How much Legal Advice is enough for your new business client?
July 27, 2004
By Jim Harnsberger, Sr. Tax Analyst

SAN DIEGO – Most attorneys do a very good job in advising their new business clients about such issues as “entity formations”, protection of the assets of the business, and legal issues that can confront a business, especially in its early days of operation. On balance, attorneys serve an important role to the business owner in assisting and advising in these important areas in order to minimize the exposure for legal consequences that could, in effect, send the business into bankruptcy.

However, one point is clear in the advice provided to a client in terms of the operational considerations of the business, and that is within the area of entity selection. In most cases the attorney advises the client to form a corporation or an LLC, and while balancing the legal considerations is an important issue that requires the advice of a legal professional; it is not the only issue for consideration.

For example; the client who is advised to form their business under the entity structure of a corporation may not be aware that significant tax benefits can be obtained by using an “S” election for the corporation. Moreover capitalization of the corporation and its stock also becomes an important tax issue in the formation phase of the entity if the shareholder is to pass-through any losses on their personal returns.

In another example the entity of choice most common is that of the Limited Liability Company, (LLC). What most attorneys might not be aware of is that a single-member LLC will be taxed as if the client were self-employed; thus forcing the business to file Schedule C and pay the highest amount of taxes possible in the form of taxes on the gross receipts of the business; then the income taxes and SE taxes on profits derived from the business to its owner.

With the legal climate of today in malpractice cases, it should go without saying that a prudent attorney would solicit the assistance of a qualified tax advisor as a part of the total team approach in advising clients about ALL of the important considerations before selecting the final entity structure.

One could argue of course that a disclosure advising the client to seek the advice of their tax professional may be a defense against such a claim; however the question is who did the client FIRST rely upon in selecting the entity; and was this tax advice obtained before or after the formation of the entity.

For the legal professional who desires to provide the best in all options to their clients, it should go without saying that a team approach is one that reduces this potential for liability while at the same time provides the client with all of the options and well reasoned advice BEFORE they make the final selection. In the end clients do not know what form of entity best suits their needs; this is why they seek advice from qualified professionals.

San Diego based Tax Smart America has developed a unique business methods Intellectual Property patent that defines these legal standards, business plan formats, and tax planning considerations for dozens of business types. Careful consideration of all points, the operational considerations, and counter-measures for audits make this unique approach very innovative in advising clients about the manner of conducting the business activities, and provide a valuable enhancement to the legal services provided by the law firms. You may reach the company at (619) 469-5800 for more information on their Business Methods Patent; or for a free business evaluation.