bikemom3 Posted 25 Dec 2013 , 11:33pm
post #1 of

AJust curious for those of you who operate under cottage food laws- how do you have your business structured? LLC or sole proprietor?

12 replies
jason_kraft Posted 27 Dec 2013 , 4:35am
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AIn most cases it will depend on how much the LLC costs. In California it's minimum $800/year so you need to have significant income and/or higher than normal liability risk to make it worthwhile. If it's only a one-time fee of a couple hundred bucks the LLC is probably worth it.

costumeczar Posted 28 Dec 2013 , 9:50pm
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If the cost isn't a huge issue, I'd go ahead and do the LLC. If you start out as a sole prop then want to change you end up having to do a lot of duplicate paperwork and it's a pain in the butt. I know from firsthand experieince. It would have been better to just do the LLC from the beginning.

sixinarow Posted 28 Dec 2013 , 11:28pm
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I started out as a sole proprietorship and switched over to an llc. One benefit of switching over was that I have documentation with my state to protect my business name. In my state, sole proprietorship are not required to register with the state. I'm glad I switched over, because I had a person from another state, try to tell me that they had federally trademarked part of my business name and I couldn't use it. I had the paperwork to prove that I was an established business in my state and also had my federal ein before she filed her trademark. Depending on your state (and how much you like your business name) filing as an llc will protect that name from other people in your state from using it. Your state may require you to register either way, but it was my incentive to switch when I did. 

bikemom3 Posted 29 Dec 2013 , 1:19am
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AThanks guys! I'm trying to get my "ducks in a row" so I can open under my states new cottage food law. I've been reading like crazy (including Kara's book) to learn as much as possible for the past 2 years. I've got all my paper work ready file for my LLC

costumeczar Posted 29 Dec 2013 , 3:46am
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Quote:

Originally Posted by bikemom3 

Thanks guys! I'm trying to get my "ducks in a row" so I can open under my states new cottage food law. I've been reading like crazy (including Kara's book) to learn as much as possible for the past 2 years.
I've got all my paper work ready file for my LLC
itsacake Posted 29 Dec 2013 , 11:58pm
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I just filed to dissolve my LLC and so did the person who shares my kitchen space.  In California it is expensive ($800.00/year minimum tax) and two attorneys told me that since the LLC is, at this point, just me, anyone suing me with a good attorney would be able to pierce the veil of the LLC and get at my personal assets anyway.  I know this topic is contentious here at CC, so I'm posting more in the way of saying "check with an attorney for your specific situation".  No one on here knows exactly your situation and most of us are bakers, not  really qualified to give legal advice.

jason_kraft Posted 30 Dec 2013 , 3:46am
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A

Original message sent by itsacake

two attorneys told me that since the LLC is, at this point, just me, anyone suing me with a good attorney would be able to pierce the veil of the LLC and get at my personal assets anyway.

That doesn't make much sense to me. The likelihood of the corporate veil being pierced is dependent on how carefully you follow the rules for creating and maintaining the LLC, not how many members the LLC has.

leah_s Posted 30 Dec 2013 , 5:05am
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AI'm an S Corp. "Old school".

itsacake Posted 30 Dec 2013 , 5:44am

Jason,  You and I have engaged in similar discussion before.   If you are an LLC, following the rules includes things like having to have board meetings, for example.  If it is just one person, you can have them in your head, or whatever, but you need to write up minutes for the relevant items discussed.  If there is just one of you there is nothing much to discuss and there isn't really a board which makes minutes a little strange.  It really is just you, so it isn't hard to prove that it is just you.  Even if you keep finances separate the corporation is more or less a legal fiction.  

 

As you know, having an LLC in California is pretty expensive.  You have even posted that it might not be worthwhile in states where it is expensive.  My point is that most of us on CC are not actually attorneys so the OP should consult with one about his or her specific situation.   No one answer is going to be correct for everyone.   I have now consulted three attorneys who specialize in corporate law in California and each of them said the same thing.  Since it makes sense to me, I  am following their advice and saving money.  I also discussed it  with my accountant as did my colleague who is doing the same thing.  In addition I checked with my insurance company and that rate stays the same for the same coverage so I am feeling OK with my decision.   I have 2 million dollars in liability insurance just in case I ever do have an issue.

 

I understand that you have an MBA which gives you some gravitas in giving business advice and I usually even agree with your views.  I'm not sure how much legal experience you have so whether it makes sense to you or not, I'll follow the advice of the three attorneys who work with corporate law every day in California and who have advised me not to waste my money.  Again, I urge everyone not to take legal advice from others on CC, but to consult an attorney familiar with the rules in your state. 

jason_kraft Posted 30 Dec 2013 , 6:49am

A

Original message sent by itsacake

Jason,  You and I have engaged in similar discussion before.   If you are an LLC, following the rules includes things like having to have board meetings, for example.  If it is just one person, you can have them in your head, or whatever, but you need to write up minutes for the relevant items discussed.

This is incorrect. In California, LLCs are required to submit a company operating agreement to SOS (if they don't, they are subject to default operating rules). The operating agreement dictates whether or not meetings are required, so if you indicate that meetings are not required, then you don't have to hold them or record minutes.

It really is just you, so it isn't hard to prove that it is just you.  Even if you keep finances separate the corporation is more or less a legal fiction.

All corporations are legal fictions in that they are a separate entity (corporate personhood) as long as you follow the rules of the corporation. The nice thing about LLCs is that you set your own rules, and as long as you let SOS know what they are they can be as simple or detailed as you wish.

As you know, having an LLC in California is pretty expensive.  You have even posted that it might not be worthwhile in states where it is expensive.

IMO how you arrive at the answer to a question is as important as the answer itself. In California the LLC costs are high enough that relatively low-volume small business owners may be OK with just liability insurance in many cases, but this is a cost/benefit decision and not because single-member LLCs are worthless.

Now it may be true that owners of single-member LLCs tend to be sloppy about following the rules (which would allow the corporate veil to be easily pierced), but correlation does not imply causation.

I do agree that it's important to talk to a local attorney and accountant before making important decisions like this, but it's a best practice to also be informed yourself before talking to a professional.

itsacake Posted 30 Dec 2013 , 5:09pm

Sure, Jason.  It may not be legally necessary to have minutes or anything else, but if you make the requirements so minimal that it doesn't look like a corporation, then it doesn't look like a corporation-- QED.

 

I don't think we are really in disagreement and I don't have any more time to devote to this thread so I'll just say Happy New Year and go do something more profitable like bake a cake....

jason_kraft Posted 30 Dec 2013 , 6:15pm

A

Original message sent by itsacake

It may not be legally necessary to have minutes or anything else, but if you make the requirements so minimal that it doesn't look like a corporation, then it doesn't look like a corporation-- QED.

The whole point of an LLC is to allow minimal operating requirements while offering liability protection as long as the LLC is treated as a separate entity (and there was no fraudulent behavior). So your proof stands, but the fact that an LLC with minimal bylaws does not look like a traditional corporation is orthogonal to the point of whether liability protection will hold up.

Maintaining business/personal separation is the key here, and if you can do that with minimal bylaws then you should be OK. If you need more detailed bylaws (requiring meetings and minutes) to help you maintain separation that's fine too, it's up to you as the founder of the LLC.

Unless there was a miscommunication, my issue with the advice you received from the attorneys is that it was based on the false premise that board meetings and minutes are always required for LLCs.

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