Business Formation Process: Should You Hire a Lawyer or Paralegal?

Hi my name is Andy Gale. I’m a small business attorney. One of the more common questions I get from new clients is, “Hey, I understand lawyers have got a lot of experience, but they also seem to cost a lot of money to provide the service. Why don’t we go with the less expensive alternative?” One of the less expensive alternatives that people occasionally will give consideration to is the hiring of a paralegal.

Difference Between a Paralegal and a Business Attorney

A lot of people think, “Well, a paralegal is just as good as an attorney.” Actually, in many cases, that is not the case. And there is a misunderstanding in terms of the differences between paralegals and attorneys. One of those main differences is that a paralegals job is simply to assist you in the completion of forms. They help you fill in the blanks, if you will, in any document that you would bring to them. They are, however, prohibited from giving legal advice and guiding you through all the other myriad of questions that come up in the formation of a business process.

Real Case of Client Who Hired a Paralegal Instead of a Lawyer

I had a client come see me earlier this week. She had gone to a paralegal to form her business. It was about nine or 10 months down the road. And she was wondering and more concerned, whether or not, the paralegal that she had hired to do the work for her had actually completed the process. As part of the services we offer, we’ll do a review of the corporate records to see if they’re complete and if they were done properly.

Well, what discovered is that the paralegal had barely done any work on the project at all. All she had done is file a set of articles of incorporation, which is a one-page document that gets filed with the California Secretary of State here in our state. And she’d done nothing more. The paralegal had charged our client 2500 dollars.

The paralegal had done nothing with helping the client set up with the Internal Revenue Service the right kind of tax election. The paralegal had not done the necessary filing of what we call a statement of information to make sure that the state was aware of who the directors and the officers were of the corporation. And furthermore, there was other failings in terms of filings that were done, so that when we went to look at the client’s status, whether or not it was active or suspended with the state, we discovered that in fact, the corporation was suspended. So if she were sued, she would be held personally responsible for anything that happened in the corporation versus having the corporation be that corporate shield between her and the liabilities of her company.

The Problem

I think the problem was two-fold: the client went to somebody that she thought was an expert to help her do the documents. But the expert that she went to was a low-cost alternative to an attorney, who really understood all of the hundred question that come up during the formation process, the hundred questions that come up once the company is opened up, and the hundred questions that come up during the course of the first year of the operation of the business. Lacking that kind of experience and lacking the legal ability to advice the client through that process, I think really caused just the breakdown in the entire process of formation.

The Solution

So what was the solution to the problem? The solution was this: that we did a few things. The first thing we did was we immediately contacted the Internal Revenue Service for our client, to make sure that she was able to get the correct tax election for her corporation, because so many people are interested in operating their business in the most tax-efficient way possible. The second thing that we did was that we contacted the Secretary of State to do the additional filings that were missing, to remove her from the suspended status from the state, and to once again make her corporation active in the State of California. The last things that we did was we went through all of the corporate records, we completed all of the formation documents, so that she was able to open up a corporate banking account, she was able to give the appropriate documents to her CPA, and then she was able to actually carry out business in the State of California as a legal corporation.

So what was the two-fold problem? Problem number one was the client. Because they’re not attorneys and they’re not paralegals, and they’ve not been trained in the law, didn’t know whether or not the documentation that they were given, that they paid for, was actually complete and/or done properly.

The second problem was the paralegal that was performing the service was completely incompetent. But the client didn’t know enough about the process to know whether or not the paralegal had performed as they should have or whether or not the paralegal had completely ripped them of. And so unfortunately, the problem became the client’s until they were clever enough to say, “You know what, I got a sense that this not right, because I have one piece of paper and I have other friends that have corporations, and there seems to be a lot more documentation that goes along with the formation of a corporation.” And hence, the reason that the client reached out to us to see whether or not her suspicions were correct.

So I would strongly advice you, and I know it’s such a hard thing to do when you’re just forming your business because costs are always crucial. But I strongly, strongly advise any new entrepreneur who is considering opening a business to go invest in the time and expertise that an attorney can give you during the formation process, because there’s just so much that goes into that you really don’t understand. Sometimes it’s difficult for the lawyer to convey to you the thousand things that it takes to really do a good job.

I would imagine it would be like going into a fine dining restaurant and having a chef prepare an excellent meal. I mean we can all go into the kitchen and do some form of cooking but there’s something that really differentiates the home cook from an excellent chef. In this case, it’s absolutely critical to make sure that the recipe that you’re putting together and the way your meal is prepared when it comes to forming a corporation is done absolutely right, because you’re counting on the corporation to protect you when it comes to liability issues. And you’re counting on the corporation to give you the maximum tax benefits. And you’re counting on the corporation to really establish yourself in the business community as a business separate from your.

So once again, my very strong recommendation is to go out and get that trusted advisor. I think you’ll be so much happier if you do. My name is Andy Gale. I’m a small business attorney here in California. I specialize in forming corporations for small business owners, entrepreneurs. We also form limited liability companies. So we have a lot of expertise at the entity formation stage of opening up a business. If you have any questions, please feel free to reach out to us. We’re more than happy to guide you through the process.

Categorised in: Business Attorney, Business entity, business formation, business lawyer, paralegal

This post was written by BusinessAttorney