Legal Question in Business Law in California

If he uses a properly-formed, capitalized and rum LLC, your friend is at risk only of losing his business, not his everything. So, it's a good idea, but if the business itself is valuable, he'll also want liability insurance.

There are two general steps or processes he'll need to accomplish. The first is formation of the LLC in the first place, i.e., bringing it into existence. The second is transferring the business from personal ownership into the LLC's ownership.

Each of these has several sub-steps that are a bit too numerous or detailed to list and describe in a LawGuru posting. Retaining a lawyer to handle it might be advisable. Alternatively, find a paperback self-help law book on setting up and running a small business, preferably one that is LLC-oriented and California-oriented.

Here are a few of the sub-steps to consider:

1. Locate Form LLC-1 on the Sec. of State Web page at www.ss.ca.gov, read the instructions carefully, fill it in and submit with the fee.

2. Prepare and sign an Operating Agreement. If the friend is the sole owner, it will be an agreement with himself, a kind of legal fiction, but at least it fulfills the legal requirement to have a roadmap for operation of the company. If co-owners are ever added, they become parties to the agreement (which will probably require amending at that point).

3. Prepare documents transferring the business assets, including goodwill, to the LLC in exchange for some evidence of ownership of the LLC, probably a "membership" in the LLC. Be careful if the business has a lease between its landlord and the proprietor - it may be advisable or necessary to get the landlord's prior approval to the assignment of the lease to the LLC.

4. Get a taxpayer ID number, business license, sales tax account,EDD account, etc. in the LLC's name. If there is insurance, have the policies rewritten. Get a new bank account and credit-card processing service. Get new stationery.

5. Make sure books are kept and funds segregated in a way to make clear that the LLC is a separate entity, not an alter ego of the owner.

Make sure an LLC is the best business form. If he does not intend to take on partners or investors, incorporating and electing S-Corp. tax treatment may be significantly more tax advantaged than an LLC. Any time you form a business, and especially when you change the legal form of an existing business, your tax and legal advisors need to work together to get the best result.

I have formed LLCs for my clients for a reasonable fee. They have the peace of mind knowing it was done right and there has never been a problem. Contact me directly.