Can I Set Up An LLC To Avoid Personal Liability In A Lawsuit?

http://www.litigationandtrial.com/2009/05/articles/the-law/for-people/can-i-set-up-an-llc-to-avoid-personal-liability-in-a-lawsuit/

by brlewis • 17 years ago

95 27 17 years ago

litigationandtrial.com

alain94040• 17 years ago

Hopefully, liability never becomes an issue in your startup, but hope is not an acceptable plan :-)

So it's good to debunk the myth of the fake LLC. I just think the article goes a bit far (but the author is a lawyer and I'm not).

Either way, it matches my experience: in the US, you can get sued pretty much no matter what steps you have taken not to get sued...

dkokelley• 17 years ago

Well, from what I understand, anyone can sue anyone for any reason. It's whether or not they will win, and more importantly what they will win that people go to great lengths to protect against.

FooBarWidget• 17 years ago

If their goal is to bankrupt you, then doesn't starting a lawsuit fulfill that goal, regardless of whether they win?

torr• 17 years ago

Setting up and keeping up an LLC is a bit of a pain in the neck. Also working out how to pay yourself, keeping accounts separate, and so on takes extra time.

One benefit of an LLC might be a somewhat more professional image (for some customers anyway). Also, my guess is that corporate customers may not want to do business with you unless you're an LLC (though I wouldn't know for sure as I have no corporate customers).

Anyone here go from having your own LLC to dissolving it and going sole proprietership?

bonsaitree2• 17 years ago

"A pain in the neck"

You've got to be kidding.

1. Trivial law work is required. 2. Annual total business license fees range from ($20-$1,000) depending on location 3. Trivial bank account setup

All of this can be accomplished literally in the span of a few hours. I would argue the biggest maintenance costs are related to tax filings and accounting, but they're more than offset by all the available expense write-offs.

It's really a no-brainer decision with today's streamlined systems and litigious society. Additionally, having an LLC operating agreement (even a generic one) in place, usually makes converting to a C-corp (to be available for VC financing) much easier.

blurry• 17 years ago

Not so in New York. You have your UBT (over $3,000 per year), your publication requirements (over $1,500 per registration), and more. Considering that generally your clients cannot sue you for more than the contract was worth in the first place (excepting rare cases of willful negligence etc.) it is far from a no-brainer.

jey2• 17 years ago

LLCs are simple. Maybe you're thinking of C-corps and the mountain of paperwork involved with that?

I have an LLC for my consulting business, mostly so I don't get qualified as an employee of my clients, have "limited liability", etc. It's simple in terms of paperwork because it's treated by the IRS just like a sole proprietorship as long as the LLC only has one employee. The biggest downside is that I have to pay an $800/year LLC tax to the state of California.

jey2• 17 years ago

Oops, s/qualified/classified/...

menloparkbum• 17 years ago

Anyone here go from having your own LLC to dissolving it and going sole proprietership?

Yes. I still don't know what the advantages of a one person LLC are, even after doing it myself. On the other hand I didn't find it a pain in the neck. I still keep separate bank accounts, have a tax ID, etc. I dissolved the LLC because I moved to another state. I think the LLC makes more sense if you have more than one person. Maybe it helps you not seem like a temp employee if you're a consultant and only have one client. However, that seems like more of an advantage to the client, not the LLC owner...

dan_the_welder• 17 years ago

I have one of each, a sole proprietorship and an LLC. LLC costs $150 a year in Florida. I should ditch the SP and do both as LLC, but habit is a powerful thing.

MaxwellKennerly4• 17 years ago

I'm the author; thanks for reading and let me address it "go[ing] a bit far."

In the context of Hacker News readers (presumably startups looking for funding and with employees) there are many good reasons for setting up an LLC, including limiting liability if one of those employees gets sued, and limited contractual liability. However, the point I was getting at is that the LLC doesn't totally shield you from liability, a misconception that has brought a lot of trouble to people who played fast and loose with their conduct and ended up staring down the barrel of potential personal liability.

The core point is: don't try to "dodge" liability. Instead, take steps to reduce the likelihood of causing harm and get a good insurance policy.

mattmaroon• 17 years ago

That article was very useful. I wish we had more attorneys writing such entries for the rest of us. There are a striking number of legal misperceptions out there among businesspeople.

micks562• 17 years ago

Do you have any specific topics in mind?

sports_guy• 17 years ago

Thanks for the article. Do you have any insight on the best way to protect yourself from what seem like mostly frivolous suits that can come out of no where. For a contrived example say Valleywag which is banned from HN decided to sue PG for defamation or something similar and won a large verdict. Whats the best insurance to hold against HN/PG going bankrupt?

MaxwellKennerly4• 17 years ago

There's defamation-specific insurance out there, typically called "media liability insurance," which fills that need. I believe Chubb Insurance just released a new "MediaGuard" policy that's supposed to have pretty broad coverage in that area.

For reference, there are two main risks covered by liability insurance: "defense" and "indemnity." The former pays the costs of a legal defense, the latter pays a settlement / verdict. Most media liability insurance policies cover both, but can charge different premiums based on the "retention" for defense and/or indemnity, i.e. how much you have to spend before the insurance kicks in.

If the big worry is paying lawyers to defend a "frivolous" suit, then focus on the former; if the big worry is a "large verdict," then focus on the latter. A common way to save on the premium is to have a sizable retention -- like $20,000 or more -- but then have good coverage after that. If you get sued, you might have to eat the first $20k in legal fees, but won't get bankrupted by the legal fees or the verdict.

sown• 17 years ago

Does this include anonymity? I am not trying to dodge the law or liability but I am wondering if using such a thing like LLC or s-corp would?

tectonic• 17 years ago

Does an umbrella insurance policy cover if a web property owned by an LLC is sued for copyright infringemet?

MaxwellKennerly4• 17 years ago

To answer two questions in this thread: a number of the media liability policies include copyright infringement, though typically only of text (and sometimes images), with specific exclusion of hosting media like MP3s or DVDs, and an exclusion for intentional copyright infringement. That is to say, they're geared more for someone who exceeds the bounds of fair use than for The Pirate Bay.

As for anonymity, though the LLC is an independent entity which can conduct its own business and enter into its own contracts, and thus can keep a name out of its general business, in the event of a lawsuit most courts will permit discovery into the operations / management of the LLC, and sometimes even into the ownership. There's no specific legal protection for anonymity for incorporated businesses; the only concrete anonymity protection comes from various First Amendment doctrines, which usually don't apply to commercial activities.

mattmcknight• 17 years ago

Well, the general liability is the financial liability. So, if the LLC borrows money, the lender cannot come after the assets of the individuals (unless they give a personal guaranty). This also applies if the LLC is sued.

I suppose the point here is that a smart person will sue the individual in addition to the LLC. Even if you are sued only as an individual, your ownership stake in the LLC is at risk.

dryicerx• 17 years ago

Any thoughts on getting sued regarding IP Infringement as a LLC, how does the liability trickle down to the people behind the LLC.

For example company X sues a LLC stating that they have violated a patent for example?

MaxwellKennerly4• 17 years ago

If by "people behind the LLC," you mean the investors, then, yes, their liability is typically limited.

I write "typically" because investors can be liable if either (1) they participated in the infringement or (2) a court decides to "pierce the corporate veil," which is rare, but can happen if an investor abuses an LLC (undercapitalizing it, disregarding corporate forms, etc) for the purpose of avoiding liability.

newsio• 17 years ago

My umbrella insurance policy includes coverage for defamation-related suits, and it seems to be standard for the insurance company's customers (i.e., I did not have to request it). It's not like I am going out of my way to provoke such suits, but it's nice to have.

Can I Set Up An LLC To Avoid Personal Liability In A Lawsuit?

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