Attorneys are often approached by individuals who would like assistance in forming or reviewing business entities that they intend to use to conduct a new or existing venture. Often times, these people believe that the attorney they hire represents them individually as well as the yet to-be-formed or already formed legal entity. Conventional wisdom would assume that to be the case—the individuals chose the attorney, they will direct the attorney, and will pay (or direct the entity to pay) the attorney. However, in such situations conventional wisdom is often wrong. When a group of individuals hire an attorney and the agreement with the attorney is with the entity, or on behalf of an entity, the attorney is usually not their individual attorney.
It is always important to keep in mind that businesses are separate and distinct legal entities from their owners. As such, when individuals engage attorneys to do work for a to-be-formed entity or an existing entity, it is often the case that the attorney represents only the business and not the individuals. This is true even if the entity has not been formed, since some jurisdictions allow pre-formation actions, such as hiring an attorney, to be ratified by the business after it is formed. This is not to say that an attorney cannot also represent the individual owners—they often do—but when, for example, there are two or more individuals forming a business, it may not be possible (or ethical) for the attorney represent each individual as their interests may conflict. Attorneys have a duty to act in the best interests of their client and since this cannot be done when they are conflicting interests, the attorney, to avoid a potential conflict of interest, may only represent the business or one of the individual owners.
PRACTICAL COUNSEL: When two or more individual hire an attorney to help start a business, individually they should not assume that the attorney represents or will “look after” their individual interests. If they want an attorney to represent their individual best interests, they should consider engaging an additional attorney(s) in their own name and not that of the business. In short, always clarify in advance who the “client” is to ensure that your expectations and that of the attorney are aligned.