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Can minors set up LLC in California Starting a Business

Discussion in 'Starting a Business, Incorporation' started by Keyad, Jul 17, 2020.

  1. Keyad

    Keyad Law Topic Starter New Member

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    Hello,

    Two rising higher school students start online trading business and make some money. The parents are really concerned about liability and do not want to intermingle the children's business with parents' wealth.

    Can minors set up their own LLC and run their owner business? The LLC is going to file as C corp for tax issue, and buy the liability insurance for the LLC itself.

    Thank you,
     
  2. adjusterjack

    adjusterjack Super Moderator

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    If minors expect to successfully run a business they should at least be capable of figuring out that LLCs are the purview of the Secretary of State and that's where the question should be addressed.

    The parents could still be liable for the activities of their minors that occur under their watch. Slim but possible.
     
  3. mightymoose

    mightymoose Moderator

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    There is no age requirement to register a business, but status as a minor could complicate other legal issues.
     
  4. Keyad

    Keyad Law Topic Starter New Member

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    Thank you for your quick reply. The parents' concern is to limited the liability to the children's business. Yes, there is no age requirement to register a business in CA. And the parents prefer to file income tax return for LLC as a C corp so that the net profit won't be a matter for the parents' own income tax liability.

    What do you mean "status as a minor could complicate other legal issues"? That's exactly what parents concerned. Say, the children purchase some electronic equipment or gadgets, or products online and then sell the electronic products to their clients. If, I mean, it could happen, the clients have some accidents caused by the electronic products, the clients will probably come to sue the seller (the two minors). It may happen. If that happens, will the parents be responsible for the liability even if the business was conducted under an LLC?

    Thank you,
     
  5. army judge

    army judge Super Moderator

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    California minors may enter into contracts, but they may disaffirm those contracts (i.e., such contracts are voidable by the minor).

    The general rule regarding contracting with minors or infants is that such a contract is voidable by the minor. This rule has been established to protect younger individuals who may not fully grasp the consequences of certain contracts. Minors are believed to lack the capacity to contract. Therefore, courts and statutes provide minors with the ability to exit the contract at the minor’s discretion. This right does not belong to the other contracting party; it is only at the discretion of the minor. So while the contract is still valid, the minor can basically leave it as he or she sees fit. Due to the fact that such a rule can be abused or otherwise lead to harsh results, a variety of exceptions have been carved out of the general voidability of a minor’s contract.

    Allowing a minor have the ability to disaffirm the contract would make most adults who MIGHT contract with the minor NOT to do so.

    This website has a lengthier discussion of contracts, minors, and voidability/volatility of same.

    https://www.hg.org/legal-articles/can-a-minor-enter-into-a-contract-34024

    You might want to speak with a CA attorney to fully understand why it might be advantageous for your aspiring child to wait until he/she has achieved majority status to seriously pursue entrepreneurship and use any excess time to focus on her/his studies.
     
  6. zddoodah

    zddoodah Well-Known Member

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    Trading what?

    Liability for what? Also, are you one of the kids or one of the parents, and how old are the kids?

    They can run their own business, but they cannot form an LLC because they lack the capacity to contract. See Cal. Civil Code section 1556, et seq. and Family Code section 6700, et seq.

    The parents could set up an LLC and make the kids members of the LLC, but I'm skeptical that an insurer would issue a policy of business liability insurance unless the parents were also members and managers of the LLC.

    You should also take a look at Civil Code section 1714.1, which makes parents liable, to some extent, for certain torts committed by a minor.
     
  7. Tax Counsel

    Tax Counsel Well-Known Member

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    That would not, in most cases, be the best way to go. In general having the entity taxed as a C-corporation is likely to cost you more in tax than being treated as a partnership or S corporation.

    Note that forming a LLC in California will subject the LLC to the California franchise tax. This tax is a minimum of $800 and can be more depending on the income of the business. A LLC does not protect the owners of the business from all liability that may arise from the operations of the business. Significantly, the kids will still be personally liable for their own negligence (along with the LLC). And they'd be liable for any debts of the business that they personally guarantee, at least to the extent that they are unable to disaffirm those debts due to minority. They can also be personaly liable for certain taxes or other obligations by statute. They really ought to consult a business attorney to see if forming a limited liability entity like a LLC or corporation will really help them all that much in avoiding personal liability for debts. Depending on the details of this "online trading business" it may be that it wouldn't help that much, and if they wouldn't benefit from it then they can save money by avoiding the franchise tax by operating as a general partnership instead.

    They definitely need to consult a business attorney and also a tax professional to help them set up the online trading business properly. There is a lot more involved in running a business than most teens realize, and it'd be shame for them to screw this up and end up starting out their adult lives with a large debt as a result of it.
     
  8. Keyad

    Keyad Law Topic Starter New Member

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    Taxpayer, say "AAA foundation", is a non profit organization set up in CA and runs it very successful.

    Taxpayer set up a new non profit organization, say "BBB Foundation" at the same time. No activities.

    The purpose of set up a new non profit organization "BBB" is to take this name so that other organization cannot register this name.

    Do that have to do that to keep the second name? Can the non profit organization file a DBA name?

    I did a DBA filing for business years ago. The original name of the business is XXX Enterprises, DBA "YYY", no INC, Corp, LLC, included in the DBA.

    Can we apply DBA for a Non profit organization?

    Another question. We canceled "BBB" through Secretary of State first. Now apply for FBN "BBB"

    The DBA "BBB" is filed to the County, not the State. Right? Then how can we make sure other people cannot file to the State SOS with name "BBB"? FBN "BBB" is not an effective name included in the SOS database any more.



    Thank you,
     
  9. Keyad

    Keyad Law Topic Starter New Member

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    Well, that's pretty new to me.

    I was told that LLC's owner has limited liability, as long as the owner does not intermingle the funds between personal and business. That's why it is called LLC. In a general partnership, the general partner is personally responsible for the partnership's debt.

    I am not a professional with law practice. But was told by some many accountants. Please refer me any authority's so that I can do research this weekend.

    Thank you,
     
  10. Keyad

    Keyad Law Topic Starter New Member

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    [QUOTE="



    You might want to speak with a CA attorney to fully understand why it might be advantageous for your aspiring child to wait until he/she has achieved majority status to seriously pursue entrepreneurship and use any excess time to focus on her/his studies.[/QUOTE]
     
  11. adjusterjack

    adjusterjack Super Moderator

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    You need a business lawyer and a tax pro.
     
  12. mightymoose

    mightymoose Moderator

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    This is not accurate.
    There is nothing prohibiting minors from registering an LLC.
    Contracts are among the "other complications" previously referred to. Contracting is a separate issue.
     
  13. Tax Counsel

    Tax Counsel Well-Known Member

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    A LLC provides the owners with some limited liability. A lot of people, including some accountants, misunderstand the extent to which a LLC gives the owners protection from various debts of the business. Too many people think that a LLC provides the owners absolute protection from all personal liability for debts that might arise from the operation of the business. It doesn't.

    A corporation, LLC, or other limited liability entity shields owners of a business from personal liability for the debts of the business that would occur simply because of being an owner. But the liability is not absolute.

    First, the owners are, of course, liable for any debts that they personally guarantee. Most major creditors of a small corporation or LLC, including bank lenders, landlords, utility companies, any supplier that ships on credit, etc., will require personal guarantees from all (or at least the principal) owners prior to doing business with them.

    Second, you are always liable for your own negligence. Thus, let’s suppose that Alan and Bob own a LLC that operates a small store. Bob works the store himself and is the LLCs only employee. Alan never works there and is simply an investor in the LLC. Bob is negligent in failing to clean up a water spill that occurred in the store and took no steps to warn customers of the spill. Cindy slips in the water and is injured. Bob is personally liable for Cindy’s injuries because he was the one who was negligent and thus caused her injuries. The LLC, as Bob’s employer is also liable for Cindy’s injuries. Alan, however, would be protected from personal liability for Cindy’s injuries because he wasn’t the one who was negligent and he is protected by the LLC form of ownership from being liable just because he’s an owner.

    Third, the law provides that owners or others may be liable for the debts of a business even though the business is operated by a limited liability entity. For example, some tax obligations (typically employment taxes and in some states sales taxes) of a limited liability may also become personal liabilities of the owners or other responsible persons in the company because the tax statutes expressly provide for that.

    Finally, owners may be liable for the debts of the business if they fail to sufficiently honor the separate existence of the entity. Very generally this means that the owners have blurred the distinction between themselves and the entity by doing things like having the company pay for personal expenses of the owner, the owners using the entity’s assets for personal use, and so forth. Several different doctrines, like piercing the corporate veil, alter ego, and nominee may be used by creditors of a limited liability entity to go after the owners personally in these sorts of circumstances.

    Generally the biggest benefit of the LLC is that it shields an owner from personal liability for the negligent acts of other other owners or employees of the LLC (though the owner remains liable for his own acts of negligence) and for contract debts of the LLC for which the owner did not give a personal guarantee.

    Thus, it may be that your particular business might not even benefit all that much from the limited liability that a LLC or corporation offers. That’s going to depend a great deal on the details of your business.
     
  14. zddoodah

    zddoodah Well-Known Member

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    Huh?

    One would assume so.

    I have no idea what "apply DBA for a Non profit organization might mean," but I would assume you have this ability.

    Sigh...the operating agreement that every LLC must have is a contract. Minors lack capacity to contract. Can it be done. Sure. Two minors, each of which has the ability to disaffirm, can sign an LLC operating agreement and file the necessary docs with CASOS. Great, but absolutely no one who cares to dig into the entity will do business with its.

    Right, but "limited liability" is not the same thing as "no liability."
     

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