From time to time, I come across a situation in which a client has had an LLC or other business entity set up by a CPA or Financial Advisor. Usually, the lawyer was going to charge $2000 or so, and the CPA/Financial Advisor tells them it only costs $100 to do, so why pay the lawyer. Is this a smart way to save money or a terrible idea?
IT'S A TERRIBLE IDEA.
This is an unauthorized practice of law. A license to practice law is required to give advice about business formation, and for good reason. The main purpose of setting up an LLC is to limit the business owner's personal liability if something goes wrong in the business. A CPA or financial advisor doesn't know jack about how to protect you and your assets. The CPA probably knows about tax saving entities, and usually a lawyer will involve a CPA in the business setup process. In most situations, a financial advisor has nothing of professional value to add to the LLC setup conversation. (This includes Financial Advisors who have access to a "Legal Department," which is usually located out of state and inexperienced in business law and therefore completely useless in this situation.) To be completely honest, most lawyers have nothing of value to add to this conversation unless they are practicing in estate planning and business law.
In 100% of these situations that I have seen, the client has simply filed Articles of Organization with the state and maybe applied for an EIN. (Although I have seen clients who have a totally inadequate LegalZoom operating agreement.) That may be enough to allow you to do your taxes the way you want, but it will not help you if you are ever sued and want to protect your personal assets. So really, you are not saving yourself a couple thousand dollars; you are wasting the time and money it took to set up an inadequate LLC. Would you rather throw $200 in the garbage, or pay $2000 to adequately protect your assets?
Be wary of any CPA or Financial Advisor who is comfortable practicing law without a license, especially when it comes to the possibility of losing hundreds of thousands of dollars if things go wrong. Like everything else in life, you get what you pay for.