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hello everybody this is Elana pearl and I am here for your weekly fairy god lawyer live update so I've got a really good topic for you this week and it is the top four mistakes that I see when people form their LLC on Legal Zoom and I actually have my notes here because this is a really important topic and I want to make sure that I cover everything and don't forget anything so I can't tell you how many people come to me for their estate planning they come because they want to protect their family and their assets and maybe you're in their business and once we start getting into things we get into their business and I find out that you know they formed this LLC on LegalZoom a couple years ago maybe they got a package of paper work from Ella or LegalZoom that they never really did anything with and that's about it and you know there's a lot of problems with this and even though it may seem like all you need to do in California is just file a couple documents with the secretary of state either yourself or through LegalZoom and then you have an LLC that's really not the case and one of the biggest problems is that if all you do is just pay LegalZoom to file some documents for you you're not going to know what you don't know about how to properly maintain this LLC so you actually get the benefits for why you filed for it in the first place for why you formed it in the first place so in other words you've sort of just wasted your money if all you do is just pay Legal Zoom to file some paperwork for you because you don't actually have a real business what you have is a piece of paper and you dressing up as a business so here are the top four mistakes that I see when people go it alone or try and use a online entity like Legal Zoom so mistake number one is not keeping the right records for their business and not respecting the formalities of having a business so right off the bat a lot of times people they just get started on Legal Zoom they get their paperwork and then they don't really know what to do from there with with respect to keeping the right records and respecting formalities so their personal assets and their business assets are sort of mixed and commingled it's not clear what's what they don't have any records of the cash or the property or the assets or even the services that they put into the business to get it started they use the business accounts to pay for personal accounts and personal accounts to pay for business accounts I asked them about a corporate record book and they look at me with sort of a curious face and say what's that they sign documents the wrong way they sign them just in their name instead of making it clear that they're signing on behalf of the business and they generally just don't know what they need to do to treat this business like a separate legal person that's not just an extension of yourself now this is really important because most people have probably heard of the concept of piercing the corporate veil but you may not know what that actually means so let me break it down for you so it's a legal doctrine and basically what it says is that if you ever get sued and the Court finds that you didn't respect all these formalities of having a business and you really didn't treat it the way it needed to be treated so that it had a legal existence separate from you then the court is gonna find that it's just really what's called your alter ego it's just an extension of you and if you get sued for something that happens in the business the court is going to pierce that corporate veil that would otherwise exist between you and the business and all of your personal assets are going to be at stake like your home your car an investment property and really the whole reason in the first place that you went on LegalZoom to form this entity is not going to exist when it's actually really needed so that's mistake number one is not knowing how to respect the formalities of the business not knowing how to keep good records how to keep adequate records of capitalization how to document decisions of the business how to keep a corporate record book and generally how to do everything that an ordinary person just wouldn't know how to do by you know when they file an LLC with Legal Zoom and let me tell you something LegalZoom not gonna tell you so you need to figure it out for yourself or get good advice and counsel so mistake number two that I see often when people either go to loan or file for an LLC on Legal Zoom is they don't consider how they want to be taxed so you've probably heard of an LLC and you've probably heard of an S corporation but what you may not know is that an S corporation is actually not a legal entity you can't form an S corporation as an entity in the state of California it is actually a tax election it is a way that you may choose to be taxed when you form a business if it's the right choice for you now you can have an LLC that elects to be taxed as an S corporation and that may be something that is right for you and is the best situation for you but if all you do is file some paperwork on LegalZoom then the default is you're going to be taxed as if you never even filed that LLC if you're the only owner so that may be right for you it may not but the point is is that if you don't get the advice you need and you don't do this analysis you could be missing out on some tax savings available to you and you could be paying way more than you really need to because all you did was file a document with LegalZoom and thought you were good to go so you definitely want to make sure that you do an analysis of how you should be taxed and the best way to be taxed for your personal situation and for your business because to be honest if you don't do these things if you don't learn how to maintain the business properly if you don't do an analysis of the best way to have your business tax then there really is no purpose of even spending the money on LegalZoom to form this entity because when the rubber hits the road and it actually batters you're not gonna be seen as having a real business just because you have a couple documents from LegalZoom so mistake number three is that they don't understand the difference between inside liability and outside liability and this is really important for people in California and a lot of people get this wrong so let me explain to you the difference so inside liability it's something that happens because of the operations of the business so let's say you have an LLC and you own a pizza joint and somebody comes in and there's a glass shard in their slice and then you get all cut up and they see you for a million bucks so that's an inside liability because it's something that has occurred from the operation of your business and if you've respected corporate formalities and you've done things the right way you've kept good records and hopefully you have good insurance then you're gonna be ok you know it's gonna be it's not gonna be a happy day but you're gonna be ok your business is probably gonna be ok your insurance company is going to provide you with a lawyer and they're gonn
Thanks for your comment Tristan Wellbrock, have a nice day.
- Stephania Colbeth, Staff Member
welcome back to this week's frequently asked questions let's see who's got a question for us today it is danny3xd and they ask wow great site there's a ton of great information and links somebody worked really hard on this and did a great job thanks it's not a question but i'll take it quick question there it is due to illness i abandoned my llc a few years back i am sure i received requests from the state but i bravely ignored them i think being a little more with it now how should i address this if at all i did nothing with it and made no income but thanks again really well written and laid out hope you're feeling better many states will dissolve llcs after a certain period of time if the llc does not remain compliant such as if they fail to file an annual report connecticut is no different and llcs that fail to file their annual report with the state will lose their good standing and may end up dissolved or forfeited if you want to revive an llc you'll have to contact the state for reinstatement package if your llc has remained compliant it will remain active until you file a certificate of dissolution with the state connecticut provides helpful instructions on how to do this here at your government site it would also be a good idea to consult their page about closing a business that addresses certain potential state tax issues thanks for the question again glad you're feeling better and tune in next week when it's school colors day and it's orange of course we're always orange except for me i will always wear black you
Thanks razdraz7 your participation is very much appreciated
- Stephania Colbeth
About the author
I've studied american politics at University of Illinois at Urbana-Champaign in Champaign and I am an expert in cultural policy. I usually feel bewildered. My previous job was poets and lyricists I held this position for 31 years, I love talking about electronics and trampolining. Huge fan of Backstreet Boys I practice wakeboarding and collect bazooka joe comics.
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