This is forum where you can submit business and legal questions directly to Jeff Unger. Please submit your question below in the comment field. Please note that all matters discussed here are not to be used as professional legal advice.
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I am starting a small production company to film a web series. My friend has told me that I should form a LLC to protect myself.
From Jeff: Congratulations on your new web series. Both a corporation and a LLC would protect you in the same way, but a LLC can be considerably more expensive to operate. In California, a LLC must pay a “gross receipts fee” on gross revenue. The fee kicks in once you have $250,000 in gross revenue (even if there is no cash flow), and ranges from $900 to nearly $12,000 annually. There is no such fee for a corporation. However, if the gross revenue from the web series is anticipated to be less than $250,000, a LLC would be just fine for new company. Plus, unlike a S-corporation that can only have individuals as shareholders, LLCs can have any sort of owner. This means that LLCs are considerably more flexible if you are going to raise capital from investors in the future.
Wow. I just paid my California gross receipts fee for the apartment building I own. It was $2500, and the building isn’t even cash flowing any more. What should I do?
From Jeff: I feel your pain. The California gross receipts fee is out of control, and it’s especially painful now that vacancies are rising. An alternative would be to convert to a limited partnership. Limited partnerships pay a flat $800 annual fee, but the downside is that the general partner gets no liability protection, so you would need to form a second corporation or LLC to act as the general partner. That means it would take two entities to get the job done – the limited partnership and the corporate general partner, so the real cost of the structure would be $1600 plus the cost of the additional tax return. A decent savings nonetheless.
I have just written a treatment for a new project, and my accountant tells me that I need to incorporate. I’m excited, and I hope I get an offer that moves to Los Angeles. Should I form a NY corporation?”
From Jeff: How exciting, Annabelle! It sounds like forming a New York corporation would work for you today, but if you move to Los Angeles, you would be stuck paying New York franchise taxes and filing a New York tax return. I suggest you consider forming a Delaware corporation and “qualifying” the corporation to do business in New York. You might incur a little bit of extra expense to maintain the corporation in Delaware, but it wouldn’t be much, and the good news is that you could pick up and move the corporation to California very easily if your career takes you to LA. To do that, you would “surrender” the right to do business in New York and simply qualify the corporation to do business in California.
I was laid off recently, and I am starting a new construction company. I’ve heard that Nevada is the place to set it up. What do you think, Jeff?
From Jeff: The idea of forming a corporation in Nevada is one of the biggest myths of the business world. Unless you are actually planning on doing business in Nevada, there is no benefit to forming a corporation there. If you do so, you would also need to “qualify” to do business in California, which subjects you to the same fees, taxes, and laws that would apply if you form the corporation in California in the first place. Plus, you would have to pay Nevada annual fees, a business license fee, satisfy annual filing requirements, as well as incur the cost of a Nevada resident agent.
Do I need a lawyer to start a LLC?
It’s so easy to jump online and form a new company without a lawyer, but the initial steps of forming a company (filing the Articles) set the wheels in motion for all sorts of ramifications. That one little act – filing the Articles, which consists of one piece of paper and a nominal filing fee – is a decision that sets a business down a path. A path that is very hard to change without delay, inconvenience, and expense. It pays to learn exactly what decisions are being made when the Articles are filed. I’m not suggesting that every entrepreneur in America should use a lawyer to form a new company, but if you don’t, I would suggest that you speak with a CPA or some advisor to learn the ramifications of filing Articles. Without a lawyer, you can easily get the process started, but first educate yourself on the right entity choice, jurisdiction, structure, etc. Doing so will avoid unbelievable inconvenience later.