We just started and have no income to date. We have minor expenses up to this point, 2-3 K. We started 12/1/09. We are concerned for liability, but we also are concerned with the costs of starting the LLC, namely the $800 fee in CA. It is just two of us, my partner and I, with no employees, and we work out of the home office. The business is online retail selling miscellaneous goods Fair Trade goods. Is it a bad idea to wait a year to see how the business goes before committing to the LLC idea? What real vulnerability do our personal assets realize in a general partnership vs. an LLC, and vice versa.
Thank you for your help and advice.
To answer your last question first, as it seems to be the overriding issue, each partner in a general partnership is jointly and severally liable for all of the liabilities of the partnership, i.e. your personal assets could be taken for the acts of your partner in the partnership in the extreme case. Your business may not involve significant risks, and even if so, much of these risks (except contractual) can be insured. Having said the above, corporations and LLCs in California involve significant additional costs and activities, e.g. an annual minimum franchise tax of $800, whether you make any money or not. You should discuss this issue in detail with a business attorney.
Proviso: My response does not constitute legal advice, as I do not know all of the relevant facts of your case, and I do not legally represent you. Although I strive to make sure the information I provide is generally accurate and useful, you should promptly consult an able lawyer who can learn the unique details of your case more completely in a confidential relationship to ensure that the information I provide, and your interpretation of it, is appropriate to your particular situation.
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Family Law Attorney
Is it a bad idea to wait and see how business goes? No. I think it's a good idea. Focus on the task of marketing and providing excellent goods and/or services. The purpose of corporations, LLCs and other business entities is to provide protection from personal liability for business debts and to memorialize the rights and the obligations of the individuals who are shareholders or members.
A corporation or and LLC can be expensive to maintain. Corporate books and records must be kept, minimum state taxes must be paid and an annual tax return must be prepared and filed, even if there is a loss. Dissolving a corporation is time consuming and expensive. And the shareholders are personally liable for any unpaid corporate income taxes. A limited liability company does not require the corporate formalities that a corporation does; however, both limited liability companies and corporations must pay annual minimum state income tax (presently $800) even if there is a loss.
Assuming you do incorporate or form an LLC, to borrow money you will almost certainly have to provide a personal guarantee for the loan. Similarly, most vendors will require that you be on the hook personally for goods and services they provide. This means that one of the benefits of an LLC or corporation, protecting personal assets from business debts, will not be possible until you have several profitable years.
Having said all that, I applaud your interest in laying the ground work for a business. You and your partner need a written agreement that explains the obligations of the parties as well as your rights. You need a plan for any ownership changes; such agreements are often called buyout contracts or buy-sell agreements.
You can educate yourself regarding partnership agreements, corporations and LLCs by visiting www.nolo.com, which the website for the Nolo Press. Check out the company’s concise, easy to understand books on starting a business and running one as well as books on creating your own partnership, LLC or corporation.
You should buy commercial liability insurance in any event, and especially if you keep the partnership - should cost only a few hundred dollars per year.
Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.