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Navigating Business Incorporation: The Role of Legal Counsel
Starting a business is an exciting endeavor that requires careful planning and decision-making. One of the critical decisions you’ll need to make is how to legally structure your business. Incorporation is a popular option for many entrepreneurs as it offers various benefits, including liability protection, potential tax advantages, and enhanced credibility. However, a common question arises: do you need a lawyer to incorporate a business? While it’s not a legal requirement in most cases, there are several factors to consider when deciding whether to involve a lawyer in the incorporation process.
Understanding the Basics of Incorporation
Incorporation is the process of legally forming a separate entity for your business, known as a corporation. This entity is distinct from its owners (shareholders) and has its own legal rights and responsibilities. Corporations offer limited liability protection, meaning that the shareholders’ personal assets are generally shielded from the company’s debts and liabilities. Additionally, corporations can potentially attract more investment and lend credibility to the business.
The DIY Approach
Technically, it is possible to incorporate a business without the assistance of a lawyer. Many jurisdictions provide straightforward online resources and forms that allow you to complete the necessary paperwork on your own. These resources guide you through the process of choosing a business name, filing articles of incorporation, and fulfilling other legal requirements.
However, the DIY approach is not without risks. Incorporation involves more than just filling out forms. It requires a clear understanding of the legal implications, potential tax consequences, and various nuances of corporate governance. Mistakes made during the incorporation process can lead to costly and time-consuming problems down the road, including legal disputes, tax issues, and even the potential invalidation of your corporate status.
Benefits of Hiring a Lawyer
- Legal Expertise: Lawyers specializing in business and corporate law have the knowledge and experience to navigate the complexities of incorporation. They can help you choose the most suitable legal structure based on your business goals and needs.
- Customization: A lawyer can tailor the incorporation process to your specific circumstances, ensuring that your business’s unique requirements are met.
- Paperwork and Compliance: Incorporation involves a significant amount of paperwork and adherence to various legal regulations. A lawyer can ensure that all required documents are properly prepared and submitted, minimizing the risk of errors that could lead to complications in the future.
- Liability Protection: While incorporation itself offers liability protection, a lawyer can guide you on maintaining corporate formalities, which is essential to preserving your limited liability status.
- Tax Implications: Different legal structures have different tax implications. A lawyer can provide insight into the tax advantages and disadvantages of various options, helping you make informed decisions.
- Conflict Resolution: In the event of disputes among shareholders or other legal issues, having a lawyer already familiar with your business can facilitate smoother conflict resolution.
While you are not required to hire a lawyer to incorporate your business, the benefits of doing so are substantial. A lawyer can provide invaluable guidance, helping you avoid potential pitfalls and ensuring that your business is set up for success from a legal and operational standpoint. While there may be initial costs associated with hiring a lawyer, the long-term benefits far outweigh these expenses. Ultimately, the decision to involve a lawyer in the incorporation process is an investment in the future of your business.
Do You Need a Lawyer to Incorporate Your Business?
Absolutely not. And I regularly tell clients that you don’t need a lawyer to do this. You don’t need to use a service like LegalZoom or any of these other services to set up an LLC or a corporation. You can do it on your own.
Considerations When Incorporating and the Role of a CPA
Now, there are a couple of considerations, and often these considerations can be discussed with a CPA, and you can save a lot of money by using a local CPA.
Choosing Between LLC and S Corporation
The first question is, are you going to save more money, or are you going to be better situated to have an LLC or an S corporation? And if you are just going to own this business on your own, and it is a simple business, usually, you can just work with your CPA to figure out whether an LLC or an S corporation is better for you. Then either the CPA will register the business for you, or you can get free forms online. Usually, the government office that handles business registrations has templates available. I know Minnesota has that. And for most business types, you can use the template for the articles. For example, if you want to register a corporation, you would use the articles of incorporation template provided by the Minnesota Secretary of State.
Now, why did I say you should work with a CPA? Because if you don’t elect to have that corporation taxed as an S corp, it will be, by default, taxed as a C corp or a C corporation. That is not good usually because that results in double taxation. And if you register an LLC, by default, it is taxed as a sole proprietor if you are the sole owner of the LLC. So working with a CPA is a great option.
When to Use an Attorney for Business Incorporation
Now, when would you want to use an attorney? If you have multiple owners, it’s pretty important. If it is a complex business, it’s pretty important. If it is going to be a business that grows in size or has significant revenue, I would say spend the money now to make sure everything is done right.
But, for example, if you are opening a little Etsy business and you are hoping to make $5-10,000 a year, I wouldn’t spend the money on a lawyer or some other online service to form your entity. I would go to the Minnesota Secretary of State, file your own articles of organization for a new LLC, work with a CPA to make sure you are taking the proper tax deductions and exemptions, and save money on legal fees. And I have recommended that my clients actually do that rather than working with me.
In fact, sometimes I will tell them in a five-minute call, “Hey, look, in your scenario, you are not going to need an S corp or benefit from the tax savings there. You need an LLC. It is a single-owner LLC. You don’t need me to put that together. You can just go file that with the Secretary of State’s office on your own.” In fact, the Minnesota Secretary of State has a little Q&A wizard where you answer different questions and then pay your filing fee, and it gives you a printout of your articles of organization. That is a great option for small businesses that really don’t have the money to put into a lawyer. You can always do this later. You can always bring a lawyer on later to fine-tune some of what you are doing or look it over and make sure that as you grow, you have things in proper legal order.
All right. If you haven’t already subscribed at aaronhall.com/free, you are welcome to check out our channel where we have all sorts of other questions from business owners and the answers provided to you. I do these videos as a public service, as a way to use my knowledge as a licensed attorney to help business owners avoid problems, spot issues to discuss with their attorneys, and improve the likelihood that you will have a successful company and successful life. It is great being here with you today.