Comment by will_brown | Hacker News Reader

Comment by will_brown | Hacker News Reader

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>can you comment at all on the limits (if any) of liability protection with an LLC. Is a single-person LLC going to be a solid shield over my personal assets, or are there still possible risks?

Think of liability as a 2 way street.

1. Someone suing your LLC and trying to collect against you/your assets personally. Generally this is the type of protection you will receive with an LLC (single or multi member) barring any exceptions, such as piercing the corporate veil in which case the plaintiff might go thru your LLC protection and reach your personal assets to collect.

2. Suing you and trying to get to your LLC. This is the direction the single member LLC might not offer protections. Imagine a scenario where you are personally sued and you don't have personal assets to cover the judgement. Say if you owned 1 share of Apple, obviously they can't collect against Apple just because you are an owner, and the same protection will typically exist with a multi-member LLC. However, in the case of a single member LLC in these types of cases the courts will likely allow the plaintiff to collect against LLC and/or even foreclose on your LLC company/assets if need be.

>Does California just not like small businesses?

CA likes revenue and as high as the fee is, small businesses will pay because they don't have options (they could incorporate in CA as opposed to organizing an LLC or moving states).

One possible hack is create LLC #1 in another state, qualify it as a foreign LLC to do business in California, and and the end of the year repeat the process with LLC #2 and transfer all assets from LLC #1 to LLC #2. The only reason someone might not recommend this route is because people prefer continuity of a business, but that shouldn't really be an issue when the main goal is liability protection from side projects.

Edit: dissolve and file final tax return

You have not advised "hack." You've just advised someone to commit borderline tax fraud. Please note that tax practice is unique in that advisors can go to jail or be criminally sanctioned for advising tax evasive strategies.

Also, I don't think you realize that foreign LLCs are required to pay the franchise fee in California in order to be licensed to do business (meaning, having employees, facilities, or activities in CA). Thus, if you're in CA, your suggestion really just amounts to paying franchise taxes (or their equivalents) to two states instead of just one, and then committing tax fraud in two states instead of none.

I strongly suggest you delete this post and your followup post, because it can be used against you in a court of law.

>Also, I don't think you realize that foreign LLCs are required to pay the franchise fee in California in order to be licensed to do business (meaning, having employees, facilities, or activities in CA).

No, LLC's file an LLC-5 form and pay the $70 filing fee. The business will not be liable for the Franchise Tax if the entity is dissolved or cancelled before the liability is encurred (Franchise Tax Due Date) if the LLC is dissocled after the Tax is still owed.[1]

>Thus, if you're in CA, your suggestion really just amounts to paying franchise taxes (or their equivalents) to two states instead of just one, and then committing tax fraud in two states instead of none.

Not remotely, most states don't even have franchise taxes not all even have annual report requirements.

>I strongly suggest you delete this post and your followup post, because it can be used against you in a court of law.

I think you are reading a lot of facts into my post that aren't there and ignoring the facts that are there, for starters I wasn't asked for advice and I didn't give advice. As one lawyer to another, if you are going to suggest I delete my comment due to liability going so far to expressly state criminal liability, I ask you show me a single case where the California Franchise Tax Board has gone after anyone for tax evasion for dissolving their LLC and creating a new one, because I can show you plenty of instances where the CA secretary of state disolves an LLC prior to 4/15 and then opens a new LLC with similar name (sometime exact same) immediately thereafter.

[1] https://www.ftb.ca.gov/businesses/faq/ab2341faq.shtml

Edit:

BTW the specific form for this type of action is Certificate of Cancellation Short Form (LLC-4/8) and it negates the Franchise Tax when:

1) being filed within twelve (12) months from the date the Articles of Organization were filed with the Secretary of State;

2) The domestic LLC has no debts or other liabilities (other than tax liability);

3) The known assets of the domestic LLC remaining after payment of, or adequately providing for, known debts and liabilities have been distributed to the persons entitled thereto or no known assets have been acquired;

4) The final tax return or a final annual tax return has been or will be filed with the Franchise Tax Board;

5) The domestic LLC has not conducted any business from the time of the filing of the Articles of Organization;

6) A majority of the managers or members, or if there are no managers or members, the person or a majority of the persons who signed the Articles of Organization, voted to dissolve the domestic LLC; and

7) If the domestic LLC received payments for interests from investors, those payments have been returned to those investors

To conclude I never advised anyone to do this, but acknowledged it is possible and LLCs for side projects that don't justify an $800 minimum franchise tax are a good example of when something like this might be done.

This hack is not a good idea. In most states you have to pay that year's franchise tax (the $800 in CA) before you are allowed to dissolve the company or surrender your qualification, and there are also filing fees for each of these things so you will never save money doing this way and will instead pile up more fees.

In general legal and tax is not the place where you want to be trying to innovate.

>In most states you have to pay that year's franchise tax (the $800 in CA) before you are allowed to dissolve the company or surrender your qualification, and there are also filing fees for each of these things...

Actually you would not have to pay the CA $800 franchise tax so long as you dissolve/cancel the qualification before the yearly due date and there is no separate filing fee to cancel the foreign LLC qualification in CA.

The only time the $800 fee would need to be paid is if the business was not dissolved/cancelled before the annual due date, then the $800 would need to be paid before CA would accept dissolution and CA will come after the franchise tax + penalties.

>In general legal and tax is not the place where you want to be trying to innovate.

Its not "innovation" its practice. And after you have formed thousands of businesses for people you can identify the best solution for their needs. I wouldn't recommend the "hack" for most businesses, but under a very specific set of facts where the LLC is just for liability protection and the CA $800 franchise tax is prohibitive, there are ways to do it at the trade off of continuity of the business, and this is one of the rare instance continuity might count for nothing.

I wouldn't recommend the hack to anyone, as what you suggested would be treated as tax evasion by the California Franchise Tax Board.

We are both lawyers, I don't know how often you have worked with CA secretary of State and Franchise Tax Board, but I will tell you this, in thousands of interactions I have never had the franchise tax board waive a $800 minimum franchise tax after it has been incurred. Even if the owner was indigent, the business not just dejure inactive but defacto inactive, and they just wanted to dissolve to avoid incurring additional penalties...Not once, ever, and they would initiate collection actions.

On the other hand, when it is legitimate - lets be careful not to read additional facts here - an owner may dissolve an LLC before incurring the franchise tax obligation and open a new LLC...even with the same name, and it is not tax evasion. Obviously returns are a separate issue and final returns, even with no income or loses, would be filed. A side project with no income is a perfect example of when this might be done properly without issue.

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