on January 23, 2020
Do you have any employees?
When you consult with a lawyer, she will tell you that the "limited liability" of a corporation or an LLC does not - repeat, does not - insulate you from legal liability for your own actions. A plaintiff pursuing a claim can sue MM LLC and MM, individually, and MM the individual will not be dismissed based on the existence of the LLC.
What the LLC does is insulate MM the individual from liability for the employees of MM LLC.
posted by megatherium at 4:40 PM on January 24, 2020
When you consult with a lawyer, she will tell you that the "limited liability" of a corporation or an LLC does not - repeat, does not - insulate you from legal liability for your own actions. A plaintiff pursuing a claim can sue MM LLC and MM, individually, and MM the individual will not be dismissed based on the existence of the LLC.
What the LLC does is insulate MM the individual from liability for the employees of MM LLC.
posted by megatherium at 4:40 PM on January 24, 2020
Response by poster: Thank you -- that's the perfect question for the lawyer! I'll ask him.
posted by MelanieMichelle at 5:45 PM on January 24, 2020
posted by MelanieMichelle at 5:45 PM on January 24, 2020
This thread is closed to new comments.
posted by daisyace at 11:04 AM on January 23, 2020 [1 favorite]