The Cost Of Keeping A Corporation On "Life Support"
Cliff Ennico
www.creators.com
"My hairdresser is a psychologist in private practice and she is not incorporated. I keep telling her she has to be to protect herself in case she gets sued. She said someone told her it would cost her over $2,000 a year to do this. Do you know? What do you think?"
Frankly, I think all hairdressers are psychologists. It's just that this one has a license . . .
I'm a little surprised at the $2,000 quote for legal fees. It may well cost $1,000 to $2,000 to set up a corporation in most states, but once the corporation is set up the annual "carrying charges" aren't that much. Many states impose a "minimum tax" on corporations each year, but it's usually only in the $250 (Connecticut) to $800 (California) range. There's also a filing fee for an "annual report" you have to file with your state Secretary of State's office each year, but that's usually in the $50 to $100 range.
What may be going on here is that an attorney quoted her an "annual retainer" of $2,000 to keep the corporation alive each year. Some attorneys do this, and it's not at all unethical. In fact, it may actually save your life if you're not disciplined enough to do the corporate paperwork yourself.
When you form a corporation, there is certain paperwork that must be prepared on a regular basis each year. Fail to do the paperwork, and there's a risk that a judge may disregard your corporation - a procedure known as "piercing the corporate veil" - and allow a plaintiff to get at your personal assets if someone sues you. Paying an attorney an "annual retainer" guarantees that the necessary paperwork will be done correctly, and on time, so it will be there if you ever need your corporation to shield you against personal liability.
The idea is that you pay an attorney $2,000 a year as a "flat fee", and he handles all of the corporate paperwork (other than tax returns, which your accountant does) you need to prepare each year. The services that are normally included in an "annual retainer" arrangement are:
preparing resolutions of directors' and shareholders' meetings when your corporation needs to do something "outside of the ordinary course of business";
conducting the annual meetings of your directors and shareholders (generally required by law for corporations with more than one director or shareholder);
overseeing elections of your corporation's directors and officers;
preparing and filing the annual report to the Secretary of State; and
acting as your corporation's "registered agent" (basically the designated recipient of litigation papers and other important documents that are legally "served" upon the corporation).
The $2,000 would cover the attorney's time (i.e. you wouldn't pay by the hour for these services), but you still probably would be on the hook for the attorney's out-of-pocket expenses (known as "disbursements"), such as filing fees, postage, and overnight courier fees. The "annual retainer" also would not include fees for services other than routine corporate maintenance. So, for example, if you ask your attorney to negotiate a lease of office space for your corporation, or prepare an employment agreement with a senior executive, those services likely would not be included in the "annual retainer".
A valuable service indeed, but still $2,000 sounds a bit high to me. If the hairdresser asks around, she should be able to find an attorney willing to perform these services for an annual fee of $1,000 or less, plus expenses. Unless, of course, the hairdresser/psychologist's office is located in a high-rent district, such as midtown Manhattan, in which case $2,000 is probably a bargain.
One more thing: in most states, professionals (such as psychologists or lawyers) cannot limit liability for THEIR OWN professional malpractice by forming a corporation or limited liability company (LLC). If they have partners, they can limit their personal liability for THEIR PARTNERS' malpractice by forming a legal entity, but the corporation or LLC will not protect them against THEIR OWN malpractice. That's frankly why many "solo" professionals don't bother forming corporations or LLCs - they would rather spend the money on a drop-dead policy of professional liability (malpractice) insurance, in the hopes that a potential plaintiff will chase after the insurance policy and not try to seize the professional's personal assets.
Cliff Ennico (
cennico@legalcareer.com
) is a syndicated columnist, author and host of the PBS television series 'Money Hunt'. His latest book is 'Small Business Survival Guide' (Adams Media, $12.95). This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at
www.creators.com
. COPYRIGHT 2007 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC. Permission granted for use on DrLaura.com.
