Business lawyers rarely get to tell funny stories about their practice at cocktail parties. We’ve always envied criminal defense lawyers for that. However, we do get lots of informal questions from people starting or operating businesses. Here are a few of the most common that we hear and some short answers.
1. “I formed a corporation, so I can never be held personally liable, right?”
Not exactly. While a corporation (or a limited liability company and some kinds of partnerships) does limit your liability, it is not a total shield. You are always liable for your own actions, such as a car accident when you’re driving, and you may become liable by agreeing to a personal guarantee of company debt, for example on a lease or a loan. Additionally, someone might be able to “pierce the corporate veil” if you don’t maintain a clear line between you and the company. However, forming an entity does separate your business assets from your personal assets.
2. “My friend and I have a business together, but he did not put my name on the papers. Does that matter?”
Yes, it does! If a business is conducted through a corporation or other entity, and if you do not formally own some or all of that entity, you don’t really own any of the business. It’s important to have clear agreements that determine everyone’s rights and responsibilities. Relying on verbal agreements is very risky, even when people start with the best of intentions.
3. “Should I form a corporation, partnership or limited liability company?”
It depends. The right kind of entity is not always obvious. Each has different characteristics for governance, tax and other issues, and the right answer depends on the situation. You, your lawyer and accountant should have a careful discussion about options before you choose.
4. “Can I take investments from friends or raise money on the Internet?”
This is the classic example of a “yes, but” answer. Yes, you can certainly raise money for your business, including on the Internet, but doing so requires that you follow the rules relating to the sale of securities. There are separate rules for fundraising on the Internet. If you violate them, your investors may be able to require you to give the money back and pay damages, and you run the risk of enforcement action from regulators.
5. “I got a letter from the IRS. What should I do?”
There are dozens of reasons the IRS might write to you, some good and some bad. No matter what, though, the most important thing is to deal with it immediately. There are tight deadlines for dealing with the IRS and ignoring them can put you in a bad spot right away. If the letter relates to a tax return you filed, you should contact the person who prepared the return. The questions we get most often are, “Should I hire a lawyer? And what is it going to cost me?” Of course, a lawyer will always say you should hire a lawyer! Realistically, you do not need a lawyer for every transaction, but hiring one makes sense when you’re making big decisions. As for costs, most lawyers charge by the hour and will discuss costs before starting a project.
Wayne Carlson and Mike Raum are attorneys in Fredrikson & Byron’s Fargo office. You can reach them at firstname.lastname@example.org and email@example.com.