Starting a Business? Talk to a Professional First

“We do not offer tax or legal advice, we just make incorporation fast and simple”

This is a direct quote from a commercial I hear regularly on the radio.  While I can see how the concept of a cheap, quick and easy incorporation may be appealing to folks, especially in light of the current economic climate, I can’t fathom why anyone would rely on a website to assist in perhaps the most critical aspect of establishing a business when the advertisement expressly states that it will not provide any tax or legal advice. 

Tax and legal advice are the paramount factors when deciding to incorporate, form a limited liability company (“LLC”) or establish another entity with limited liability.

Easy ≠ Cheap

Many of these websites claim to be an inexpensive alternative to lawyers.  However, based on the real life experiences of some of my clients and colleagues, it seems unlikely that these websites offer such services at any discount from what a local lawyer would charge.  In one instance a client indicated that one of these “cost-saving” services would have charged him approximately four times my fee to establish an Ohio limited liability company.

Even if the price point were comparable, the service is clearly not.  Many people understand that creating a limited liability entity is necessary to avoid the personal liability that is associated with operating a business these days.  However, a client who pursues incorporation without the proper analysis regarding the appropriate entity choice (corporation, LLC, or limited partnership) could actually find themselves in a worse financial position after formation than they were in when they were at risk for personal liability.

Here's why: upon incorporating, myriad tax and regulatory obligations are imposed on businesses. These obligations frequently require an adaptation of the administrative processes used pre-incorporation.  A company that fails to adapt may become aware of the applicable taxes and laws after the fact and after statutory penalties for non-compliance have been imposed.

Additional Liability Risks from Insufficient Counsel

An improperly managed corporation can also have its “corporate veil” pierced, which will result in personal liability for any shareholders and defeat the primary objective of incorporating-- preventing personal assets from being reached by a creditor of the company.

Many of my clients are nervous about navigating these very complex tax and regulatory waters.  No business is too small or too simple to require proper advice and counsel at startup.  When it comes to the assessment of penalties and interest for non-compliance, the IRS, State Department of Taxation, Ohio Bureau of Workers’ Compensation and other agencies that are owed funds will not make an exception due to a company’s size or lack of sophistication. 

The ill-advised business owner who tries to save some money in startup expenses may end up spending the difference in accounting expenses fighting an audit, or attorney fees defending itself against an aggressive trial lawyer trying to reach the personal assets of a corporate shareholder.

Therefore, instead of clicking over to Legalzoom.com, or identifying the other legal self-help site-du-jour on Google, you may want to consider consulting a legal professional to advise you through start up.  The peace of mind that comes from knowing the appropriate entity was selected and the work was done right the first time should offset any out of pocket expenses paid to your attorney.

Thank you once again for your time, and please come back often to learn more about legal topics that may be of interest to you.