LLC basics - why bother, general guidelines?

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TheCowbell
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LLC basics - why bother, general guidelines?

Post by TheCowbell »

I have a small side hustle that I always ran as a DBA. For no particular reason beyond professionalism in invoices (branding) and some supposed amount of legal protection, I set up an LLC late last year in NYS. Total cost was about $200 or so.

I set up a deposit savings account in the LLC's name and began sending invoices made out to the LLC.

I saw an unexpected (and temporary) uptick in that side hustle. I'm approaching a mid-5-digit balance in the LLC savings account.

I've been paying for minimal business expenses, including some computer equipment, services, and estimated tax payments using my rewards-points personal credit card. I have not yet reimbursed myself from the LLC savings account for those expenses.

My question is: do I really have any legal protection? My risk is low but I'm paranoid and can think of several unlikely ways a client may decide they want to sue me into oblivion. My layman understanding is that the LLC's assets are the 'limits of my liability' but is that realistic? Outside of the value of my computer equipment and the savings account there are no other real assets.

Should I be regularly reimbursing myself from the LLC savings account for my business-related purchases? Should these purchases and reimbursements to my personal account be meticulously documented? Is there a "best practices" playbook for someone like me, a single-entity LLC that would like to maintain some appropriate level of separation in the event of litigation?

Thanks for any pointers!
bsteiner
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Re: LLC basics - why bother, general guidelines?

Post by bsteiner »

Were you able to find a sufficiently small county to set it up in so that the cost of publishing the notice didn't put you over $200?
Topic Author
TheCowbell
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Re: LLC basics - why bother, general guidelines?

Post by TheCowbell »

bsteiner wrote: Tue Oct 13, 2020 2:52 pm Were you able to find a sufficiently small county to set it up in so that the cost of publishing the notice didn't put you over $200?
You lost me - I used incfile, it was a painless process that cost about $200. No idea about publishing a notice.
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vitaflo
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Re: LLC basics - why bother, general guidelines?

Post by vitaflo »

I've had a single member LLC for over a decade. It's not a side gig, it's my primary business. I didn't set it up because of litigation, I set it up because many clients wouldn't do business with a sole-prop, but they happily would with an LLC. Sure there are some protections there, but if you're seriously concerned about it you may also want to look into Liability Insurance, specifically Errors & Omissions (depending on what you do). Note, this can be expensive. I only carried it for a year for a client that required it. Otherwise I've never worried about litigation.

As for your bank accounts, you want to set up a bank account for the business, and since you have an LLC this should be pretty easy. Also get a credit card for the business. Keep all money you receive for the business in the biz bank account. When you get paid, put it directly into the biz account. When you pay expenses, again from the biz account or on the biz CC. Do not use your personal accounts for any business related things. Do not move money from your personal account into the biz account if you can help it (initial deposit notwithstanding). This will not only help a lot for accounting purposes at tax time (you're not mixing personal with business) but also if you get audited. Way easier to prove to the IRS that you weren't doing something shady if you keep things separate (and being audited is much more likely than being sued into oblivion, but I suppose it depends on what you're doing).

The only real transfer of money from biz account to personal account should come when you "pay" yourself. In my case I would just transfer money from my biz account to my personal account once a month. That was it.
HIMcDunnough
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Re: LLC basics - why bother, general guidelines?

Post by HIMcDunnough »

You're conflating two different issues: liability protections and accounting...though failure to treat the LLC as a separate entity could imperil what little liability protection there is.

First, liability...you're really only insulating yourself from liability from breach of contract, and that's only so long as it's clear that your clients/customers are contracting with the LLC, not you individually. Absent a written contract, that's probably not clear and you're still on the hook. For all other potential liabilities (fraud, hitting someone with a car while on business, etc.), you're still on the hook personally. If your LLC starts hiring people and they hit someone with their car while working for you, maybe you get protection from that liability and it's just the LLC. But as noted above, that sort of protection can disappear if you don't treat the LLC like it's a real company.

Second, accounting. So long as you're keeping records of everything, it's probably not going to be a problem. But the better practice is to have the LLC account and credit cards pay all the expenses, and then your clients pay your LLC. When there's money left over, you can move it into your personal account as a distribution.
J295
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Re: LLC basics - why bother, general guidelines?

Post by J295 »

TheCowbell wrote: Tue Oct 13, 2020 10:07 pm
bsteiner wrote: Tue Oct 13, 2020 2:52 pm Were you able to find a sufficiently small county to set it up in so that the cost of publishing the notice didn't put you over $200?
You lost me - I used incfile, it was a painless process that cost about $200. No idea about publishing a notice.
Our state requires that a notice is published in the county where the primary office of the LLC is located. The coordination of that notice and the cost for it is paid by the LLC. Do you know if your service handled that, assuming it is required by state law? I suspect that was the genesis of bsteiner inquiry.
simas
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Re: LLC basics - why bother, general guidelines?

Post by simas »

TheCowbell wrote: Tue Oct 13, 2020 12:13 pm My question is: do I really have any legal protection? My risk is low but I'm paranoid and can think of several unlikely ways a client may decide they want to sue me into oblivion. My layman understanding is that the LLC's assets are the 'limits of my liability' but is that realistic? Outside of the value of my computer equipment and the savings account there are no other real assets.
Are you single person LLC meaning that there is no real company here just you? if that is the case , the answer is likely 'little to none'. instead focus on insurance as other mentioned.
cadreamer2015
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Re: LLC basics - why bother, general guidelines?

Post by cadreamer2015 »

On the question of liability protection, you should really consult your attorney. My attorney told me that an LLC would provide essentially zero liability protection for me and my one-person consulting business. So I've always operated as a sole proprietor and filed the income and expenses on Schedule C.
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Topic Author
TheCowbell
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Re: LLC basics - why bother, general guidelines?

Post by TheCowbell »

Thank you to all that offered advice. I never really did my research on LLCs, and my primary reason was to have invoices that looked more professional than "Joe Cowbell". It's valuable to know that I don't have any real protection.

I view getting an LLC in a similar vein to getting my umbrella policy. At about $200 per year it's a "why not" expense; hope you never use it, and if you need it maybe it'll help.

I've been considering dropping the umbrella policy after years of paying around $200 per year I think it's money wasted, especially considering my relatively unexciting life is even less exciting during this pandemic where I drive less than 100 miles per month!
Investing Lawyer
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Re: LLC basics - why bother, general guidelines?

Post by Investing Lawyer »

Best practices:

Have a formal operating agreement
Have a contract regarding your "salary" payment (if desired)
Execute resolutions regarding distributions (no just paying yourself whenever you want)
All signature blocks should be on behalf of the LLC (emails and contracts)
FOLLOW WHAT IS IN THE DOCUMENTS

None of these steps will prevent you from being sued personally, but will decrease the probability of corporate veil piercing.
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JoMoney
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Re: LLC basics - why bother, general guidelines?

Post by JoMoney »

I had a LLC for awhile as a independent contractor...
I never saw how it provided any protection for me, but my primary customer would only deal with a corporate entity to "protect" them from any claim that I was or should have been their employee.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
ChrisC
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Re: LLC basics - why bother, general guidelines?

Post by ChrisC »

:confused Hmmmm, I created an LLC in 2010, and with filing fees with the NY Secretary of State and publication notice fees from 2 local newspapers, as required under NY Law back then, I recollect my total cost was around $1500 with no legal fees!

I shudder to think about the consequences of a defectively formed LLC, not that I’m suggesting that this might be the case here.
TheDDC
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Re: LLC basics - why bother, general guidelines?

Post by TheDDC »

LLCs are a good thing for asset protection, even in the case of single member LLCs. As pointed out, some companies won't do business with a SP, dba or not.

When you start making "structural" changes such as applying for an EIN or creating a dba, you are departing from operating in SP territory. It's time to look at an LLC before you go and do those kinds of things in my view.

Contracts must be signed with signature blocks indicating your LLC. In terms of communication, I wouldn't get too far into the weeds about whether or not every single e-mail has a signature indicating your LLC. Just make sure that contracts are signed as your name, member of the LLC.

-TheDDC
Rules to wealth building: 90-100% VTSAX piled high and deep, 0-10% VIGAX tilt, 0% given away to banks, minimize amount given to medical-industrial complex
CFM300
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Re: LLC basics - why bother, general guidelines?

Post by CFM300 »

TheDDC wrote: Sat Oct 17, 2020 3:36 pm LLCs are a good thing for asset protection, even in the case of single member LLCs.
How so?
NYCaviator
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Re: LLC basics - why bother, general guidelines?

Post by NYCaviator »

I don't know where people get their information that it won't protect you. If done right - i.e. use a lawyer to draft the paperwork - they should provide liability protection in that your personal accounts/assets will be shielded.

As mentioned before, you have to make sure to set it up and operate it correctly so that it is separate from yourself. This means separate bank accounts, credit cards, etc. You should also get adequate insurance. The more you do to make it look like a separate entity, the better off you are.

I don't know what your business does, but let's say you sell something. If a customer sues you for a late or incorrect order, they are going to sue your LLC not you individually. This should, theoretically, mean that only the LLC assets are on the line, not your own. Now if you personally guarantee a line of credit, credit card, or loan its a completely different story. The whole purpose of an LLC is to limit liability. I see no reason why it wouldn't be worth it unless you have high LLC fees and taxes.
Lee_WSP
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Re: LLC basics - why bother, general guidelines?

Post by Lee_WSP »

NYCaviator wrote: Sun Oct 18, 2020 12:05 pm I don't know where people get their information that it won't protect you.
I've learned that the vast majority of people who post here about their side gigs are doctors or other solo service trades. In some states or most states, an LLC doesn't insulate personal assets under a professional liability suit as the person is being sued as an individual for failure to adhere to professional standards.
NYCaviator
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Re: LLC basics - why bother, general guidelines?

Post by NYCaviator »

Lee_WSP wrote: Sun Oct 18, 2020 12:15 pm
NYCaviator wrote: Sun Oct 18, 2020 12:05 pm I don't know where people get their information that it won't protect you.
I've learned that the vast majority of people who post here about their side gigs are doctors or other solo service trades. In some states or most states, an LLC doesn't insulate personal assets under a professional liability suit as the person is being sued as an individual for failure to adhere to professional standards.
That is very true. It doesn't insulate you from professional malpractice (only insurance can protect you from that), but definitely should for other debts, business loans, etc. that doctors/lawyers can incur in trying to grow their practice.
Lee_WSP
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Re: LLC basics - why bother, general guidelines?

Post by Lee_WSP »

NYCaviator wrote: Sun Oct 18, 2020 12:27 pm
Lee_WSP wrote: Sun Oct 18, 2020 12:15 pm
NYCaviator wrote: Sun Oct 18, 2020 12:05 pm I don't know where people get their information that it won't protect you.
I've learned that the vast majority of people who post here about their side gigs are doctors or other solo service trades. In some states or most states, an LLC doesn't insulate personal assets under a professional liability suit as the person is being sued as an individual for failure to adhere to professional standards.
That is very true. It doesn't insulate you from professional malpractice (only insurance can protect you from that), but definitely should for other debts, business loans, etc. that doctors/lawyers can incur in trying to grow their practice.
True, but only if you can convince the bank to not require a personal guarantee. I think landlords are the easiest ones to slip in the LLC thing. But I'm not sure how often they sue tenants for lease breakages either.
J295
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Re: LLC basics - why bother, general guidelines?

Post by J295 »

Lee_WSP wrote: Sun Oct 18, 2020 12:15 pm
NYCaviator wrote: Sun Oct 18, 2020 12:05 pm I don't know where people get their information that it won't protect you.
I've learned that the vast majority of people who post here about their side gigs are doctors or other solo service trades. In some states or most states, an LLC doesn't insulate personal assets under a professional liability suit as the person is being sued as an individual for failure to adhere to professional standards.
A lot of non-lawyers seem to post replies to legal questions ("I'm not a lawyer but one time my Uncle Elmer told me ....."). Most lawyers know the correct guidance is usually fact specific and thus only limited guidance/pointing in the right direction is offered.

On the estate planning side I note that Bsteiner and Gill are both lawyers and seem to offer excellent guidance.

There is no substitute for competent legal counsel for all but the most routine inquiries.
Lee_WSP
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Re: LLC basics - why bother, general guidelines?

Post by Lee_WSP »

J295 wrote: Sun Oct 18, 2020 12:33 pm
Lee_WSP wrote: Sun Oct 18, 2020 12:15 pm
NYCaviator wrote: Sun Oct 18, 2020 12:05 pm I don't know where people get their information that it won't protect you.
I've learned that the vast majority of people who post here about their side gigs are doctors or other solo service trades. In some states or most states, an LLC doesn't insulate personal assets under a professional liability suit as the person is being sued as an individual for failure to adhere to professional standards.
A lot of non-lawyers seem to post replies to legal questions ("I'm not a lawyer but one time my Uncle Elmer told me ....."). Most lawyers know the correct guidance is usually fact specific and thus only limited guidance/pointing in the right direction is offered.

On the estate planning side I note that Bsteiner and Gill are both lawyers and seem to offer excellent guidance.

There is no substitute for competent legal counsel for all but the most routine inquiries.
Are you replying to me or NYC or just making a general observation and just quoted me? Because I don't understand what you're trying to say to me.
J295
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Re: LLC basics - why bother, general guidelines?

Post by J295 »

Lee_WSP wrote: Sun Oct 18, 2020 12:39 pm
J295 wrote: Sun Oct 18, 2020 12:33 pm
Lee_WSP wrote: Sun Oct 18, 2020 12:15 pm
NYCaviator wrote: Sun Oct 18, 2020 12:05 pm I don't know where people get their information that it won't protect you.
I've learned that the vast majority of people who post here about their side gigs are doctors or other solo service trades. In some states or most states, an LLC doesn't insulate personal assets under a professional liability suit as the person is being sued as an individual for failure to adhere to professional standards.
A lot of non-lawyers seem to post replies to legal questions ("I'm not a lawyer but one time my Uncle Elmer told me ....."). Most lawyers know the correct guidance is usually fact specific and thus only limited guidance/pointing in the right direction is offered.

On the estate planning side I note that Bsteiner and Gill are both lawyers and seem to offer excellent guidance.

There is no substitute for competent legal counsel for all but the most routine inquiries.
Are you replying to me or NYC or just making a general observation and just quoted me? Because I don't understand what you're trying to say to me.
Just a general observation to the statement that "I don't know where most people get their information ...." Would have been cleaner just to quote his/her statement.
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