Business Organization - Firm Organization: LLC, LLP, S Corp. etc

[Craig Kleffman]

Hi, 

What business organizations do those of you in California use to organize your business/es?  I'm in California.  Here are (more or less) my notes on how I expect to organize my enterprise.  

INTRODUCTION

According to the California Secretary of State, the options are:  

* Corporations (presumably S Corp. and C Corp); 

* Limited Liability Company (aka LLC);

* Limited Partnership; 

* General Partnership; 

* Limited Liability Partnership (aka LLP);

* Sole Proprietorship(1)

Since I expect to organize my own operation--and I happen to be a lawyer, although I practice criminal law--I'm going to walk through my thought process and lay it out on paper.  Of course, none of this should be construed as advice.  

PREAMBLE. . . 

Before we get started, a few things to note.  First, law is incredibly specialized.  Indeed, prior to becoming a lawyer, I would ask attorney-friends for advice and they would shrug their shoulders and say things like "I have no idea, I don't practice in that area."  At the time, I never believed them.  I do now.  The reason I believe them is because of just how specialized my own practice is.  I can explain to you the law of murder and robbery--no problem.  But, if you want to ask me about business organizations, I would explain I didn't have the class in the past 10 years-so, I'll need to look it up and think it through, and even then I might be wrong.  

Second, and more importantly I think, is what I came to learn in law school.  Legal problems have solutions.  And, no matter what endeavor you take on, there will always be risk.  Before law school I thought one had to have perfect legal strategies in order to avoid legal problems at all costs.  Now my views are much more refined.  I won't spend unlimited amounts of money for perfect protection (incidentally, corporate veils can be pierced--and, given what I know about how judges think, the more draconian the injury, the more penniless the plaintiff, and the more wealthy the defendant, the more likely some judge will come up with a creative solution to pierce the veil.  Like I said, there are no perfect solutions)  

Third, I come at law from a vastly different view than most of the corporate business organization types of lawyers.  I try cases for a living.  (I've tried more than 60 criminal cases in front of 60 juries.  Some of those cases were very serious with several life sentences in the mix).  This experience has taught me that merely because a controversy makes it into the legal system, doesn't mean that the plaintiff will prevail.  And, the mere threat of getting sued and being involved in litigation, is a risk of business--and a risk that can be managed.  

The constant drone of the worry-wart lawyers is that, you're going to get sued and the legal fees are going to be very expensive; therefore, any reasonably human being would set up multiple layers of complex corporate structures--well, I'm not wholly convinced, for several reasons.  

First, while legal fees are an issue, there are many hungry lawyers that can do legal work for less rather than more in our current legal practice environment.  So, when I'm given the grim news that without proper protection, if someone trips on a board at my house, breaks a fingernail, so that I'm going to be sued for $1 million and they're going to collect -- well, I simply don't buy it.  First they have to decide to sue (many won't get to that step).  Next they have to find a lawyer willing to take that case (this may be more difficult than a layperson understands.  Not only must the case be pretty good, but there must be a good chance of an easy settlement and a pool of cash, otherwise, most lawyers will move on to easier prey).  Finally, Juries don't just hand verdicts out, contrary to what popular press reports may tell you (at least that's my experience).  (Yes, I will admit that juries get some verdicts wrong; but all in all, juries are pretty good).  

So, with all of that as a backdrop, here's my review of the options.  

* * * 

THE OPTIONS TO LIMIT LIABILITY

A quick web search turned up this article that compares the different types of business (firm) organizations:  http://www.colleylaw.com/Articles/Entity-Formation....  Here's another decent article on the costs of LLCs in California:  https://www.ftb.ca.gov/businesses/bus_structures/L....  

There are apparently two start-up costs:  a) $70 for articles of incorporation; and b) $20 for statement of information (see, http://bpd.cdn.sos.ca.gov/pdf/be-fees.pdf).  In 2016 the annual fee appears to be $800.  So, for $890, I get some asset protection (apparently there are some exceptions, that I haven't reviewed).  

The income from the LLC will flow through onto my schedule C of my own tax return (apparently known as a disregarded entity). While it seems a bit expensive to me -- it seems like a necessary expense. Oh, yes, I think there's a hidden cost here, too. One must have a registered agent for service of process. http://www.nolo.com/legal-encyclopedia/california-....  It appears hiring an agent is something like $50 to $100 per year (and apparently they'll file some documents for you with the secretary of state if you agree to let them serve as your registered agent of process).  http://www.corpgate.biz/Registered_Agent.html?gcli....  

I suspect I will end up organizing as an LLC. It provides personal liability protection for the workings of the business. Happy to hear others thoughts on this - how they organized, and any other hidden costs.

--Craig.

(1) See, http://www.sos.ca.gov/business-programs/business-e...