How A Law Firm As Your Registered Agent Will Help Keep Your Corporate Shield Or LLC Shield Intact.
by George C. Hutchinson, Esq.
Most individuals have decided to operate as business entities such as corporations or limited liability companies (LLCs). This is because there are practical (and substantial) liability protections as well as tax advantages to being “incorporated” as opposed to being “self-employed”.
California and most other, if not all 50 states, state statutes require a registered agent for corporations[i] and LLCs[ii]. In fact, websites like www.LegalZoom.com, www.RocketLawyer.com, and www.OfficialLegalSolutions.com allow you to go online and for a nominal fee help you setup your entity documents and gets you ready to submit your forms to the secretary of state. Some people even pay their CPAs or bookkeepers to setup the business entity for them.
But what if you are not as protected as you think you are? Or even worse … what if setting up a company actually made you more susceptible to liability and lawsuit exposure?
ANALYSIS
Generally speaking, when you setup an entity and designate a registered agent that registered agent must continuously maintain an ability to be served with legal documents. But did you know:
- The registered agent must make themselves available during regular work hours to be served legal documents, which means that if you are your company’s registered agent you may want to think twice about taking any extended vacations;
- If you are your own company’s registered agent be prepared to be served with a lawsuit or other legal documents in front of your co-workers or employees; and
- IF YOUR REGISTERED AGENT ADDRESS IS THE SAME AS YOUR BUSINESS ADDRESS, OR IF THE REGISTERED AGENT IS AN INDIVIDUAL THAT IS NOT AN ATTORNEY, OR IF THE REGISTERED AGENT ADDRESS IS YOUR HOME ADDRESS YOU MAY HAVE JUST DRAWN A RED TARGET ON YOUR BACK FOR AVOIDABLE LAWSUITS.
Fears in Hiring an Attorney in setting up your entity and registered agent may be misplaced
Most people go to websites and CPAs thinking that it is easier and faster to setup their entity that way but the BIGGEST reason I hear that attorneys are generally disregarded is because most people automatically assume that attorneys charge an hourly rate and/or are just too expensive. The truth of the matter is that most attorneys can help you setup your business entity for the same, similar, or even cheaper fees charged by your CPA. My office[iii] has setup entities for some of our California clients for as little as $323.00 which included state filing fees, registered agent fees, and other fees like annual compliance fees. Therefore law firms, including mine, are actually very affordable in helping you setup your business entity. Just like anything else, it might take some shopping around to find your affordable solution, but law firms are affordable and not something to be feared when setting up your business entity.
Drawing a target on your back
In over 25 years of practice I have discussed lawsuits with consumer watchdog groups and other “consumer advocates” and was not surprised to hear that there is a whole business setup on suing small businesses over minor administrative or other trivial violations. I’ve seen the most trivial issues turn into nightmares for businesses. I’ve even heard of restaurant owners being sued for disability violations in a parking lot the restaurant owner doesn’t even own[iv]. According to the 2011 office of the Attorney General there were 338 settlements, for more than $16 million, of which nearly 75% of that money went to plaintiff’s lawyers[v]. In speaking with ex-consumer advocate plaintiffs I was told that most attorneys would take on cases basically for “free … on a contingency basis” mainly because the small business owners were unsophisticated and a settlement could be easily gotten from these types of small business owners. One former plaintiff continued to explain that if the registered agent address is the same as the business address, or if the registered agent address is a home address, or if the registered agent is an individual not an attorney, then most plaintiffs’ attorneys know that this is most likely an unsophisticated small business owner which will settle out of court on a settlement even 2 years later before actually going to trial.
One strategy that has been discussed is the idea of suing the owner of the business individually because suing the business owner always “freaks them out enough to get a settlement faster”. One argument that was discussed is the idea of using the secretary of state information showing that the owner is the registered agent and that the registered agent is liable through what’s called an “alter ego” theory[vi]. All the plaintiff has to do is argue enough facts to show that the business is an alter ego of the business owner and if the court buys the argument then the business owner (in addition to the business) can be individually liable[vii]. So the first line of defense is PRIVACY and making the unscrupulous plaintiff FIRST find out who owns the company. Then if your company’s registered agent is an attorney the NEXT few questions that need to be asked by the other side looking for a settlement is 1) whether or not law firm and the business have a personal relationship with each other; 2) whether or not the law firm is offering the business a discount on legal fees meaning that this “potential lawsuit” would actually go to trial; or 3) whether or not the business owner is sophisticated enough to know how to defend against frivolous or other lawsuits. If it looks like too much work or the likelihood of gaining a settlement from the case is not great chances are that law firm looking to take on the case might decide to move on to easier prey. The really bad part about the “alter ego” argument is that under some circumstances a judgment against a corporation may be amended to add you in as an individual “alter ego” after the judgment is entered[viii]. And yes the alter ego argument can be raised in all civil cases and even in divorce cases. So instead of becoming an easy target posted on public records, my suggestion would be to hire a third party company, preferably a law firm to be your registered agent in order to be afforded a little more privacy on public records.
Hiring a Law Firm to be your registered agent is a tax deductible “otherwise free”
In speaking with some bookkeepers over the subject of registered agent I was told by one bookkeeper that to hire a third party as registered agent is a business expenses and therefore a tax deductible item to the business. My office charges $119.00 for the year for my firm to be your registered agent. So for less than you spend on gas, food, or clothes for the year you can get my law firm to be your registered agent and enjoy the protections a law firm would give you as your business’ registered agent AND get it for “free in the form of a tax write off at the end of the year” as the bookkeeper put it “it just makes sense”.
CONCLUSION
Don’t allow yourself to be subjected to an incomplete business entity formation. Allow an attorney to help guide you in structuring a complete business entity for you or completing the one you already have and allow yourself to be protected with greater privacy and security. After all, if protection and privacy is your main goal in setting up your business entity why not do it right from the very beginning? And if you are being served with legal documents wouldn’t you want an attorney to get it first? The cost for registered agent at my office is $119 for the year. So basically for $119.00 tax write off you can afford to hire a law firm to be your registered agent and avoid being so visible to unscrupulous plaintiffs looking to sue you for a quick settlement. Protect yourself at an affordable rate “it just makes sense.”
For a free consultation regarding any issue that you might have with your entity structure or any other business needs, call Legal Solutions 2 U today at 855 – 77 LAW 2 U (855-775-2928).
[i] California Corporations Code Section 202 (c) provides that “The articles of incorporation shall set forth: … The name and street address in this state of the corporation’s initial agent for service of process in accordance with subdivision (b) of Section 1502.”
[ii] California Corporations Code Section 17701.13 (a)(2) provides that “A limited liability company shall designate and continuously maintain in this state both of the following … An agent for service of process.”
[iii] Author of this article is George C. Hutchinson, Esq., California Bar License 138735 and has been in practice for over 25 years, including complex insurance, civil, and other litigation.
[vi] California Corporations Code Section 171011 (b) provides that “A member of a limited liability company shall be subject to liability under the common law governing alter ego liability and shall also be personally liable under a judgment of a court or for any debt, obligation, or liability of the limited liability company, whether that liability or obligation arises in contract, tort, or otherwise, under the same or similar circumstances and to the same extent as a shareholder of a corporation may be personally liable for any debt, obligation, or liability of the corporation; except that the failure to hold meetings of members or managers or the failure to observe formalities pertaining to the calling or conduct of meetings shall not be considered a factor tending to establish that a member or the members have alter ego or personal liability for any debt, obligation, or liability of the limited liability company where the articles of organization or operating agreement do not expressly require the holding of meetings of members or manager.”
[vii] Nevertheless, no single factor is determinative and the result depends on the circumstances of each particular case. (Zoran Corp. v. Chen (2010) 185 Cal.App.4th 799, 812 [110 Cal. Rptr. 3d 597]; Baize v. Eastridge Companies, LLC (2006) 142 Cal.App.4th 293, 302 [47 Cal. Rptr. 3d 763].) Whether a party is liable under an alter ego theory is a question of fact. (Zoran, supra, at p. 811.)
[viii] Under some circumstances a judgment against a corporation may be amended to add a nonparty alter ego as a judgment debtor. (Hall, Goodhue, Haisley & Barker, Inc. v. Marconi Conf. Center Bd. (1996) 41 Cal.App.4th 1551, 1555 [49 Cal. Rptr. 2d 286]; Code Civ. Proc., § 187.) “This is an equitable procedure based on the theory that the court is not amending the judgment to add a new defendant but is merely inserting the correct name of the real defendant.” (NEC Electronics Inc. v. Hurt (1989) 208 Cal.App.3d 772, 778 [256 Cal. Rptr. 441].) It is also possible for a party to bring a wholly separate action against the individual to enforce a prior judgment against the corporation on an alter ego theory. (Brenelli Amedeo, S.P.A. v. Bakara Furniture, Inc. (1994) 29 Cal.App.4th 1828, 1840 [35 Cal. Rptr. 2d 348].)