08/18/2015
Why Do I Need An Attorney To Help Me Form A Business?
Many new business owners learn that one does not need an attorney to file articles of incorporation (for a corporation) or a certificate of formation (for an LLC) with the Secretary of State. In fact, on-line fill-in-the-blank forms make the process easier than ever. Many wonder why they need an attorney at all. You, too, may not need an attorney to form a business, IF you know how to address the following issues.
1) Which entity is right for my business? – Most small businesses, though not all, should be either limited liability companies or S-corporations. In many cases, choice of the wrong entity form (between these two) can have serious tax consequences. In a small percentage of cases, the best choice is neither of these.
2) What answers do I want to give on the form? – All of the fields look deceptively easy, but some are not. Should your LLC be member managed or manager managed? What kind of stock is your corporation going to issue? Who will you list as the registered agent? (Caution: Whatever name and address you list as registered agent will be readily available on the Secretary of State website.)
3) Once I form my entity, what do I need to do next besides start making money? – Once you form the entity, the work has only begun. You must also apply for a master business license with the state, a local business license, and any state or local licenses that may be particular to your line of work. You need to obtain an EIN number from the IRS, and if you intend that your corporation will be an S Corp, you will need to file a 2553 with the IRS promptly. Otherwise, your entity will be a C Corporation, and your dollars will be taxed twice. For many businesses, other steps, such as obtaining insurance or filing a bond, are required as well.
4) Once I obtain my licenses and take care of the various government agencies, is there anything else I need to do? – You also need to complete your company’s internal formation documents. These documents may strike you as the product of some hidden vendetta that lawyers have against trees, but they actually serve several important purposes.
a) These documents provide your business with the opportunity to opt out of some of the state’s laws. (For example, under Washington State laws, shareholders all have certain rights, and do not have other rights. Perhaps you would like shareholders in your corporation to have additional rights, or perhaps in your corporation’s case, it is appropriate that they relinquish some of those rights.) These variations from the “default setting” may be spelled out in the company’s shareholder’s agreement and bylaws (in the case of a corporation) or operating agreement (in the case of an LLC).
b) These documents allow your business to fill in the blanks where the law is silent. This is particularly important if there is more than one owner involved. How will you share the profits? Who will be responsible for what tasks? What is each contributing to the business? What happens if one owner is leaving the business? Who buys out whom, for how much, and under what terms? This can be an issue when two owners learn that they may be friends, but they can’t work together. However, it can also become important when one owner dies, becomes disabled, or decides to follow a better opportunity. Be aware, too, that in this state, the owner’s interest in the business may be considered community property in the event of dissolution of his or her marriage. Also, if one owner personally goes bankrupt, his or her interest becomes part of the bankruptcy estate. Properly prepared shareholders’ agreements and operating agreements can provide a significant amount of protection from this parade of horrible what-ifs.
c) Documentary formalities help strengthen the corporate veil. One of the reasons people choose to form entities is because they want the personal protection from liability for much of what happens in the company. Having proper documents in place helps to document the entrepreneur’s compliance with the formalities that are necessary to keep the business entity separate from his or her personal finances.
5) What about employees? – I have actually heard of business owners (including some attorneys!) who decide not to allow their businesses to grow beyond a certain point, because they do not want the hassle of complying with all the tax and other laws related to having employees. There are many reasons not to grow a business beyond a certain point, but this is an unfortunate one. Complying with the necessary laws is not difficult, and most business owners can do it with assistance at startup, and the occasional brief consultation.
Okay, but why can’t I have an attorney help me with the parts I don’t understand, and do the rest myself. There is no good reason why not. New business owners don’t have unlimited cash flow, even in the best of times. Many attorneys are willing to work with entrepreneurs to do for them what they cannot do, but to give them direction and guidance in the things they can do for themselves.
