I have heard that a lot of people form their own business entities through legal zoom type services or by going directly to the Secretary of State without any council or tax advice. These are often the people who ask, “Why should I use an attorney to form my business entity?”. I wonder, if the whole purpose of forming an entity is to protect yourself from personal liability why would you risk forming it on your own without any guidance?
Limiting liability is generally the number one reason people form business entities. An attorney is going to be able to explain each step of the process to you, assist in determining which type of business entity makes the most sense for your situation, and make sure everything has been set up properly in order for you to truly be protected from personal liability. I also encourage all of my clients to consult with their tax advisor as well, because forming a new business can be a taxable event. It can affect your taxes and how you are going to be categorized by the IRS depending on how you form it.
People will call me after they’ve already formed the entity and an issue comes up, and they realize that they needed to do this or that, or they haven’t done this or that. They call me and then I have to go fix it. Essentially, by trying to cut corners and save a little bit of money in the beginning doing it themselves, the process ends up costing people much more than it should have if they would have originally consulted an attorney.
When forming entities, particularly LLCs which I talk about a lot on this podcast, you want to be careful about how it is managed on the Secretary of State’s website. It can be member managed or it can be manager managed. Those are important designations that you need to talk to your attorney about. You also need to decide how it’s going to be taxed, which is something you talk to your tax advisor about. I have a lot of people call me and say, “I have an S-corp” and that actually isn’t a legal entity, it’s a tax designation. You can have an LLC with S-corp tax, or you could have a corporation that’s taxed as an S-corp. It’s important to understand what you are actually forming before you form it.
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