Posted by CalimnCA on 4/10/06 10:15pm
Msg #112626

LLC vs Sole Proprietor

I have done a search and read all the posts on EIN, business banking, etc. Here is the question. I have a LLC dba my business. I am really rethinking why do I need a LLC??? I carry E&O and as a Notary I am personally liable so my LLC doesn't protect me much. Why shell out the $800 a year (California requirement). I have no employees, carry all licenses required and have an EIN, business banking account and claim everything on my 1040. It won't change as a Sole Proprietor will it??? I am not asking for Legal Advise or Tax Advise just want your opinions.

Thanks in advance

Reply by John_NorCal on 4/10/06 10:19pm
Msg #112627

I think you've answered your own question. Why do you need an LLC or Sub Chapter S for that matter? I can't see paying that minimum $800 fee either. I'm staying sole prop until I see a need to do otherwise.

Reply by Drakester_IA on 4/10/06 10:28pm
Msg #112629

I am not an attorney but the way it was explained to me by an attorney is that the only way an LLC will help is if you have employees. I will give the example under a construction company. If an employee does something (Steel erection) and the building colapses the LLC can be sued but the owner is not personnally liable. On the other hand if you as the owner were to erect the steel that collapsed, then you and your LLC are held liable.

I hope this makes sence and helps

Good Luck

Reply by John_NorCal on 4/10/06 10:37pm
Msg #112631

Re: I've chosen sole prop for the very reasons that .....

CalimnCA questions why have an LLC. There is no benefit to us, that I know of anyway, as notaries. There is no protection from our actions. If I had a real estate agency or a company with employees, then I would consider an LLC. Buot as they say, "that is my own opinion, not to be construed as legal advice, etc etc."

Reply by TitleGalCA on 4/10/06 10:24pm
Msg #112628

Calimn...I'm no attorney either, but this question is totally attorney related/required. My understanding is that an LLC limits your liability in anything/everything but you need an expert opinion in that.

Since your primary business is notary related and the handbook says you're responsible, you may be right in your assumption, and may not need the LLC protection. Just don't think that anyone here can answer with authority.

Reply by Drakester_IA on 4/10/06 10:30pm
Msg #112630

TitaleGalCA is correct and I am of no authority

Reply by BP/WV on 4/11/06 10:23am
Msg #112674

I've always understood that an LLC protects your personal assets if your company should go bankrupt.

Reply by Charles_Ca on 4/10/06 11:06pm
Msg #112632

I've owned a Subchapter S and the reason to do it is very simple. If you own substantial assets and feel that you could do enough damage to put those assets in jeopardy you should seek protection from a corporation. If you have no assets you are basically suit proof and so you don't need the protection of a Corp. It is as simple as that. If you can cover your assets with a 100k E & O policy go for it. If you have assets in the millions you need a corp. Even if you are set up as a corp there are still ways to pierce the corporate veil. If you have to go to court its a crap shoot any way you look at it especially with the awards that have been given out lately. But a corp will stack the odds in your favor but only if you act as a corp and there is where most people make a mistake. You must have annual meetings, keep minutes and vote on all actions. Its tedious but if you have the assets you need the protection. I am not an attorney and my opinion is worth every cent you've paid for it. TTFN!

Reply by Paul_IL on 4/11/06 1:22am
Msg #112644

Your personal liability is only for notary errors.....less than 10% of your duties. The LLC covers the rest of your activities.

Reply by Kevin Ahern on 4/11/06 5:09am
Msg #112646

The shield of the LLC or corporation protects you against different liabilities than your e&o insurance. The insurance protects you against claims of negligence initiated against you by one of your clients in the performance of your work as a signing agent. Check your insurance policy, but in many cases it may not protect you against claims for contract breach. When you think of a contract, think beyond the written agreement that you may or may not have signed with your client. There are many different types of contracts for which you could be sued...express written contracts...express oral contracts...contracts implied in fact....contracts implied in law. If you have accepted the assignment from the client in return for a negotiated fee, a contract exists. If your client sues you, the client could include alternate claims for both negligence and contract breach.

In states such as Connecticut there is a longer statute of limitations for contract claims than for negligence claims. If the statute of limitations has expired on a negligence claim, the contact suit may still be an alternate theory upon which you could be sued. If you are properly organized as a corporation or LLC and are properly signing your contracts and documents related to the transaction of your business as a representative of a corporation or LLC, you have a defense to the contract claim. You should consult with a local attorney, but in my experience it is best to have both the insurance coverage and the corporate shield to limit your liability. The set up charges for a corporation or LLC are a one time expense, and the annual taxes paid to the state are a small price to pay by comparison to the potential liability against which you would be protected.

Reply by Kevin Ahern on 4/11/06 6:21am
Msg #112650

The e&o insurance is also not a guarantee of complete protection. The claim made against you may exceed the limits of coverage provided by your policy. Many e&o insurance policies also require that the legal expenses for your defense be paid from the proceeds of your policy which would further reduce your coverage. You are personally liable for the portion of the claim asserted against you in excess of the proceeds of your policy's coverage.

Reply by Drakester_IA on 4/11/06 7:48am
Msg #112654

Kevin it does state in the begining and in previous threads that in CA there is an $800 annual fee for an LLC registration

Reply by Kevin Ahern on 4/11/06 8:15am
Msg #112657

I understand that. The point I was trying to make was that these expenses are small compared to the protection it the LLC/corporation affords you in the transaction of your business. It is just a cost of doing business. In Connecticut we pay an annual $250 business entity tax for corporations. I have my accountant prepare state and federal tax returns anually. The $250 tax is listed on the K-1 forms as an expense which he then includes on my personal tax return as a deduction.

Reply by lulu on 4/11/06 9:11am
Msg #112665

Did you have to submit Articles of Organization to the state of CA?
If so read through it. In mine Article VI:Nonliability and Indemnification Section B states: No Manager of the LLC shall be personally responsible or liable to the LLC or its members or anyone else for monetary damages for breach of fiduciary duty as a manager except for liability for any breach of the managers duty of loyalty to the llc or its members for acts or omissions not in good faith or which involve intentional midconduct or a knowing violation of law, for a transaction from which the mngr derived an improper personal benefit or wrongful distribution in violation of section______of the IOWA LLC Act.
Section C: Each person who is or was a mngr of the llc who was or is made a party to or is involved in any threatened, pending or completed action, suit or proceeding whether civil, criminal, administrative or investigative, by reason of it fact that such person is or was a manager of company or is or was serving at the request of company as a manager director, office, partner, trustee, employee or agent of another llc, corp, partnership, joint venture, trust, employee benefit plan or other enterprise shall be indemnified and held harmless by company to the fullest extent permitted by applicable law, as the same exists or may hereafter be amended. This was taken from a generic Iowa Articles of Organization taken from the State of Iowa site. If yours is similar, my interpretation of the above is that 'personally' one cannot be held liabel for the actions within the llc. In additional reading of my Articles it says the manager has the right to have the llc defend and pay all legal fees involved to defend the manager. That still would be money out of your business but my interpretation is that if that suit went beyond what the company has for funds they couldn't come after you personally to settle the difference. Definitely read through your articles which you would have had to submit to the state. Additionally, I make certain that everything I do I represent as my company name. Disclaimer: this is in no way to be considered legal advice.

Reply by Kevin Ahern on 4/11/06 9:54am
Msg #112669

In most states members and managers of LLC's have the right to indemnification for debts and expenses that are justly incurred on behalf of the LLC. Generally the LLC protects individual members on contract claims in which the member/manager has properly disclosed that he is acting in his representative capacity on behalf of the LLC. If he does not properly identify himself as such he runs the risk of becoming an agent for an undisclosed principal. In which case he and not the LLC becomes liable to the third party. (In Connecticut he is required to disclose this information at the time of the transaction. The other party to the transaction is not required to go searching for it). If he is held personally liable to a third party, he could seek indemnification (in accord with statutes similar to the one you cited above) from the LLC if the claim for which he was sued was justly incurred for the benefit of the LLC. If the other members of the LLC refused to indemnify him, he would have to sue the LLC for indemnification, and all of the issues of whether he was rightfully acting on behalf of the LLC would be determined by the court.

The reason you may also need to carry e&o insurance relates to the issue of whether the manager or member or the officer/director of a corporation acted in a tortious capacity. In states such as Connecticut tortious conduct is not included in the duties performed whether it be in a personal capacity or a representative capacity. Negligence is a tort. The e&o insurance is designed to protect the insured against claims of negligence which may not be protected by the LLC or the corporate sheild. In so far as intentional torts are concerned it is not likely that either the LLC/corporate shield nor the insurance would protect you. By the way if you have organized a corporation or LLC and carry e&o insurance also, you should make certain that the policy protects both the corporation/LLC and its members. This is because both the LLC and member may be named alternately as defendants in a suit. One or the other may be held liable depending on whether the member is judged to be acting on his own behalf or the LLC's behalf.

Reply by lulu on 4/11/06 12:13pm
Msg #112693

I appreciate your detailed response. It has made me think of some holes in my armor. I will have to fix those. In this instance I believe the CA notary I replied to is the sole member of this LLC so there is no issue of the other members refusing to indemnify him/her. As for tort law and the statement that you doubt that either the LLC or E&O insurance would protect in the member capacity; if negligence is defined strictly under civil tort law and E&O insurance does not cover torts then there is no protection from law suit and/or damages under the guise of either and I would be of the opinion that one may as well have neither, they are just money down the drain. But I am not of this opinion. For anyone who would care to know a bit more about tort law I have attached a link.
http://en.wikipedia.org/wiki/United_States_tort_law

Reply by Kevin Ahern on 4/11/06 1:45pm
Msg #112709

No. I said Intentional torts most probably would not be covered by e & o insurance. Negligence is not an intentional tort. Negligence includes the errors and omission for which the insurance is intended.

Reply by lulu on 4/11/06 2:05pm
Msg #112716

ahhaha. If it's intentional negligence then one does not deserve to have the protection of either the LLC or E&O. Ya I read the last post and replied without reading all the responses.
I was a little embarrassed once I read your other responses. I think we are on the same page. Thanks for your patience.