Can I Set Up An LLC To Avoid Personal Liability In A Lawsuit?
litigationandtrial.com
litigationandtrial.com
In the context of Hacker News readers (presumably startups looking for funding and with employees) there are many good reasons for setting up an LLC, including limiting liability if one of those employees gets sued, and limited contractual liability. However, the point I was getting at is that the LLC doesn't totally shield you from liability, a misconception that has brought a lot of trouble to people who played fast and loose with their conduct and ended up staring down the barrel of potential personal liability.
The core point is: don't try to "dodge" liability. Instead, take steps to reduce the likelihood of causing harm and get a good insurance policy.
For reference, there are two main risks covered by liability insurance: "defense" and "indemnity." The former pays the costs of a legal defense, the latter pays a settlement / verdict. Most media liability insurance policies cover both, but can charge different premiums based on the "retention" for defense and/or indemnity, i.e. how much you have to spend before the insurance kicks in.
If the big worry is paying lawyers to defend a "frivolous" suit, then focus on the former; if the big worry is a "large verdict," then focus on the latter. A common way to save on the premium is to have a sizable retention -- like $20,000 or more -- but then have good coverage after that. If you get sued, you might have to eat the first $20k in legal fees, but won't get bankrupted by the legal fees or the verdict.
As for anonymity, though the LLC is an independent entity which can conduct its own business and enter into its own contracts, and thus can keep a name out of its general business, in the event of a lawsuit most courts will permit discovery into the operations / management of the LLC, and sometimes even into the ownership. There's no specific legal protection for anonymity for incorporated businesses; the only concrete anonymity protection comes from various First Amendment doctrines, which usually don't apply to commercial activities.
I suppose the point here is that a smart person will sue the individual in addition to the LLC. Even if you are sued only as an individual, your ownership stake in the LLC is at risk.
So it's good to debunk the myth of the fake LLC. I just think the article goes a bit far (but the author is a lawyer and I'm not).
Either way, it matches my experience: in the US, you can get sued pretty much no matter what steps you have taken not to get sued...
For example company X sues a LLC stating that they have violated a patent for example?
I write "typically" because investors can be liable if either (1) they participated in the infringement or (2) a court decides to "pierce the corporate veil," which is rare, but can happen if an investor abuses an LLC (undercapitalizing it, disregarding corporate forms, etc) for the purpose of avoiding liability.
One benefit of an LLC might be a somewhat more professional image (for some customers anyway). Also, my guess is that corporate customers may not want to do business with you unless you're an LLC (though I wouldn't know for sure as I have no corporate customers).
Anyone here go from having your own LLC to dissolving it and going sole proprietership?
You've got to be kidding.
1. Trivial law work is required. 2. Annual total business license fees range from ($20-$1,000) depending on location 3. Trivial bank account setup
All of this can be accomplished literally in the span of a few hours. I would argue the biggest maintenance costs are related to tax filings and accounting, but they're more than offset by all the available expense write-offs.
It's really a no-brainer decision with today's streamlined systems and litigious society. Additionally, having an LLC operating agreement (even a generic one) in place, usually makes converting to a C-corp (to be available for VC financing) much easier.
Nah, the tax write-offs alone make those costs more than manageable.
I have an LLC for my consulting business, mostly so I don't get qualified as an employee of my clients, have "limited liability", etc. It's simple in terms of paperwork because it's treated by the IRS just like a sole proprietorship as long as the LLC only has one employee. The biggest downside is that I have to pay an $800/year LLC tax to the state of California.
Yes. I still don't know what the advantages of a one person LLC are, even after doing it myself. On the other hand I didn't find it a pain in the neck. I still keep separate bank accounts, have a tax ID, etc. I dissolved the LLC because I moved to another state. I think the LLC makes more sense if you have more than one person. Maybe it helps you not seem like a temp employee if you're a consultant and only have one client. However, that seems like more of an advantage to the client, not the LLC owner...