The Dangers of Setting up your Business Without an Attorney

a business owner

a business ownerIn this blog, I’ll discuss why it is important to hire an attorney to help you start your business.

In Today’s Market, it Makes the Most Sense to Hire Experts Rather than 1-Stop Shops

There was a time when a person could get a basic education in just about every profession and industry known to man; a doctor was often just as well trained in philosophy and engineering as medicine. For better or worse, the period of the “Renaissance Man” has passed. We are now so specialized that it’s difficult, if not impossible, for a single person to keep abreast of even two professions at a time, much less several of them.

Why is this an important subject for a legal blog? Only to make the point that financial advisors are specialized in the same way that attorneys are and you should not expect that either an attorney or a financial advisor can do the other’s job well. When I see organizational documents and business structures created by an accountant, for example, it probably looks a lot like my taxes filings would for a non-profit based out of Canada, Spain, and Kentucky, with owners that have their own sub-corporations (each of which requires a separate tax return?) that are headquartered in Delaware but with their principal place of business in Georgia. Sure, I can try to pull something together, but is my client prepared to take that risk? Hopefully not. Am I willing to take that risk? No way. Instead, I would encourage my client to hire a specialist (CPA) to file their tax return. At the same time, an attorney should be the one to set up their business.

Why Conflating Business Entity Types is Dangerous

It is essential that your company acts according to it’s correct business structure. In my previous blog, on limited liability companies, we went over the specific advantages of limited liability, and what happens when and if it gets waived. If simply forgetting to file an annual report and/or tracking corporate minutes risks your limited liability, imagine what could happen if you inadvertently held your company out as a corporation when it is, in fact, an LLC!

Each business structure has its own unique administrative requirements, some of which directly conflict with one another. For example, many business owners prefer extra layers of limited liability protection on their business. If there are two owners of ABC, Corp., then each owner would have their own personal corporation that owns their respective shares in ABC, Corp. So, let’s say that my corporation, JSparks, Inc. owns 50% of the shares in ABC, Corp. This is all well and good, but what if my company were filed with the secretary of state’s office as an LLC? Then, which requirements apply, requirements for corporations or for LLCs? Furthermore, it is currently impossible for an LLC in Georgia to own interest in a corporation, but the reverse is not true; corporations can own interest in an LLC. So, again, which requirement applies? Can you file with the secretary of state’s office as a Corporation, but defend a lawsuit as an LLC? If I represented the plaintiff in that situation, my first argument would be that the defendant company is a sham that is trying to get the best of both worlds (LLCs and Corporations) and that the defendant should have their limited liability waived altogether, allowing my client to go after the defendant-company-owner’s personal assets.

My apologies if this is getting confusing; it is a confusing subject and it is essential that you choose the right legal entity when setting up a company. Moreover, you must maintain compliance with all of the regulatory laws associated with that entity type throughout the life of the business. As this is a business law issue, non-lawyer professionals like CPAs and financial advisors may not know about it–it’s not what they are trained for–so having them set up your business is, well, risky business.

Thanks for reading,

Jonathan Sparks is an organizing partner at Sparks Law. He helps small to medium sized businesses with their legal issues, general counsel and registered agent services.
– Jonathan Sparks, Esq.