Why you should probably have an LLC for side projects

http://stu.mp/2010/09/why-you-should-probably-have-an-llc-for-side-projects.html

by conesus • 16 years ago

17 8 16 years ago

tptacek2• 16 years ago

I think it's handy to have an LLC set up for a number of reasons, but the point raised in this blog post isn't one of them.

Corporate protection from personal liability is extremely valuable for contracts, and especially to protect you from your company's creditors. It does not however automatically shield you from liability to negligence claims, and, more generally, from tort claims of all sorts.

One reason you don't hear about this very often is that established businesses tend to maintain liability insurance, and in practice people sue with the intention of recovering money, and what they're targeting with those suits is the company's insurance.

This might be a good argument for buying professional liability insurance --- and, indeed, all contractors should (and probably have to, as a contract term). But for your open source side project, it's a moot point; use any well-known open source license and your users are already conceding a disclaimer of warranty and limitation of liability as a term of using your code.

gte910h2• 16 years ago

You still run the risk of being sued open source or no.

I don't think the shield of LLC liability or open source license disclaimer will necessarily help the guy there (as people can still personally sue him), but I can't see it hurting.

It's also important to distinguish between liability and errors and omissions (what tptacek called professional liability insurance). Make sure if you do buy insurance, it's the right type. Each type protects you against claims only of a certain type.

tptacek2• 16 years ago

Forming an LLC won't hurt you. It will help with other things. But it will do nothing to address the legal risk this guy is talking about.

greg_holsclaw• 16 years ago

The costs associated with starting an LLC vary from state to state, but usually side jobs don't rise to level of needing liability insurance. If your side project is big enough to be a lawsuit target, then it isn't a side project anyway. Build it into something more, and form an LLC, or just get some kind of business/manager's insurance.

sahillavingia• 16 years ago

Just created an LLC for this purpose, as well as combining all of my side projects under one brand.

It costs a significant amount, and I'll soon see if it's worth it...

ams6110• 16 years ago

I'm sure things vary state to state, but where I am you can form an LLC online at the Secretary of State website in 10 minutes, for about $100.

A couple of things I've been advised by my attorney (not that I'm giving anyone else legal advice...)

If you form an LLC but then don't operate it "seriously" (keeping records, having written articles of organization, etc) a court may nullify your "limited liability" protection.

The author states that "Unfortunately, the US is a litigious country and any idiot can sue you for anything." and while technically true, in practice it's not that easy. Outside of small claims, you can't file a civil complaint unless you hire an attorney, and in most civil litigation each side pays their own fees. There may be exceptions for gross negligence but that would be pretty hard to prove in a contract dispute for software development. So unless a fairly substantial amount of money is at stake it's not going to be worth doing. No good lawyer is going to bring a lawsuit that costs his client more than he can recover, and you also have to take into consideration the ability of the other party to pay (an LLC that has assets comprising a laptop computer and a few thousand dollars in the bank is not going to be a target for any litigation).

georgemcbay• 16 years ago

In California there is a minimum $800 per year tax on all LLCs regardless of whether or not you made any money from the venture, so that kind of nullifies the potential benefits for most people, IMO.

$800 is a very real cost and the chances of anyone suing you over a side project are so incredibly remote that a $800/yr insurance policy versus being sued is severely -EV.

YMMV in other states.

Why you should probably have an LLC for side projects

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