We get a lot of telephone calls and emails from potential clients regarding the creation of a new business or real estate venture or investment. Invariably the potential client asks us for our estimate of the charges to create the new entity and then asks us why they shouldn’t use the self-help legal services websites to advise and form their new entity. The online entity formation tools seem to be cheaper and fairly simple to use. We typically inform these potential clients that the lower cost offered by such options does come at a price that they may well end up paying down the road.
Here are just a few of the things that you may be missing by opting to go without personal, professional legal representation in setting up a new entity:
- Choosing the right legal entity for your needs is perhaps the most important decision in setting up a new entity. A lot of factors are considered when I advise a client regarding the type of entity to use in their proposed venture, including type of business or activity, the location of such activities, the number of owners, and asset structure of such proposed business. While it may be possible to convert an entity from one form to another later on, the cost and frustration involved may leave you wishing you had made a different decision initially. Whether it’s a limited liability company, corporation (with a S election), or some other form of entity, your choice for the type of entity should be made after consultation with a professional adviser.
- Choosing the appropriate tax structure for your entity will likely influence your decision on what type of entity to use. Knowing which entities lend themselves to each tax structure is therefore vital. Moreover, the stringent time limits on filing tax elections can be a trap for the unwary. An attorney experienced in both entity formation and state and federal taxation can help you choose the most advantageous tax structure for your entity and keep you out of trouble with the IRS.
- The more owners involved, the more the complexity in the formation of the entity. An experienced attorney can guide the owners through the analysis of the various types of entities and their operating structures. Company Agreement/Operating Agreements/Shareholder Agreements are critical when there are several owners.
- Most automated entity formation websites take a “bare bones” approach to entity formation. There is generally very little information that the law requires to be included in an entity’s formation documents. However, stopping at what the law requires may not be the right decision for you. Texas law provides very few restrictions on what can be included in an entity’s formation documents and deciding to include optional information and provisions can give you an entity that more closely meets your needs and offers you greater protection.
- The action of forming the entity may seem relatively easy, but the single action of forming the entity is less than half the battle. There’s much more to consider during the formation stage, whether it be the aforementioned tax elections, obtaining a federal tax identification number, registering your entity in other states, verifying the need to obtain licenses and permits, filing assumed name certificates, applying for trademarks and copyrights, or any number of other considerations. Simply forming the entity without taking all the steps necessary to bring your entity into compliance with the law can leave you at risk. In addition, preparing and adopting ancillary governing documents for your entity can be a complex task with a multitude of factors to consider such as capital funding requirements, transfer restrictions, buy-sell provisions, and tax guidelines. Most automated entity formation websites don’t provide such documents, and fewer still provide the options and depth that you likely need.
- Even after seeing your entity completely through the formation stage, there are numerous periodic actions and recurring filing requirements that should be addressed. Failing to comply with some such requirements, such as those related to the Texas franchise tax, can result in the forfeiture of your entity’s existence.
We have extensive experience in entity formation and administration. Please contact us to learn more about what we can do to help you start your entity off on the right track and keep it there in the future.
P.S. I like to think that our current clients already know these things and come to us first!!