Why do I need to hire a lawyer to incorporate? Can’t I just do that online?

“It is often said that everyone needs a good lawyer, C.P.A. and mechanic.”


One of the most common mistakes entrepreneurs make is incorporate on the cheap. Numerous television advertisements or internet banners advertise, “For just $99.99, you too can incorporate online.” Sometimes, a C.P.A. firm will offer to incorporate a business as part of their services. However, that $99.99 internet special typically costs the business owner thousands of dollars later.

First, one of the prime considerations of incorporating, forming a limited partnership or forming a limited liability company is to protect you, individually, from liability. A lawyer can identify where your business may be vulnerable and what steps should be taken moving forward to protect your assets and minimize your risk.

Second, incorporating may not be the best option for your business. Depending upon the nature of your business, your relationship with other investors, or your long-term goals, forming a limited partnership or limited liability company may be preferable. Third, a lawyer will draft bylaws, a partnership agreement, or company agreement tailor-made on how you want to manage and sell equity in the company. Fourth, a lawyer will need to draft organizational minutes electing the company’s officers and outlining the scope of their duties, which a bank typically requires.

Most importantly, a lawyer drafts company documents with an exit strategy in mind. For example, co-owners of a company often start out the best of friends and continue to be so, especially as the business thrives. All too often, however, some event occurs that causes mistrust or the co-owners decide to part ways. Depending upon the circumstances, the company’s break-up results in an expensive lawsuit. Often a lawsuit could be avoided if the business owner simply hired a lawyer in the beginning. As discussed above, a lawyer could draft the documents that would prevent any ambiguity as to the Company’s management, sharing of profits or losses, requiring additional equity contributions or its dissolution. A lawyer should also discuss the possibilities of whether the business owner’s exit strategy is to sell to another company, his or her co-owner upon retirement or pass the company to his or her children.

The ultimate question is whether the entrepreneur is serious about starting a business or will it be just a hobby. If a business owner is serious about being successful, then the initial investment of sitting down with a lawyer in the beginning will yield big returns, or avoid costly litigation, in the future.

Adam W. Vanek
avanek@tiponjoneslaw.com
214.890.0991

Taxation of Limited Liability Companies

Doing business as a Limited Liability Company is popular because, similar to a corporation, owners (members) have limited personal liability for the debts and actions of the LLC. At the same time there is great management flexibility, and LLCs enjoy the benefit of pass-through taxation. Members may be individuals, corporations, other LLCs and foreign entities. There can be only one member of an LLC (in most states), or there can be an unlimited number of members. We are frequently asked how LLCs are taxed.

If an LLC has only one member (a single member LLC), the default taxation is that the member files as if the LLC does not exist. So if the single member is an individual, LLC income and expenses are reported on schedule C, E or F of the member’s 1040 return. If the single member is a corporation, the LLC income and expenses are reported on the corporation’s return (usually Form 1120 or 1120S). If an individual LLC single member prefers the LLC to be taxed as a corporation, the LLC must submit IRS Form 8832 to change the default and select the corporate form of taxation.

If an LLC has multiple members, the default is for the LLC to be taxed as a partnership (Form 1065). If the LLC prefers to be taxed as a corporation, the LLC must submit IRS Form 8832 to change the default and select the corporate form of taxation.

Remember that LLCs are subject to withholding of employment tax. Members of single member LLCs are subject to self-employment taxes on earnings. Also, members of multiple member LLCs pay self-employment taxes on their share of partnership earnings.

We would be happy to be of assistance in solidly planning and properly setting up a business entity for your venture.


Paul Tipton

(214) 890-0991

ptipton@tiptonjoneslaw.com