Business Law

Does Using an LLC Ensure Compliance With AB5?

By March 1, 2020 March 12th, 2020 No Comments

Without weighing in on the politics behind the law, it’s safe to say that California Assembly Bill 5 is wreaking havoc with many independent contractors and the businesses who hire them. We’ve talked about the efforts to change the law and the exceptions laid out within the law for certain professions. But how are businesses and contractors adapting? As the San Francisco Chronicle reports, some businesses are requiring contractors to form LLCs in order to keep working with them. Does this work?

The ABCs of AB 5

To understand why businesses want contractors to have LLCs, let’s start by looking at how the law defines the new rules for independent contractors. AB 5 was launched with a deceptively simple set of guidelines for determining a basic level of compliance with independent contractor regulations called the ABCs: contractors must be A) self-directed, B) providing a service beyond the scope of the business’ normal functions, and C) operating an independent business. Unless a contractor falls under one of the excepted categories, like insurance agents and freelance writers who publish less than 35 pieces a year for that client, they must meet these requirements.

Where Do LLCs Come In?

So how do LLCs factor into the ABCs? The short answer is… they really don’t. Having an LLC has no real impact on whether a contractor’s work does or does not meet the requirements for AB 5. It may make things look more independent, but, legally, appearances aren’t everything. Businesses that require contractors to form LLCs are likely doing so “just in case,” but the truth is that it doesn’t change the substance of any of the regulations for independent contractors.

So Should Freelancers Form LLCs?

There are lots of good reasons to form an LLC, from deducting business expenses to limiting your liability. There’s nothing illegal about a business refusing to work with anyone who doesn’t have an LLC. That means that if you’re a freelancer and a client is requiring you to form an LLC, you need to decide whether that client is worth the cost and effort of forming one. This is not a trivial consideration—in California, most LLC owners must pay an annual $800 franchise tax in addition to a $70 filing free.

When it comes to your business, an experienced business lawyer like Brian A. Newman in Los Angeles County can help you stay in compliance with all regulations and make the best decisions for the future of your enterprise. Call (424) 254-5186 today to schedule a complimentary consultation for your case.