As a small business attorney (and a small business), I can empathize when clients and small businesses balk at spending money for goods and services that they feel they don’t need, such as fancy marketing and promotion. However, there’s one area that I’ve observed where too many small business fail to appreciate the value: legal services related to business formation and legal compliance.
Here’s why proper entity formation is critical. Most, if not all, persons forming a business entity decided to form a business entity to shield themselves from personal liability for the business debts and activities. Whether a person is forming a “Limited Liability” Company (LLC) or an IRS Code Subchapter “S-Corp” or C-Corp, one goal for using an entity to operate a business is to limit personal liability.
I remind clients and potential clients that merely “forming” a business entity, i.e. incorporating through a turnkey service like RocketLawyer and LegalZoom, does not automatically protect them from creditors and injured parties.
A FewTheories of Liability Available due to Poor Incorporation
One legal theory with which many small business owners may be unfamiliar is called “Piercing the Corporate Veil.” Wikipedia has a decent summary of this theory here, although the Wikipedia post doesn’t delve into the various state laws and how this legal theory is applied within those states. In short, the Piercing the Corporate Veil theory asks a court to disregard the limited liability protections of corporations and LLCs because of certain factors, one of which is whether corporate formalities have been observed.
Another theory is the “alter-ego” theory where the entity should be disregarded because it’s merely the alter ego of the defendant. Factors, such as whether there’s a shared bank account, corporate payments of personal expenses, tend to impact whether the entity will be disregarded.
How Attorneys Can Lower Liability Risk
For about the cost of a year’s worth of premium cable TV subscription, a business owner could pay an attorney to help the business become and stay compliant with the laws of its jurisdiction. The attorney would analyze the business, draft the necessary documents, and institute the requisite actions needed so that the business performs its corporate formalities. Furthermore, the attorney can audit the business’ operations to ascertain potential legal risks.
It’s better to plan ahead because “failing to plan is a plan for failure.” If you’re a startup or entrepreneur who is bootstrapping their company, paying an attorney to strengthen your startup business would be worth ditching the cable tv.
