Starting a new business is an exciting time filled with possibility, but it’s also a process filled with legal, financial, and operational decisions that can have long-term impacts. While many entrepreneurs focus on their products or services, they often underestimate the importance of consulting an attorney before choosing and forming their business entity. From tax implications to compliance, having a legal expert by your side ensures you’re building your business on a solid foundation.
Common Types of Business Entities
Before we get into why you should consult an attorney, let’s define the types of business entities you might consider:
- Sole Proprietorship: Owned and operated by one person, this option is straightforward but offers no liability protection.
- Partnerships: Businesses owned by two or more individuals sharing profits, liability, and management.
- Limited Liability Company (LLC): A popular choice offering liability protection and flexible tax benefits.
- Corporation: Offers liability protection and is often preferred by larger businesses, but comes with more formal requirements.
Each of these entities comes with unique benefits and challenges. Choosing the right one depends on factors like your business goals, industry, financing needs, and more.
Key Reasons to Consult an Attorney
Setting up an entity may seem simple, especially with online DIY formation services. However, consulting an attorney offers specific advantages that can save you time, money, and stress in the long run.
1. Tax Implications
Different business entities come with different tax structures, and making the wrong choice can be costly. For example:
- An LLC allows for pass-through taxation, meaning profits are reported on the owners’ personal tax returns—ideal for small businesses.
- A corporation may result in double taxation (corporate profits and personal dividends are both taxed).
An attorney, often working in tandem with a tax advisor, can guide you toward the entity that minimizes your tax liability while maximizing your benefits.
2. Operating Agreements
If you’re forming an LLC, creating an operating agreement is crucial. This document outlines key aspects of your business, such as:
- Ownership structure
- Distribution of profits and losses
- Management responsibilities
- Procedures for adding or removing members
While templates exist online, an attorney can customize your operating agreement to ensure it fits your unique needs and complies with state requirements.
3. Registered Agents and Virtual Mailboxes
Many states require a registered agent—a person or entity designated to receive official government notices on behalf of your business. An attorney can help you choose a reliable registered agent service or determine whether you should step into that role.
Additionally, for online-based businesses or those without a physical office, using a virtual mailbox service is a great way to maintain privacy and ensure secure communication. Your attorney can advise on the best options while ensuring compliance with state and federal laws.
4. Compliance with State Laws
Every state has specific rules about forming and maintaining business entities. For example:
- Annual report filings
- Franchise tax payments
- Required permits or licenses
An attorney will ensure compliance with these laws, helping you avoid fines or losing your good standing status.
5. Obtaining a Tax ID
Also known as an Employer Identification Number (EIN), a Tax ID is essential for opening business bank accounts, hiring employees, and filing taxes. While you can apply for an EIN online, an attorney ensures this step is handled correctly, avoiding potential delays or errors.
6. Minimizing Personal Liability
One of the main reasons to establish a formal business entity is to protect your personal assets from liabilities. However, protection isn’t automatic—if not set up correctly, you could still be at risk. An attorney can structure your entity to safeguard your personal finances and help you understand what measures you need to take to maintain that protection.
Navigating Anonymous LLCs
For entrepreneurs who want to protect their privacy, forming an anonymous LLC is an option. These LLCs allow you to separate personal information from your business entity, often relying on a registered agent or legal entity to protect your identity.
Setting up an anonymous LLC can be tricky and is not available in all states. Consulting a legal expert helps you understand where and how to set one up while ensuring your business remains compliant with local laws.
When to Contact an Attorney
You should consult an attorney as early in the process as possible, ideally before you make any formal decisions or file paperwork. Here’s when an attorney can be most helpful:
- When you’re deciding which business structure is best for you
- When drafting or reviewing legal documents like operating agreements or bylaws
- When choosing a registered agent or setting up a virtual mailbox
- When exploring tax-saving strategies for your entity
- When setting your business up for compliance with state and federal laws
Even if you’ve already formed an entity, it’s never too late to seek legal advice to ensure you’re on the right track.
Investing in Peace of Mind
While working with an attorney may involve some upfront costs, it’s an investment that pays off in the long run. From reducing your tax burden to protecting your personal assets, the right legal advice sets the stage for growth and success.
If you’re ready to take the next step in starting your business confidently, consult a qualified attorney to guide you through the process. A little legal direction now can save you a lot of headaches later.
Law 4 Small Business® (L4SB®). A Slingshot company. A little law now can save a lot later®.
