Legal Counsel

Scott M. McElhaney and Michael W. Malakoff

A person who represents himself has a fool for a client.

-Anonymous

This chapter covers the selection and retention of legal advisors for professional services firms. As with most businesses, professional services firms require good legal advice-whether for client disputes, incorporation, mergers and acquisitions, or simple contract advice.

Why This Topic Is Important

Professional services firms cover a variety of industries, from real estate to medical practices to management consulting. While such firms may not need counsel on a day-to-day basis, inevitably the time comes when legal advice is required, or at least helpful. Using the right lawyer for the right situation in

Disclaimer: The material in this chapter has been prepared for informational purposes only. The chapter is not offered as legal advice on any matter and should not be used as a substitute for seeking professional advice from a competent attorney in your jurisdiction for your particular problem. Although we have attempted to be accurate, we do not guarantee that the information in this chapter is correct, complete, or up to date. The laws of different jurisdictions may be entirely different from what is described in this chapter. The authors will not be responsible for any action or failure to act in reliance on the information in this chapter. In addition, this information is not intended to create, and receipt of it does not constitute, an attorney-client relationship.

the right way can help professional services providers run their businesses more effectively and see legal services as a benefit to their businesses rather than a painful, distracting cost. Thus, we explain in this chapter: (1) the most common times (but not all the times) that the firm should solicit legal advice, (2) how to select, and organize legal service providers, and (3) how to manage the relationship with your legal service providers.

When the Firm Needs a Lawyer

An important aspect of managing a professional services firm is successfully navigating your way through the legal environment. When used properly, a qualified lawyer can help you take advantage of the opportunities the legal system provides, thereby helping you run your firm more effectively, as well as minimizing the difficulties that present themselves from time to time. In this section, we examine some of the situations in which the firm may want to consult a lawyer. This is, of course, not a comprehensive list. Rather, we intend to point out some of the more frequent situations in which a lawyer can be useful. Naturally, a given firm may have many other major needs, depending on the nature of the business and the specifics of the organization, size, geography and other factors.

Organizing Your Firm

Organizing your business is a challenging task for which a lawyer can be very valuable. The considerations when establishing and organizing your legal entity are complex. As discussed in Chapter 3, the firms management will be presented with a variety of entity selections to evaluate-corporations, partnerships, limited liability companies, and so on-each with advantages and disadvantages that must be considered. The choices you make during the formation of your entity will have an impact on firm and partner tax liabilities, personal liability, and other important issues. The specifics of taxes, liability limits, and other relevant issues, however, are complex and vary by legal jurisdiction. Working with a lawyer can help you choose the best entity for your specific set of circumstances.

Once you have chosen your entity type, you will need to work through a variety of additional requirements associated with the set up of your entity. These diverse requirements range from bylaws to shareholder agreements to setting up the company checking account to a host of other checklist items. Again, working with a lawyer who helps establish new businesses frequently can help a new firm through the many complex issues associated with getting set up. The lawyers will likely have checklists and standard operating practices that may help avoid large omissions during the process and promote the efficient use of your time and money.

Employment Law Matters

In addition to seeking assistance in organizing your business, it is usually useful and, in the long run, extremely cost effective, to consult a lawyer who can guide you through the typical maze of rules and regulations that govern the relationship between your business and the people who work for it. This part of the chapter surveys some of the major topics and considerations you may want to discuss with a lawyer.

Independent Contractors versus Employees* If you need other people to help you in your business, one of the first questions you should address is whether it is more appropriate for you to hire employees or independent contractors.

There are several advantages and disadvantages to hiring employees. It can be easier to foster a sense of commitment, culture, loyalty, and teamwork in employees than in independent contractors. Hiring full-time employees also gives the employer a greater amount of control over the way employees do their work and allocate their time. On the other hand, hiring employees obligates the firm to pay payroll and other taxes and makes your business subject to numerous federal and state laws that must be navigated. Several of these laws are discussed later in this Chapter.

Hiring independent contractors presents a different set of issues. Independent contractors are typically hired to complete a particular project in a particular amount of time or to provide a specific skill-set. As such, contractors are generally entitled to determine how and even when and where to complete their assigned project. However, a business owner does not have to pay taxes or withhold income tax on money paid to an independent contractor. Depending on the needs of your business, hiring an independent contractor may or may not be a possibility. Typically independent contractors may be hired for specific engagements, but will generally not constitute the backbone or bulk of the firms professional staff.

Even if a firm agrees to hire a person as an independent contractor, the firms characterization of the relationship is not binding on others, such as the IRS. Depending on several factors, such as the amount of control over where, when, or how a person does his or her job and the permanency of the relationship, a person whom you initially hire as an independent contractor could later be deemed to be an employee, and your business, or you, may be liable to pay back payroll taxes or other benefits. Also, you may be liable for the conduct of the worker if he or she is later found to be your agent or employee; this is particularly troubling because your insurance company may exclude the lawsuit from coverage because the act was committed by someone you told the insurance company was an independent contractor. If you are considering hiring independent contractors, having a lawyer help you determine whether, given the type of help you need, the people you hire can be classified as independent