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I do freelance work on the side, and I've been meaning/needing to create an LLC for a while now. I've talked to some friends, and they mentioned somethings that I was not aware of. A couple examples:

  • You have to keep a non-trivial amount of money in the LLC, or in the event of a lawsuit, they will go after you personally
  • You must file your taxes quarterly or you will lose protect.

Of course the whole point of getting an LLC is to limit my personal liability, so I don't want to overlook something that would render it useless. What do I actually need to do to keep up the protection?

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What's the jurisdiction? –  Zuly Gonzalez Feb 19 '13 at 7:09

1 Answer 1

You have to keep a non-trivial amount of money in the LLC, or in the event of a lawsuit, they will go after you personally

This is not entirely true. You have to have the company well-funded to be able to conduct day-to-day operations, but you don't have to keep any significant extra in the company over that. You can always infuse more cash into the company when needed.

What is true is that you're not supposed to commingle your personal and business expenses, and you only should use your company bank account for company needs. Any withdrawals you make for yourself should be properly documented as distributions, and you shouldn't take out funds if it means the company won't be able to pay its debt (doing so will indeed invalidate the liability protection).

You must file your taxes quarterly or you will lose protect.

This is not true, liability protection is not related to your tax obligations (IMHO, check with a lawyer). You must file quarterly estimates regardless of working as a sole-proprietor or LLC. You can overcome this by having higher withholding from your salary (if you have a salary) so that it would cover the additional tax liabilities stemming from your other business activities (freelancing is a business activity).

Of course the whole point of getting an LLC is to limit my personal liability, so I don't want to overlook something that would render it useless. What do I actually need to do to keep up the protection, and what are some of the myths out there about LLCs?

Well, that is also a myth. LLC doesn't limit your personal liability for your own actions. It limits your liability for actions of others - your employees, vendors, contractors, property managers, liability as a homeowner (if owned through LLC) etc. You cannot hide behind the LLC protection if the liability stems from your own actions.

Re the personal liability, see for example this article from NOLO. It states this:

For example, LLC owners can be held personally liable if they:

  • personally and directly injure someone during the course of business due to their negligence
  • fail to deposit taxes withheld from employees' wages
  • intentionally do something fraudulent, illegal, or reckless during the course of business that causes harm to the company or to someone else, or
  • treat the LLC as an extension of their personal affairs, rather than as a separate legal entity.

So if you personally do something wrong (which wouldn't be considered a normal business action under the circumstances, or because you were negligent) - you will be personally liable. BTW: the second bullet (the failure to deposit taxes) may be the source of the confusion re the 1st myth you mention. Employee withheld taxes are remitted quarterly.

This is of course State-dependent, as LLCs exist based on State laws, which differ from State to State.

Check with a lawyer if you at all need LLC, maybe a proper professional insurance coverage would be more efficient.


Apparently people think I know too much to be a layman. So to disclaim and clarify: I'm not a lawyer and this is not a legal advice. If you need a legal advice you have to go (and pay) to an attorney licensed to practice in your jurisdiction.

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A friend of mine is a CPA, and he informed me that the only consequence of not filing quarterly estimates on your taxes is typically a very small penalty. –  maple_shaft Feb 7 '13 at 1:58
    
@maple_shaft its a certain percentage of underpayment, but why paying it? –  littleadv Feb 7 '13 at 2:03
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Slight disagreement; AFAIU, in the case of a single person LLC it does limit your liability for your own actions if your actions are considered actions of the company. If you write software and sell it via your LLC, and then the LLC is sued, the liability is supposed to be limited to the LLC's funds, not your personal bank account. (This is provided your LLC is run properly and not found to be merely an alter-ego of you). If this weren't the case, there would be no liability-related reasons to declare an LLC as a one person company. –  Chelonian Feb 7 '13 at 2:40
    
@Chelonian I'm not so sure. I know that in California the liability protection of SMLLC and MMLLC are not the same. I guess it depends on the jurisdiction. Re why to do SMLLC - from my experience in California its either for property ownership or instead of a limited partnership (to avoid having general partner). –  littleadv Feb 7 '13 at 3:43
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Even if the LLC would give some liability protection in some situations, if you have "pierced the corporate veil", you may lose it. Many owners are sloppy in how they handle credit cards and checks, not caring if they are using personal or business, but this means that the courts will also ignore the separation when it comes time to assign liability. Keep It Clean Kids!™ –  Peter Rowell Feb 7 '13 at 5:27

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