Dear [CLIENT NAME]:

RE: You may want to think twice before forming an LLC

Many people feel they need to form an LLC to protect themselves and their assets. But often, these concerns can be more easily addressed with insurance. You should be aware that the liability protection provided by an LLC is limited, and there are annual taxes and fees that must be considered. Also note that the FTB has been aggressively pursuing nonresident LLC members, which may deter out-of-state investors.

Limited liability protection

Generally, members of an LLC are not personally liable for the debts of the LLC. A member’s acts may bind the LLC, but they generally do not subject individual members to personal liability. However, like the corporate shareholder, the LLC member is personally responsible for his or her tortious or malpractice acts.

An LLC member’s non-LLC assets may be attached if:

• The member caused the event;
• The member was negligent in hiring the person who caused the problem; or
• The member was responsible for supervising the activity (e.g., a project manager overseeing a job).

What about insurance?

For LLCs that hold real estate, all lenders will require the owner to carry insurance on the property. Depending on your needs, you may be able to purchase an additional $1 million of insurance for less than the cost of California’s annual LLC tax. Cost of insurance is based on a number of factors, including who the carrier is and what other coverage the carrier provides.

In short, here’s the choice: Pay the $800 LLC annual tax plus the cost to prepare the return, or pay a smaller amount for $1 million of additional coverage.

The annual tax and fee

Be aware that, at a minimum, the LLC is liable for an $800 annual tax, and that obligation is indefinite until the LLC formally dissolves. LLCs that have gross receipts attributable to California of $250,000 or more must also pay an LLC fee. The LLC fee starts at $900 and can be has high as $11,790 per year.

While LLCs are an excellent structure for many businesses, they aren’t the right choice for everyone. If you are considering forming an LLC, contact our office so we can address the issues above and help you decide if an LLC is a good fit for you.

Yours truly,

Your tax professional