Why is a lawyer writing to tell you when you don't need to hire a lawyer? Because it's a question that many business owners ask themselves all the time, and one that I frequently answer. This is the first in a series of articles that will hopefully guide you as I frequently guide my clients.
Entity Formation – No, you don't need a lawyer to form an entity.
Anyone starting a business can access volumes of information about types of entities, the pros and cons of various entity types, and the necessary legal process to form an entity. Assuming you have decided what type of entity to form (which is a question about which you may wish to consult a lawyer), almost anyone can walk through the steps to form the entity. Most states, including Maryland, allow you to form an entity online and provide resources to assist with the process.
While there are more entity types than LLCs and corporations, these two are the most common entities for businesses and the two that I will deal with in this article.
The requirements for forming an LLC are generally simpler than forming a corporation. This is because, when an LLC is formed, the LLC members (owners) do not have to answer questions about the type of stock that will be issued, the initial selection and election of directors and officers, and what type of organizational structure is desired.
If the entity is a corporation, though, there are questions that you should ask and for which you should consider hiring a lawyer (or accountant) to weigh in on professionally:
- Do I want my corporation to be a “close” corporation?
- How many shares should be authorized, and what will the par value be?
- Do I want more than one class of stock?
- Who should the initial directors be?
The answer to the above questions will affect what is set forth in the company's articles of incorporation. If the articles are not correct, they will need to be amended, which, once formed, can be more rigorous than getting it right from the start. So long as you properly set forth the above information in the articles of incorporation, you don't need a lawyer to file the articles for you.
Hint: Beyond the actual formation of a corporation, many state statutes require other documents to be completed and other actions to take place if the corporation is to be operated properly. Those actions include the issuance of the stock, the drafting and filing of the organizational minutes, the adoption of corporate bylaws, etc. If these additional steps are not completed, a corporation may lose the limited liability protection that the corporate shield provides.
Who can go without hiring a lawyer to form the entity?
- Business owners or founders desiring to form an LLC.
- Business owners or founders desiring to form a corporation who know the answers to the above questions.
Who should consider hiring a lawyer?
- Business owners or founders who need assistance with the responses to the above questions.
- Business owners or founders who need assistance with the steps required after the formation of a corporation.
Hint: Many lawyers and firms provide entity formation services that go beyond merely filing the required document with the state. Those services will include the initial discussions about which type of entity to form given the type of business and operational structure you desire. The services will also typically include your ability to ask a lot of questions during the process as well as the follow-through tasks of the corporate formation process including drafting the by-laws, organizational minutes and preparation of the stock ledger and issuance of stock certificates.
This article is general information only and does not constitute legal advice based on any factual scenario. Any situation involves knowing all of the facts surrounding the issue and there is no way in an article like this that all facts can be known. If you have specific legal questions, you should contact an attorney and enter into an agreement of representation. This is not such an agreement and no attorney-client relationship is created herein.