How Lawyers Help New Businesses
It can be feverishly tempting to set up a new business without first consulting an attorney.
With 24/7 online business registration from the Ohio Secretary ofState, a new legal entity can be formed in a matter of minutes, day ornight. Why then, does our law office receive so many frantic phone callsfrom individuals who did it themselves?
Self-help like this often results in picking the wrong legal entityfor the new business – partnership, S-corporation, C-corp., LLC, etc.,as well as ending up without an appropriate operating agreement thatstates how the entity will be managed. (A previous article discussedthe need to have effective buy-sell agreements in place as part of theoperating agreement to deal with the possibility of a partner dying,going bankrupt or getting divorced. Go toBusinessJournalDaily.com/legal-strategies.)
Another pivotal shortcoming of going it alone is complicating accessto the court system. In our litigious society, businesses may becomeembroiled in civil litigation at some point during their operation. Butunder Ohio law, a corporation or other similar entity representingitself in court subjects itself to unauthorized practice of law claims.
To the self-starter, this may be maddening. However, this rule isrooted in the longstanding principle that corporations and limitedliability companies are separate legal persons than their owners orshareholders.
Therefore, when an owner or officer of an entity represents thatentity in court, they are attempting to legally represent another“person.”
In 2005, the Ohio Supreme Court created a limited exception to theabove rule in Cleveland Bar Assn. V. Pearlman. The defendant, Mr.Pearlman, was a 99% owner of two businesses and represented both of themin 13 different cases seeking money damages from tenants or formertenants in the Cleveland Heights Municipal Court.
The Cleveland Bar Association sued Mr. Pearlman for the unauthorizedpractice of law. Surprisingly, the Supreme Court held that Mr. Pearlmanwas not engaging in the unauthorized practice of law.
Specifically, the court cited Ohio Revised Code Section 1925.17, which states:
“Any bona fide officer or salaried employee of a corporation mayrepresent or defend the company’s claim in a small claims divisionarising from a claim based on a contract to which the corporation is anoriginal party or any other claim to which the corporation is anoriginal claimant, provided such corporation does not, in the absence ofrepresentation by an attorney at law, engage in cross-examination,argument, or other acts of advocacy.”
This narrow holding allows Ohio businesses to represent themselves only in small claims court.
With a limited jurisdictional limit (i.e. $3,000), small claimscourts may not be able to award litigants the full extent of theirdamages.
However, certain business entities like those operating rentalproperties may still avail themselves of the small claims court systemfor evictions and collections below the $3,000 limit, subject of courseto the restriction on cross-examination.
If the litigant desires more than $3,000 as damages or anticipatesthe need for cross-examination, they will require legal representationfrom a licensed attorney.
In our complex society filled with rules, regulations and legalpitfalls at all levels, forming a relationship with an attorney on theground floor of the new business will free the business owner to do thethings she is best suited for – running and growing a new company.