LLC Question
Submitted by rayd8 on Mon, 06/02/2008 - 17:29.
Rather than post a private message to Jonshaw I thought the forum might benefit from this question:
I have an LLC for my affiliate business. My wife is starting her own craft business and wants to form her own business identity separate from mine. Due to the high cost of forming/running a business in California (LLCs & Corps must pay a minimum $800 tax 4 months after conducting business in CA) she wants to register her business as a sole proprietorship.
Could this situation cause an unforeseen legal/accounting problem? We would use separate bank accounts for each business. I realize that my wife's sole proprietorship would not protect our personal assets as would my LLC but I am concerned about piercing the corporate/LLC veil.
Is there a better way to structure this? I hate to lose all of the advantages of forming my LLC by adding a sole proprietorship into our household.
Liability from different ventures
Typically the idea of piercing the corporate veil refers to a one-person corporation (or LLC) where a plaintiff tries to sue to pierce the veil and seize assets of the owners of the company, on the grounds that the company is not truly a separate company. So for example, if you have one bank account with both company deposits and your own personal money in it, and you routinely mix-and-match, paying personal bills out of the same account that you deposited company money into, etc, a judge may "pierce the corporate veil" and determine that you, the owner, are also liable for any company obligations (or lawsuit judgements). At that point, in effect, you've gone through the hassle of create a company, without the liability protection you wanted from the corp/LLC in the first place.
In this case, though, you have a different problem... If a client of the LLC sues the company --- and assuming you have maintained good (separate!) records, accounts, etc, so there is no piercing of the corporate veil --- then they can only get assets within the company itself, and not your other assets like your house, etc., as you know. You also know that a sole proprietorship has no such protection. So a client of the sole proprietorship can sue the owner (your wife) and seize ANY assets of the owner.
The issue will then be about how separate the ownerships are of various assets. If your wife and you jointly own your house, it's fair game to be taken, but if you alone own the LLC, it should not be subject to being seized in a lawsuit from a sole proprietorship client unless it is considered a jointly-held asset, etc. This is where the details of your specific situation should be reviewed with an attorney. Presumably it can be structured with clearly-defined ownership (i.e., separate for your wife and for you) to protect your LLC from being seizable. (Frankly, I don't know the answer to this part offhand.)
And if it turns out that your LLC *will* be considered a jointly-held (and therefore seizable) asset, you might be better off running them both within the LLC, or just biting the bullet and registering a new LLC for her, etc, rather than risking it. Otherwise, it would be silly to carefully limit y our liability with the LLC only to find that a problem in the sole proprietorship takes your LLC ownership from you anyway!
Hope that helps and at least gets you started in the right direction. :-)
Quick follow-up
I'm new to this discussion and I'm just starting the program, so I apologize if my answers are off in the wrong direction for what has been suggested in the program. :-) I'm just providing general information on the topic, and the experts here can of course clarify as needed specifically.
And I'm really looking forward to going through this program! :) Looks like an incredible resource.
johnnyboy, Thanks for the
johnnyboy,
Thanks for the reply. My LLC is a single-member (me) LLC but I think that California law would consider it as jointly held with my wife. I guess I was hoping there was some way to form more than one business entity (with separate bookkeeping) under an existing LLC. From what I have researched I don't think that is possible.
-Michael
I've e-mailed Jon... You
I've e-mailed Jon... You should hear back soon.
Best,
Jeremy
Hopefully you've heard back
Hopefully you've heard back from Jon, but just to continue the discussion here for the benefit of everyone... you can definitely run different businesses under the same LLC, as long as you're clear about the risks and benefits (discussed below). They're essentially different "divisions" at that point, and they can functionally run as separate businesses. You would file a DBA with the local county for your wife's business, so that her business is "HerCompanyName, LLC", a dba of "YourCompanyName, LLC."
In terms of accounting, you would maintain separate records for each and can maintain separate bank accounts for each as well, each in the name of the operating division. No problem t here.
Two important notes where they are NOT separate though--- In terms of tax accounting, at the end of the year, you will file one single tax filing for "the LLC" (i.e., there is really only ONE LLC). Basically, take the final year-end numbers from her division, take the final year-end numbers from your division, and merge the two to create one tax filing. She made $200K net and you made $400K net (thanks to Jeremy's awesome lessons, of course!) ==> Your tax filing says the LLC made $600K.
The other VERY important place where they're not separate is liability. Two "divisions" of a company are of course really just a single company, so if your company has $600K total and you are sued for some reason, the plaintiff is not limited to your $400K but can take the whole $600K, and potentially bankrupt the whole company, including her division. Obviously not ideal, but if you want to limit each to only $400K and $200K, respectively, then that's what the LLC itself does, so you would need two LLC's.
But if you're not concerned about liability, the consolidated approach should work quite well for you. I'm of course also curious to hear Jon's view, and I'm sure he'll correct anything here where he knows better than I do. :-)
johnnyboy, Thanks again for
johnnyboy,
Thanks again for the reply, forming separate divisions under one LLC is exactly wanted I want to do but I didn't think it was possible. My main concern is protection of personal assets. I can think of other advantages as well such as not paying double for web hosting fees, AWeber, etc.
Regards,
-Michael
LLC with two separate business
Sorry for the delay in the response. Personally I would not put two separate business together from two separate people (even being married). This muddies the water a little too much and is hard to figure out during tax time and even harder when you make a Single Member LLC into a multi-member LLC. When you do this it is called a technical termination and your old LLC ceases to exist and it creates a new entity which you will have to file new documents with the state and do some legal work too. Always consult with a legal professional with these matters.
If I were you, I would just form another entity and make it easy on you and on your wife. But, to get some real good advice about a Single Member LLC going to a Multi-Member LLC, please see a legal professional.
Best,
Jon
jonshaw, Thanks for the
jonshaw,
Thanks for the advice. I don't think I would be struggling with this situation if California didn't make it so damn expensive for small business to exist. You can bet that as soon as we are generating enough income we will move ourselves and our businesses out of state - as have many CA small businesses.
Thanks again,
-Michael