Many Accountants are unaware of the serious consequences that can result from helping their clients incorporate a business. In California, filling out legal forms without a lawyer is considered unauthorized practice of law. Practicing law without a license can result in large fines and even jail time.

Accountants and the Unauthorized Practice of Law

By Andrew Gale

A good friend of mine who is a Certified Public Accountant (CPA) approached me on his new idea for expanding the services that he currently provides to his business clients. He thought that in addition to the accounting services that he currently provides to his small business clients, he might offer to form corporations and limited liability companies, run the annual meetings, provide annual maintenance of the corporate records and other transactional functions. His view was that given the proliferation of internet web sites and attorney supply companies that seemingly simplify the process, why not jump in and make a few bucks? He had heard that other accountants had done it for their clients with no problems and it did not look so tough that he could not figure it out.

I told him that he should seriously reconsider his idea and offered to walk him through the analysis. I advised him that as a Certified Public Accountant in California, there were three major problems with this plan. First, he planned to engage in the unauthorized practice of law (UPL) which was against the law in the state of California. Second, he could easily and unwittingly commit malpractice. Third, there was little likelihood that the insurance company that provided his errors and omission insurance would offer coverage in the event that he was sued for providing this extra service.

Accounting Laws and Regulations Keep CPA on Trial

The simple fact is that we live in a very litigious world. Businesses, and people in general, are financially challenged given the current state of the economy. When things are not good, people look to shift blame. When problems arise, they look to sue everybody. Accountants are not immune from such an attack. Lawsuits against accountants could be for anything. The accountant’s action could be just the simple mistake of offering an add-on service outside their area of expertise. The action does not have to be malicious nor intentional to find oneself in court on the wrong side of a lawsuit.

The analysis starts with the prohibition set out in the California Business & Professions Code §6125 which states, “No person shall practice law in California unless the person is an active member of the State Bar.”

Well, what is the worst that can happen if an accountant, not an active member of the bar, practices law in California?

California Business & Professions Code

California Business & Professions Code §6126(a) states in part, “Any person …practicing law who is not an active member of the State Bar…is guilty of a misdemeanor punishable by up to one year in a county jail or by a fine of up to one thousand dollars ($1,000), or by both that fine and imprisonment.”

You may wonder, “Why would a prosecutor worry about me?”

To think that county prosecutors will look the other way when such activity is brought to their attention is to underestimate the serious nature of the problem in the state.

The Los Angeles County Office of the District Attorney released to the public a manual for prosecutors entitled the “Unauthorized Practice of Law.”

In the preface, District Attorney Steven Cooley said, in part, “…[U]nathorized practice of law (UPL) is a serious problem in Southern California.…Anyone, however, can be a victim. UPL occurs in all legal fields…As District Attorney, I am committed to combating this form of fraud. Working with the State Bar of California and various bar associations, the District Attorney’s Office has launched a broad scale effort to identify and prosecute these crimes. The District Attorney’s Office has initiated numerous investigations and prosecutions … and is leading statewide efforts to enhance laws dealing with UPL.”

The California State Legislature has provided prosecutors with a wide range of additional remedies and penalties available in any enforcement action brought in the name of the People of the State of California by the Attorney General, a District Attorney, or a City attorney acting as a public prosecutor.

What Happens in Unauthorized Practice of Law Cases?

In UPL cases where victims purchased services or goods, or were otherwise harmed, the court is empowered to award, as additional relief, the following: (1) actual damages; (2) restitution of all amounts paid; (3) the amount of penalties and tax liabilities incurred in connection with the sale or transfer of assets to pay for any goods, services, or property; (4) reasonable attorney’s fees and costs expended to rectify errors made in the unlawful practice of law; (5) prejudgment interest at the legal rate from the date of loss to the date of judgment; and, (6) appropriate equitable relief, including the rescission of sales made in connection with a violation of law. The court is to award this relief directly to victims, or if direct restitution is impracticable, the court may distribute this relief as it chooses pursuant to its equitable powers.

What if you acted in the capacity of a legal document assistant and “just filled out some forms”?

First, you would need to be registered (after fulfilling the educational requirements) with the county of your principle place of business. Next, you would be required to obtain a $25,000.00 bond. Once you are there, you would have learned that it is unlawful for any person acting in the capacity of a legal document assistant to provide assistance or advice which constitutes the unlawful practice of law or engage in the unauthorized practice of law, including, but not limited to, giving any kind of advice, explanation, opinion, or recommendation to a consumer about possible legal rights, remedies, defenses, options, selection of forms, or strategies.

Accountants: a Small Business Owner’s Most Trusted Advisor

It is my experience that accountants are the most trusted advisors in the average business owner’s world. I have heard many times that a client cannot make a decision until they confer with their accountant. I have experienced first-hand a client’s unwavering trust and conviction that their accountant knows everything. When a client engages an accountant to do a particular task and the accountant undertakes to do the task, the client trusts that the accountant is qualified and insured to do the work.

If you advised a client up-front that you were neither licensed nor insured to undertake a service for the client, how many clients would request the work be done? None.

Clients trust that the accountant will give no bad advice or direction. If an accountant drafts articles of incorporation, prepares corporate bylaws and resolutions required in connection with the organization or maintenance of a corporation, the client would never think to second guess the qualifications or competence of the accountant.

The California courts have specifically determined that among the acts which constitute the practice of law are the preparation, drafting, or selection or determination of the kind of legal document, or giving advice with relation to any legal documents or matters including the formation, change, consolidation, or dissolution of corporations or partnerships, contracts, leases, certificates of fictitious business names. The preparation of corporate bylaws and resolutions required in connection with the organization of a corporation necessarily includes the giving of advice concerning matters of law, and insofar as they create, modify surrender or secure legal rights, their drafting constitutes the practice of law.

So also, the minutes, resolutions, and contracts in connection with the merger, consolidation, or dissolution of corporations or with the increase or decrease of capital stock, or with the issuance of corporate securities, all create and define legal rights of an important nature, and require, for their proper drafting, expert skill in legal technique and a considerable degree of information about the law. The courts have determined that public policy demands that this practice is confined to attorneys at law.

In 1983, the San Diego County Bar Association stated in an ethics opinion that without a lawyer’s supervision, activities related to corporate formation, maintenance or dissolution would be considered unauthorized practice of law.

“CPAs and attorneys are charged with the responsibility of policing the practice of their professions. Attorneys and CPAs have an ethical duty to assist the Supreme Court or the Accountancy Board, respectively, with the prevention of the unauthorized practice of their professions. This includes reporting unauthorized practice.”

-Steven A. Martin, JD, CPA and legal counsel for The Ohio Society of CPAs

So I ask you, why take the risk?

Martin further noted, “With respect to forming business organizations, no CPA makes a lot of money doing that. Thus it is not an income generator; it is merely a trap for the unwary, especially since it’s illegal.”

If an accountant is practicing law, how would they ever get caught?

“Eventually, a client will consult a lawyer for one reason or another, and the lawyer will ask for certain documents. The lawyer might ask who prepared a certain form–perhaps because it’s not the way he or she would have prepared it. The client will tell the lawyer that the CPA did the work, and the lawyer is then required by professional ethical duties to report the CPA to the Bar Association. Even though the attorney had nothing to do with the CPA’s unlawful act, the court can sanction the attorney for failure to report UPL.”

To compound the problem, the courts have determined that to undertake an important legal transaction requiring specialized skill by a person clearly not licensed and qualified to undertake it is not only improper, but negligent. The courts have found that such conduct should be discouraged and not protected by immunity from civil liability.

Unlicensed individuals are often held at the same standard of care as that expected of licensed individuals, and therefore, can be sued for malpractice.

Imagine that your business client is sued. The plaintiff alleges that the corporate records were not properly maintained. The plaintiff tries to pierce the corporate veil to attach your client’s personal assets. You know that lawyers are trained to bring suit against everybody. If you formed the corporation or maintained the records improperly, your client’s lawyer will certainly advise that you be added to the suit. If the corporate veil is pierced, you will be forced to contribute to the damages suffered by the client.

For what?

Insurers are seeing a rise in suits for errors resulting in losses and penalties to clients

Now the problem is that you end up paying your own defense costs out of your pocket. No insurance company will provide coverage for claims or litigation costs where the practitioner has performed services for which they were not legally permitted to practice. Call your insurance carrier if you are in doubt. They are seeing a rise in suits for errors resulting in losses and penalties to clients.

How To Prevent Errors in Your Corporate Documents

The good news is that there are a lot of things you can do to avoid being in this a situation. You need to develop a good relationship with your client and be clear with them as to where your expertise begins and where it ends. Use a Corporate Formalities Checklist as a guide for this conversation.

You should form a good relationship with a corporate attorney who is trained, licensed and insured to do this kind of work.

Finally, get to know your insurance company as they provide expertise on ways to handle issues before they turn into lawsuits. Be sure to use detailed engagement letters for all the work you undertake on behalf of a client. Perhaps, most importantly, limit your services to those which you are licensed and insured to perform.

Andrew Gale is a corporate attorney and managing shareholder of the Law Offices of Gale and Vallance, APC. His firm specializes in all matters related to the formation and maintenance of business entities with an emphasis upon issues related to small business corporations. He is a graduate of Hastings College of Law.