What a Deal!

Everybody appreciates a good deal.  However, some deals are easier to recognize than others.  When it comes to commodities such as automobiles, clothing, and groceries, it is rather easy to compare “apples to apples” in order to determine whether one supplier’s offer is better than another’s.  But when it comes to professional services, it is much more difficult to distinguish “apples” from “oranges.”  This phenomenon is readily apparent with regard to legal services.

It is common to see “legal kits” advertised for a fraction of the cost of a private attorney.  Several years ago, a very famous trial lawyer was a spokesperson for one such online “legal kit” and he implied that he was sharing the “secrets” of the legal profession in the name of public service! 

On the surface, it is a compelling argument to use a “legal shortcut” rather than spending thousands of dollars more by hiring a private attorney.  But once you drill down to the specifics, you quickly realize that “discounted” shortcuts are no substitute for comprehensive, detailed, and competent legal services.  To illustrate these stark differences, take the example of an LLC.  

An LLC, or a “Limited Liability Company,” is often formed to provide centralized management, to enable gifts for estate tax purposes, and to provide a degree of lawsuit protection for business assets such as renal real property.  A quick search of the Internet reveals that an online “legal kit” to establish an LLC can be purchased for as little as $350.  A private attorney, on the other hand, would likely charge between $2,500 and $3,500 to form an LLC.  Why is there such a great disparity in fees and is the attorney really worth $2,000+ more?

Probably every attorney would agree that the actual formation of the LLC is not very complicated or time-consuming.  All that is necessary is to file a simple document with the Secretary of State and pay a minimal fee.  However, this is where the “legal kits” will stop.  As you will see, this is only the first step of many to ensure that the LLC is structured properly to carry out its purposes effectively.

First, you have to decide in which state to form your LLC.  The answer is not necessarily the state in which you live.  Every state has its own set of rules governing the internal operations of an LLC.  For example, some states such as Wyoming and Nevada provide a great degree of lawsuit protection while other states are more geared toward creditors.  The “legal kits” leave this critical first decision up to you without providing adequate guidance. 

Another key decision is whether to form a single-member LLC or a multi-member LLC.  Single-member LLC’s are simpler to administer, but in many cases multi-member LLC’s can provide a greater degree of lawsuit protection.  Again, the “legal kits” are silent on this issue and in many cases pretend that no such choice exists.

Once the LLC is formed, it is crucial to fund it with the appropriate assets.  For example, you might be motivated to form an LLC in order to attain a degree of lawsuit protection for your rental property.  However, if you fail to transfer your rental property into your LLC, the LLC will provide you zero protection.  When it comes to transferring real property into an LLC in California, special care must be taken to ensure that you do not accidentally trigger a property tax reassessment, in many cases unnecessarily increasing your annual property taxes dramatically.  Furthermore, all existing leases on the rental property should be assigned to the LLC, the business bank account should be transferred into the LLC, and tenants should be instructed to make payments to the LLC moving forward.  

Although the internal operations of an LLC are largely controlled by state statute, a comprehensive and thoughtful operating agreement is nevertheless critical in ensuring that the owners of the LLC relate to each other in an agreed upon manner and in ensuring the highest degree of lawsuit protection.  A “legal kit” will either provide a very basic and often problematic operating agreement or will not provide an operating agreement at all.

If there is an operating agreement, the procedures outlined in the operating agreement for admitting new members, making business decisions, raising capital, and making distributions should be followed.  If the integrity of the LLC is not respected, a plaintiff’s attorney will argue that the lawsuit protections afforded by the LLC should not be respected either.  

These are just some of the issues that a private attorney would likely address with you that the “legal kits” ignore altogether or pretend are not really important.  Most people come to realize that “legal shortcuts” are not the deal they appear to be once they understand the critical details that they ignore.   

KRASA LAW is located at 704-D Forest Avenue, PG, and Kyle may be reached at 831-920-0205.

This article is for general information only.  Reading this article does not create an attorney/client relationship.  You should consult a qualified attorney licensed to practice law in your community before acting on any of the information presented in this article.

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