I get the point, but I wouldn't want anyone reading that and taking the conclusion seriously. Forming an LLC in that case is pretty much a waste of time and money that offers a false sense of security.
Except that, realistically, most people aren't going to consult a lawyer or accountant for a small side project. I don't even really know how to hire a lawyer or accountant, or how to assess whether the person I pick is minimally competent to give me good advice, and I don't want to burn a few grand of my own money on a zero-revenue hobby project to guard against risks that will probably never materialise anyway. So instead, I'd chance it.
Without consulting a lawyer, you don't know what you are chancing. I hardly call that a good bet.
Not knowing how to get a lawyer or accountant is not a good excuse for not consulting one.
If you consult a lawyer for 1 project, you do learn from the lawyer and become a bit more knowledgeable for the next project and may not need to consult a lawyer a second time if the new project is similar.
Maybe you could explain how to consult a lawyer or accountant instead. That would actually be really helpful for a lot of people who have never needed to retain a lawyer or accountant, don't know what to look for, and have no idea where to even begin to do so.
1a. Ask people you know. For example, if at a company, maybe you can ask the legal dept for a referral for your personal project. Lawyers know lawyers. Even a divorce or real-estate lawyer will know other lawyers in different specialties or reputations of firms. Ask bankers, dentists, any small business people, etc. - they use lawyers too.
1b. Use Google. Call 5 lawyers and setup a meeting to meet them.
Step 2 - Interview them:
Interview them like you interview any potential employee. What is their experience with small IT projects? Are you small potatoes to them? What are their fees? Do they have legal associates to do the grunt work for cheaper than a legal partner (partner will still review and be responsible)? What do they suggest you to do for your side project? Ask why to see if they can explain themselves well. How well do you communicate with them? Do they respond to your emails or telephone calls quickly? Do they have other partners who can cover for them when they go on holidays or are busy with other urgent cases? Can they let you do some of the work such as incorporating and registering a trade name because it is easy (to keep legal fees low)?
Step 3 - Evaluate them:
As they work, get them send you all their documents. Read the legalese and ask more questions. Do they still explain themselves well. How long do they take to do the work? Attention to detail is important. If their work sucks or you don't communicate well with them go find a new lawyer.
> Not knowing how to get a lawyer or accountant is not a good excuse for not consulting one.
Lawyers and accountants industries are whole mess on its own. When you come to lawyer/accountant, he is really interested to charge you as much as he can, which creates a lot of conflicts of interests, and whatever he is saying to you can't really harm him.
One has to take calculated risks, and do research on his own to not be screwed by lawyers/accountants.
> I don't even really know how to hire a lawyer or accountant, or how to assess whether the person I pick is minimally competent to give me good advice
Reputation is one proxy you can use for trying to gauge competency - ask friends, family, or coworkers if they have someone they're happy with.
Ultimately, there's a few big things they need to do, and you can try to evaluate those things instead or as well:
1) Clearly explain things you need to know. This might be making you aware of paperwork you need to file, tradeoffs between choices, rationale behind why they're suggesting you do something, or what the tradeoff is so you can make your own decisions.
Some (many? most?) lawyers are willing to do a free initial consultation, so you can get a feel for this in person, if you don't have a recommendation or don't want to trust only reputation. Basically: Can they communicate effectively?
2) Keep you out of trouble. There's a limit to what a lawyer or accountant can do of course, but a pattern of surprise financial difficulties, or getting into frequent contract disputes or lawsuits are a bad sign. The IRS frequently correcting an accountant's filings would be another.
3) Stay on top of things. Is the accountant filing taxes late resulting in IRS fines? Paperwork not ready when they said it'd be? Asking for the same information several times because they keep misfiling it? Going incommunicado for months when you have questions?
It seems simpler in practice: It came up in conversation that my friend had gotten his will done. I mentioned I needed to get my will done. He liked his lawyer, and was able to explain some about what he liked about her approach and give me her name. So I scheduled a consult with her on her website after trading some initial questions over email, showed up as scheduled, and then traded more questions at her office. I didn't know all the right questions to ask - mine were mostly of the form "uhh, so what do I do?" - but she was able to volunteer explanations about state inheritance law that put her questions for me into context. And then she had recommendations for things to do and why, as well as things she'd recommend not bothering with and why (and the contexts under which that could potentially change in the future), without being pushy.
Based on my answers, she drafted a will for me, and I was able to come back and sign it a month later when I scheduled it. I think I paid half after the initial signing but before she drafted the will, and the other half after the signing? Now I can recommend her to my friends, or ask her if she has any recommendations for an accountant, or even other lawyers for specialized needs.
Could I have done more to vet her? Sure. But I did enough for my tastes. Can't let the perfect be the enemy of the good enough and all that.
Pro tip as someone who has experience in LLC-busting litigation: an LLC for an individual side project is totally a waste of time and money. In order to maintain the separation of liability, you need to maintain separate bank accounts, financials, everything.
If it's just a side hobby, why should you be getting the benefits of limited liability? The whole point of limited liability is to protect business investment, not hobbies.
And yes, that is the reason that CA charges $800 for LLC registration. Because if $800 is too big of an expense...then you're not running a business.
Definitely retain counsel no matter what for anything important.
I'm just saying I'd be surprised if there were a situation in which a lawyer would advise that registering an LLC is reasonable protection from all legal repercussions of your solo side project.
But would a lawyer ever advise against forming an LLC for a side project that might have liabilities, or just advise on the best language and jurisdiction? To me there is a big difference between "if you really screw up, they could try to pierce the veil and go after you personally" and "if you do everything right and your business still fails, you're automatically personally liable."
Probably not. I'm not saying "don't form LLCs" — it's probably in itself a good idea for any slightly serious project — but rather that it isn't a substitute for complying with the law.
I say this from experience because I once made exactly that mistake (formed an LLC that was otherwise unnecessary specifically to protect against potential legal consequences of a side project, only to find out from a Google Alert six months later that a lawsuit had been filed against me personally).
All legal repercussions? Definitely not. You're generally personally responsible for torts and crimes you personally commit, even if the company may be too. And personal guarantees around contracts or statutory liability provisions around wages and taxes can increase personal liability further.
But yes, when the proper formalities and separations are maintained, there are many situations where registering and operating through an LLC will limit personal liability.
Example: company signs a contract with no personal guarantee but with a commitment to make 12 monthly payments. The LLC later lacks the funds (contract was signed in good faith). No personal liability.
Disclaimer: I'm not a lawyer, just a law geek layman and former law student. I agree that retaining counsel is the right advice for anything important.
Example: company signs a contract with no personal guarantee but with a commitment to make 12 monthly payments. The LLC later lacks the funds (contract was signed in good faith). No personal liability.
I use to make good money going after contractors who thought their LLCs would protect them when they vanished with client money. Veil-piercing is actually quite simple for one-man LLCs. As a practical matter, the burden is really on the one-man LLC to prove that the veil should not be pierced, since it's usually pro forma for the plaintiff to show some evidence that the proper formalities and separations were not maintained. (For example, paying for a personal expense like lunch with LLC funds, even once, is enough to shift the burden to the LLC to show that the veil should not be pierced. Not having proper receipts for gas. Attempting to claim a business deduction for part of your garage if you're not charging the LLC market-rate rent. It's a really long list of don'ts. )
I think we're agreeing, mostly. The proper formalities and separations need to be maintained, and bad personal behavior is not shielded. I did it correctly when I had a one-man LLC, but you're right many don't.
Misconduct like "vanishing with client money" is a separate personal tort and/or crime (depending on the specifics) and would make it easy to pierce the veil anywhere regardless of formalities and separations.
That said, for more normal situations that aren't about misconduct, different states take different levels of strictness in analyzing the veil piercing question. YMMV.
