Accounting versus Legal — Isn’t so Easy

Why is it that time after time, I’m helping small business leaders or owners get out of trouble, because they paid their bookkeeper or CPA to do the work of an attorney? This is so common, that I felt I needed to write about it, and more importantly, some of the stories are absolutely heart-wrenching.

A bookkeeper, accountant and CPA are valuable members of any business owner’s team. There isn’t a day that goes by, that I’m not recommending my clients talk to (or consult with) their CPA, before making key decisions. In fact, I will often turn my clients over to their CPA, before I provide critical documents, only because the CPA can steer my business owner clients in the most cost-effective, or least-taxable, direction.

A bookkeeper, accountant, and CPA are valuable members of any business owner’s team.

The trouble is, unlike the difference between a bricklayer and a brain surgeon, it’s not clear to most people (including accountants and attorneys) the difference between an accountant and a lawyer. If an accountant says they can file some paperwork, why not take the accountant (who may often have reduced costs than a lawyer) up on his or her offer to help?

Accountants Aren’t Trained in Legal Analysis or Laws

Here’s the problem: Accountants are simply not trained in the art of legal analysis or laws (outside IRS code). They think in terms of financials and paperwork. Pure and simple. Let me give you a recent example of where this can go wrong.

A recent client thought he left an LLC he helped to form several years ago, when he and his partner had a “falling out.” He did what he thought was appropriate, including sending notices to the bank and a couple of credit card companies. Their business accountant offered to change the Articles of Organization, indicating that my client’s business partner would take 100% ownership in the company. He and his partner put together a one-month phase-out period, where my client helped his partner take over his share of the business, and then he retreated from the business entirely to pursue other interests.

Flash forward two years to today. My client attempts to purchase a car at a local dealership, and was refused. His credit was in shambles to his surprise — because his credit score was close to 800 the last time he checked.

Turns out, one of the company’s credit cards had an unpaid balance of over $15,000 and was turned over to collections.

What Can Go Wrong, When You Don’t Consult With an Attorney?

My client relied on his accountant to “file the appropriate paperwork” when he left the LLC. The problem is, his accountant doesn’t really know what the right paperwork is, to protect my client in this circumstance. Sure, the accountant knew how to amend the Articles of Organization, but that’s only a small portion of what’s needed. In particular, when leaving a partnership (or leaving an LLC as a member), you have a whole host of issues, including:

  • Agreeing on what assets and liabilities stay with the business, versus leave with a departing member.
  • Ensuring the departing member’s name is properly removed from all liabilities and security interests. This is harder than it sounds, because very few banks, debtors, lien-holders, landlords, etc, will be willing to arbitrarily remove someone from a debt that is owed.
  • Ensuring the departing member’s name is properly disassociated from the business, including for any outstanding tax obligations.

For a more complete list, read our article, Leaving a Partnership — How To Do It Right. At the end of the day, it pays to use the right tools for the job. Accounts are irreplaceable at helping a small business leader determine the right way to mange their finances and handle tax matters. Likewise, lawyers are irreplaceable at helping a small business leader determine the right way to handle business transactions and relationships with third-parties.

In many circumstances, it may make sense to involve both your attorney and your accountant.

How to Determine When to Hire an Attorney versus an Accountant

Here is a basic test, to help you decide when to hire an attorney versus an accountant:

Does the objective involve a specific financial amount or involve the IRS? Use your accountant.

Does the objective involve a third-party (other than the IRS)? Use your attorney.

Here’s another test for you: If your attorney or your accountant disagrees with the above-mentioned test, it may be time to switch accountants or attorneys.

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