I think you absolutely have to be nuts, a real danger chaser, if you’re a California CPA, and you’re in the practice of helping your clients form business entities such as corporations and limited liability companies.
I recently had a very interesting meeting with a California client. He found me on the internet and said, “Hey, it looks like you’ve got a lot of expertise in forming small business entities like corporations and limited liability companies.”
He wanted my insight into a particular problem. He had formed a small business corporation and was being sued as the result of one of his business dealings.
The plaintiff, or the person bringing the lawsuit, was trying to pierce his corporate veil.
They were trying to pierce the corporate veil on the grounds that he didn’t properly form his corporation, and he didn’t have all of the documentation necessary to show that he had completed all of the corporate formalities.
“Oh, that’s no problem,” I said. “Generally, you just go back to the lawyer that helped you form the corporation. They may be able to walk you through some of the discrepancies and describe to you, from a legal standpoint, why they did what they did.”
I was stunned. It’s always a terrible decision for CPAs to draft legal documents, so I asked again, “Your CPA was the one that actually drafted all your legal documents?”
Now he was angry, saying, “Yeah, if they pierce the corporate veil, I want to sue my CPA. He’s the one that led me to believe he knew exactly what he was doing.”
His CPA’s mistake had put this man at risk of losing a lawsuit that could cost him more than $500,000.00.
Don’t Be Another CPA Drowning in Consequences From Naively Incorporating a Business
There are three big reasons why you, the CPA, don’t want to incorporate a business.
1) When you start drafting legal documents as a CPA, you are actually practicing law. In the state of California, you need a license to practice law. If you don’t have a legal license, you can actually be prosecuted for committing a crime.
It puts you in a horrible position vis–à–vis your client. If he is suing you for allegedly doing work that you are not licensed to do, then you have no ability to defend yourself. You won’t be able to say, “Actually, I do have a license. And, I was making professional judgments in terms of how I was going about drafting the paper work.”
2) The second nasty point is one a lot of CPAs don’t think about. You are not insured if you mess up the paperwork.
Lawyers have a specific kind of insurance to cover claims of negligence. It is errors and omissions insurance, or legal malpractice insurance. It says, “Hey, look—if you the lawyer are drafting legal documentation, and you make a mistake, we’re going to insure you.”
For example, we carry multiples of millions of dollars in insurance to protect us in the event that we make a mistake. While we go to great extremes to avoid making errors, we understand that being human comes with limitations.
Mistakes happen. That’s why we have legal malpractice insurance, which protects us in the event of a mistake.
If a CPA makes a legal error in preparing legal documents, the accounting insurance does not cover the legal drafting errors.
Don’t believe me? If you call up your insurance carrier as a CPA and ask them, “Hey, by the way, if I draft legal documents and make a mistake, will you cover me?” The answer will always be “No!” Why?
Because California CPAs are not licensed to practice law, so the insurance coverage does not extend to any mistakes that you might make when acting as your client’s lawyer, or someone acting in the capacity of their lawyer.
3) The last big problem for the CPA doing this kind of work is that if you get sued and you have to defend yourself with no available insurance, you will be forced to pay the legal fees yourself.
Let’s say you’re lucky enough that you were able to just get knocked out of the case at some point down the road. Even so, you could end up spending 15, 25, 35 thousand dollars just hanging in the lawsuit long enough to be able to get yourself out of it.
Don’t risk devastating consequences for that extra $500.00 or $1,000.00 you might make helping a client incorporate their business. The downside for simply having to defend yourself in a lawsuit like this would be an absolute nightmare.
Accountants and Lawyers—Teammates in The Ultimate Incorporation Services Challenge
Alright. So we’ve now gone through a few reasons why it’s not a great idea for you the CPA to be doing legal work on behalf of your client. But we still have the ultimate challenge.
The question many CPAs face is How do we safely get our client into that entity without losing the client?
We want to help our clients do the best they can in the tax world. And, often that’s by use of a business entity in which they can run their business.
Think about what will happen if you send them over to an unknown business lawyer, or one with whom you don’t have a positive working relationship.
Worse yet, think about if you just send the client out on their own, telling them to use Legal Zoom, or to find their own business lawyer. All of those pose a major risk for you and your ongoing relationship with the client.
Is there a solution or way to avoid this business incorporation accounting disaster?
The solution is to do business with a law firm like us. We completely and totally respect the CPA/client relationship. If you, a CPA in California, refer a client over to our office, we will only ever send that client back to you.
If there are any tax questions that come up in the course of our relationship, we will send those questions back to you.
Our view is that we the lawyers and you the CPAs are partners in helping clients do the best they can in the real world. We mean the absolute best from both a legal standpoint and an accounting perspective.
I have been in this business for 30 years. I have seen hundreds and hundreds of corporate tax returns. But, do you want to know how many tax returns we have done in our office? Zero.
That is because we understand how the world of accounting is part science and part art. It’s very, very complicated. You need that 10,000 hours of experience so that you can do your absolute best for your clients.
How on earth are you supposed to master your challenging work while learning and keeping up with the intricacies of legal work?
The Next Time Your Client Wants to Incorporate a Business, Don’t Gamble Away Your Futures!