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Should I form an LLC with a partner who owes money to EDD?

Simi Valley, CA |

How will that affect the LLC or me personally?

or Should we just form a partnership?

Attorney Answers 3


As between forming an LLC and a partnership, there is no difference.

As to why you would want to be in a business with someone who owes money to EDD is a much bigger question. Do you know the facts and circumstances leading to this situation? You don't indicate how much money he owes to EDD, but would you honestly trust a business partner who has substantial debt?

Assuming you are satisfied with the explanation and situation, the debt to EDD (and any other debt which the person may owe but has not disclosed to you) should not have a direct affect on the LLC or you personally. However, as with any debt collection, eventually the debtor could enforce a judgment such that the judgment creditor becomes the owner of your "partner"'s membership share in the LLC.

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The first question is how much money are we talking about? The second question is when forming the LLC, you can form it without them and then bring them in later after the LLC has been accepted by the State of California. I would also echo the sentiments of the previous attorney in carefully choosing your partners.

As a general rule, the LLC will create a hurdle against individual creditors...but remember that it is only a hurdle and the various government agencies are often great hurdle jumpers. Since the LLC interest is a personal asset of the individual, you may find yourself with a LLC member that you do not want or, see how much money is in dispute and "partner" carefully.

By Grace...
Shawn Jackson ESQ.
Business Development Attorney EMAIL:
(707) 584-4529
No communication resulting herein shall create an attorney-client relationship unless a separate retainer agreement is signed by attorney and client. The information provided is not legal advice nor is it conveyed in the course of an attorney-client relationship, but is intended merely as a general overview with regard to the subject matter covered. You should not act upon this information without seeking professional counsel such as any attorney in this office in a subsequent email communication (agreement) and the formation of an attorney client relationship.

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Why risk it? I would bet that if they owe money to EDD they are not contributing money to this new business venture. If that is so, then why give them an equity stake or even have them involved. An LLC is better than a partnership with this concern, but there is still always some risk. You also need to be careful to keep finances separate between the LLC and other parties. There are many steps you need to talk to avoid possible alter ego liability. You should consult a business attorney. Better to avoid this person until that money or debt is settled.

This answer does not create an attorney client relationship. Consult an attorney before you decide on a course of action. A review of all documents and a consultation at a minimum is necessary to render effective legal advice.

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