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 make tons of money somehow still manage to pay zero federal income tax. Here’s a CNBC article about that that was originally published in April 2022 and updated in June 2023.
Can you make an argument that deliberately trying to pay zero tax or to limit how much an injured plaintiff can recover is unethical or immoral? Sure. Nevertheless, the fact still remains that the law does permit a business owner from using various techniques to do that. Without some sort of protection or assurance that, for example, a business owner won’t lose their house in the event their business gets sued, no rational person would undertake the risk of starting a business.
In my opinion, all of the laws and ideas about LLCs flow from ths basic desire to minimize legal liability and tax liability.
If you have any suggestions for future posts about LLCs, leave a comment down below or send me a message.
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