A few years ago I was giving a presentation to a group of entrepreneurs. I was talking about taxes and selection of business entities.
At various points in my presentation, I said “talk to your attorney about this.” For example, when talking about LLC vs corporation, I talked about the tax consequences but also warned that people should talk to an attorney about the legal considerations.
Someone in the audience raised their hand to ask why I kept recommending that they “waste thousands of dollars” on attorneys. He went on to rant and rave about how attorneys are money-sucking leeches and he was damned if he was going to hold an attorney on retainer.
(There sure are some “interesting” people in this world, aren’t there?)
You Don’t Have to Have an Attorney on Retainer
My response was that a business certainly doesn’t need to hold an attorney on retainer, but a business SHOULD have a relationship with an attorney.
I am shocked at the number of corporations I work with who have never talked to an attorney because “it’s a waste of money.” Most of the time, it goes like this: the owner files the articles of incorporation themselves with LegalZoom or a similar service — and oftentimes they file in Delaware even though they’re an Iowa-based business that is never going to have investors or operations outside of Iowa because “that’s what smart businesses do.”
Oftentimes these are corporations that have nothing going on (sometimes almost literally 0 income and 0 expenses) and they fold in a year or two. The owner never intended to pursue angel investors or get involved in other situations that might require a C-corp and a Delaware incorporation. Why bother incorporating at all in that situation??? Which leads to my next statement:
If You Are in a Position to Incorporate, You Can Afford an Attorney
I encourage my readers to disagree with me, so please feel free to write to me to disagree with what I’m about to say: if you are in a position to incorporate your business, you can afford to hire an attorney to make sure the incorporation gets done right.
This is a corollary to what I’ve said before about clients doing their own payroll (and usually not doing it well): if you can afford to have employees, you should be able to afford to pay an accountant or a payroll company to help you process payroll. If you can’t afford that, you probably can’t really afford to have employees.
I’d say the same thing is true of incorporating. If you can’t afford to have an attorney help you incorporate, perhaps you shouldn’t be incorporating.
Back to the Original Question
So, back to the original topic of holding an attorney on retainer: no, I don’t recommend a small business do that. But I DO recommend that a small business have a relationship with an attorney that they can call on when the need arises.
JD-
Very, very important – consult a tax professional BEFORE consulting a lawyer!
Often I find that lawyers advise clients to incorporate whether or not it is truly appropriate – they get paid for incorporating a business.
You do not NEED a lawyer to incorporate (not sure about all states – but expect this is true). You can probably do it yourself online, or the accountant can help. If it is appropriate to incorporate in the first place, that is.
Where you need to consult a lawyer is if you are not the only shareholder – you will have partners – or if there are special situations involved.
Also do not make a lawyer your “Registered Agent” – if you do they will probably charge an excessive (in my opinion) annual fee to file the Annual Report, which you also can do yourself easily online (again – not sure about all states).
RDF
RDF – I agree with you that consulting a tax professional is vital as well. As I’ve written before, one of the “epidemics” I see is sole proprietors wanting to form an S-corp and not understanding what they’re getting into. And too often, the business owner just goes off and “does it” (either on their own or via an attorney) without even a heads-up to me.
Well said!
Hahah yes, there are some “interesting” people out there. I think having a lawyer you trust on retainer is worth it just for the peace of mind they can provide. So much goes into a start-up so it’s nice to know someone has your back, legally.