by Andy Chen | Jul 12, 2023 | California, Enterprise, Law, in real life
I’ve written a few posts now about Limited Liability Companies (LLC) in California. In prior posts, for example, I’ve discussed whether an LLC can be used to form a law firm in California. I’ve also described the minimization approach law schools in the US typically use when teaching about business entities, like an LLC. I’m going to talk about LLCs in this post, but the basic logic I’m describing will apply to other types of entities also. In this post, I am going to expand on this idea of minimizing tax and legal liability. Most law schools start there and, unfortunately, also end there which means there is a bias towards always forming an LLC because, essentially, why would wanting to minimize tax and legal liability ever be a bad thing? In my view, it’s not a bad thing, but it might not be as good a thing as you initially think. The reason is because of Cost-Benefit Analysis. In other words, forming an LLC will result in several benefits, advantages, or positives. If you just stop there, then you should clearly always form an LLC. Realistically, of course, forming an LLC will also involve certain costs, drawbacks, or negatives. This should not be a groundbreaking concept to anyone because the same is true for all decisions you make in life. What ultimately matters when deciding to form an LLC is — like it is in other arenas in life — what the net result is. Do the benefits of having an LLC outweigh the costs of having an LLC? One relevant consideration here would, for instance, be whether...
by Andy Chen | Jul 9, 2023 | California, Enterprise, Law, in real life
A lot of people now have side hustles or are otherwise self-employed. If you’re one of these people, you might have wondered at some point whether or not you should form a legal entity of some kind, such as a Limited Liability Company (LLC). Doing so is much easier now than it was, say, even 5 years ago. Many websites advertise that they will help you form an LLC in California, Nevada, or Delaware in 10 minutes or less for $99, for example. In this post, I’m going to discuss just LLCs given how common and popular they are. They are, by no means, the only entity out there. In 2021, for example, I wrote a post about whether you can use an LLC in California to form a law firm. Specifically, I’m going to describe something simple, namely how the question of “Should I form…” is taught in law school. Law schools in the US often address this topic in a survey course discussing business organizations or entities. At my law school, the survey course was, in fact, called “Business Organizations”. That course analyzed this question from the perspective of minimization. In other words, when forming a business or running a business, the typical owner is concerned about minimizing two things: Minimizing their legal liability. In other words, if their business does get into legal trouble of some kind (e.g. lawsuit from a customer or vendor, etc.), the business wants to limit the scope of their potential loss or exposure. Minimizing their tax liability. I’m sure you’ve heard many, many stories about how very large publicly-traded companies that...
by Andy Chen | Oct 13, 2021 | California, Enterprise
Nowadays, it’s really easy to form a Limited Liability Company (LLC). A simple Google search leads you to a bunch of websites that — apparently — will fill out and file all of the forms for you in a few minutes for a low flat fee. I’ve not used any of those sites before so this is absolutely not an endorsement of any of them. Perhaps I’m old-fashioned in this regard, but I still form all of my California LLCs by hand myself with the California Secretary of State’s office. In this post, I’m going to go over a little bit about what California law allows an LLC to be used for. As it is me, I’m going to specifically answer whether an LLC can be used to form a law firm. If you’re a lawyer or law student in California, you probably know that the answer to that question is “no” but I’ll describe the specific statute(s) involved that support that answer. To answer the first question of what an LLC can be used for in California, the answer to that question is in the California Corporations Code, and specifically Section 17701.04. In short, an LLC can be used for a wide variety of purposes — assuming it is lawful, of course — in California, with the exception of a few purposes that are explicitly prohibited. For example, section 17701.04(b) says: “A limited liability company may have any lawful purpose, regardless of whether for profit, except the banking business, the business of issuing policies of insurance and assuming insurance risks, or the trust company business. A domestic or...
by Andy Chen | Oct 10, 2021 | California, Enterprise
In this post, I’m going to go over a very common question that people have when they form a Limited Liability Company (LLC) in California. Forming an LLC used to be very complicated and expensive. Very few people formed them. Nowadays, though, that cost and difficulty has gone way down. LLCs are now available to more people. Just do a quick Google search and you’ll inevitably find many sites promising to help you fill out and file all of the necessary forms in a short time for a low fixed fee. The question, though, is this: Is the Operating Agreement one of those documents that has to be filed with the State of California? Before answering that question, as background for those who don’t know, an Operating Agreement is, well, an agreement between the various people or entities who have decided to form the LLC together. As all of these parties are going to be involved in the LLC, two of many things an Operating Agreement typically goes over are (1) what the various parties are each responsible for doing, and (2) what the various parties are each entitled to receive. As you can hopefully guess, any time multiple people are involved in doing something, there is always the chance for disagreements to occur. Disagreements, fundamentally, are what lead to litigation. For a more complete list of what an Operating Agreement can cover, take a look at Section 17701.10 of the California Corporations Code. If you’re interested, the term “Operating Agreement” is defined in Section 17701.02(s) of the California Corporations Code: “’Operating agreement’” means the agreement, whether or not...
by Andy Chen | Jun 8, 2020 | California, Enterprise
Years ago, it was probably fairly difficult for the average person to form a legal entity like a corporation or limited liability company (LLC). Nowadays, however, it’s much easier and can often be done with a few clicks online and a credit card. The result I’ve seen is that entities like corporations and LLCs are much more common now with people who have small business or are otherwise self-employed. Because an entity like a corporation or LLC is its own distinct entity, however, problems can sometimes arise. One of the problems I see by virtue of what I do is when the entity needs to go to court. For example, the entity might need to sue to collect from a customer or client who is refusing to pay their bill. Or, the entity might be sued by someone else for breaching a contract, for instance. If an actual person needed to file a lawsuit or defend against a lawsuit, they can hire a lawyer, but they can also represent themselves in court. If your business is the same as yourself (i.e. a sole proprietorship), you can represent your business also because the two of you are one and the same. However, if you have a legal entity of some kind — for example, a corporation or LLC — that ability goes away. In other words, if you have a legal entity for your business, you can’t represent that entity in California unless you’re also a California-licensed attorney. Phrased another way: legal entities must be represented by attorneys in court in California. In most situations, the cost of hiring an...
by Andy Chen | Oct 31, 2018 | California, Enterprise
A topic that often arises in the context of a business is non-compete agreements. As the name should hopefully suggest, a non-compete agreement is a contract in which a party agrees not to engage in a lawful profession, trade, or business. A non-compete agreement might arise with two potential competitors agreeing to divide a particular market between them. Collusion like this is generally illegal on, among other things, federal antitrust grounds which are waaaaaay beyond the scope of this blog post. The more common scenario I encounter involving non-compete agreements is where the restriction is not voluntary. A common scenario would be where an employee works for an employer who, deep in the legalese of the papers the employee signed when they hired on, forbids the employee from either going to work for a competitor or opening up a competing business. In other words, if the employee is fired or quits, they can’t go continue in the same line of work. The vast majority of people have experience, training, etc in only one line of work so the employer’s restriction effectively means that they cannot make a living if they upset their employer. Can an employer impose restrictions like this on an employee? In California, the answer – in general – is no and it is because of Section 16600 of the California Business and Professions Code. Section 16600 states: Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void. As with everything in the law, of course, there...
