Accountant and CPA Practicing Law Without A License: Forming LLC and Corporation

An accountant or CPA assisting in forming LLC or corporations is practicing law without a license.

By Brad Nakase, Attorney

Email  |  Call (888) 600-8654

Have a quick question? I answered nearly 1500 FAQs.

In California, Section 6125 of the California Business and Professions Code is the precise statute that prohibits the unlicensed practice of law. It says, “No person can practice law in the California state unless that person has an active membership of the State Bar.” If you have questions after reading this article, please contact our San Diego business dispute attorney.

Sample fact pattern: Michael, an accountant with an unwavering love for entrepreneurism, helped his clients bring their ideas to life by forming LLCs and corporations. He not only navigated the legal complexities but also carved out a successful roadmap with an acute attention to detail and an inherent understanding of commercial goals. Michael created custom structures that reflected the goals of each client who presented him with their vision because of his expertise and commitment.

Can CPAs and Accountants form LLCs, Corporations, and Inc.?

 In California, giving legal advice, including legal documentation and analysis, and defending clients in court are all included in the broad definition of the profession of law. Creating corporations and LLCs entails establishing legal entities with certain obligations, structures, and legal ramifications. Though accountants—including Certified Public Accountants (CPAs)—have a thorough understanding of finance and can counsel clients on the implications of taxes and financial strategies about businesses, forming a corporation or LLC that entails legal aspects come under the purview of California’s accepted legal practice.

Only licensed attorneys who are active members of the State Bar are permitted to practice law in California, according to Section 6125 of the Business and Professions Code. Drafting incorporation articles, agreements of operation, bylaws, and other legal papers that go beyond accounting or financial advice are just a few of the legal complexities involved when creating legal bodies like corporations and LLCs. Since this service involves legal research and drafting legally binding documents, doing it without a license could be considered an unauthorized law practice.

Although accountants and CPAs can help with the financial aspects of creating business entities, offering financial advice and guidance on tax implications, the actual structuring and drafting of the legal papers that establish the business entities fall within the purview of law practice in California. Thus, creating LLCs and corporations without having a legal license in the state could be considered an unlicensed practice by an accountant.

Forming an LLC and Corporation Is The Practice of Law

Forming an LLC or corporation takes more than just paperwork and financial management; a thorough grasp of the legal ramifications and structural distinctions between the entities is necessary. Since it involves giving legal advice and analyzing the particular business structures and the implications, consulting a client about the variances is regarded as practicing law.

An LLC or corporation must consider several legal factors before being formed, including rights of ownership, governance arrangements, liability protection, compliance with state law, and tax ramifications. This advice ventures into the legal area in addition to financial competence. For example:

  1. Corporate Structure: Describing the different ownership arrangements, management philosophies, and legal obligations that separate an LLC and a corporation. Understanding statutes with legal standing and the implications specific to each form of company is necessary to follow this guidance.
  2. Legal Protections: How corporations and LLCs insulate private assets from liabilities of business is a necessary part of providing advice on the liability protections that come with incorporating the entities. State law safeguards and legal concepts are covered by this guidance.
  3. Corporate compliance: Understanding continuing filing needs, record-keeping, yearly meetings, and numerous legal obligations required by state statutes is essential to comprehend the legal formalities and requirements of compliance for operating a corporation or LLC.
  4. Legal document drafting: It is the process of creating essential documents such as agreements of operation, bylaws, incorporation articles, or resolutions. Legal expertise is necessary to guarantee that these documents, which set forth the company’s governance, regulations, and structure, correctly project the client’s goals and conform to state law.

Therefore, legal consulting is involved in outlining the variations in company structures and counseling customers on which type of entity could best meet their needs. It explores the area of understanding and applying legal concepts and statutes in addition to financial consultation. As a result, providing advice on the choice and establishment of these corporations falls typically under the jurisdiction of law practice and calls for a California legal license.

Lawsuit against Accountant and CPA

If an accountant or CPA forms LLCs or corporations without a license, they may be held liable for practicing law without authorization. The legal practice is restricted to licensed lawyers who have been admitted to the State Bar, as defined by law in the California state and numerous other states.

Unauthorized legal practice may occur when an accountant provides services that extend beyond accounting or financial advice and entail actions that are regarded as legal activity, such as offering advice on the creation and organization of LLCs or corporations. This unaccredited practice could result in legal implications because:

  1. State Law Violation: State law violations occur when someone practices law without the necessary license by getting involved in actions that are expressly defined as such. Like many other states, California has strict laws governing who can offer legal services.
  2. Legal Liability: A CPA or an accountant may be held legally liable for giving legal consulting without the required license. The clients may hold the said accountant liable for losses stemming from the advice if the formation of the corporation or LLC causes legal problems because of poor structuring or insufficient legal counsel.
  3. Concerns regarding Consumer Protection: There can be serious hazards for consumers if service providers engage in the unauthorized practice of law. It compromises consumer protection policies that guarantee those getting legal assistance are doing so from certified and licensed experts who follow moral guidelines and possess the requisite knowledge.
  4. Possible Penalties: If an individual practices law without a license, the state may punish them with fines or other disciplinary actions.

Even if CPA and accountants are educated on financial matters and capable of offering perceptive evaluations of the financial implications of different company arrangements, accountants and certified public accountants are not authorized to offer legal advice or draft contract documents with legal authority. It is vital to confirm that the persons offering legal services have the required license because practicing law without the required license may lead to legal issues and lawsuits.

Accountant and CPA Liability for Damages

If an accountant or CPA helps set up companies like LLCs or corporations without the proper legal license, they could get into trouble and face legal consequences. This is because it’s considered as if they’re doing legal work without the proper qualifications. If someone takes legal action against them (the plaintiff), they can ask for different types of compensation:

  1. Monetary Damages: The person taking legal action can ask for money to compensate for losses that occurred when forming the company. These losses might be because the setup wasn’t done right, the legal advice from the CPA wasn’t correct, or other related issues. Essentially, they can claim money to cover the financial harm they went through because of the advice from the accountant or CPA.
  2. Fiduciary duty breach: Clients often depend on CPAs and accountants for sound professional advice. If these professionals engage in unauthorized legal activities, it’s like breaking the trust they owe to the customer. This breach of trust would be labeled a fiduciary duty breach and could lead to legal claims.
  3. Professional malpractice or negligence: If the accountant or CPA’s advice harms the client’s business and it’s seen as careless or below the expected professional standards, the person taking legal action (plaintiff) can ask for compensation. This is called seeking damages for malpractice or professional negligence.
  4. Restitution: If the accountant or CPA gave wrong advice or services, the plaintiff can ask to get things back to how they were before. For example, they might want the money they paid for consulting services to be given back. This is called seeking restitution to make things right.
  5. Punitive Damages: Punitive damages may be awarded in certain circumstances to punish the wrongdoer and discourage similar future actions if the accountant’s or CPA’s actions are considered particularly repugnant or willful.

Notably, the details of potential compensation and legal action may vary depending on the facts of each case, the severity of the damages, and the relevant local legal rules. However, accountants who practice law without being licensed expose professionals to legal audits and potential financial consequences due to their actions.

Have a quick question? We answered nearly 2000 FAQs.

See all blogs: Business | Corporate | Employment Law

Most recent blogs:

Form 1096 - A guide for US employers

Form 1096: A guide for US employers

Guide to Form 1096 for US Employers: Learn which businesses must file Form 1096 and the consequences of not filing. Get details on obtaining free forms and submitting accurate reports to the IRS.
What Is a Gap Analysis

What is a Gap analysis?

Gap analysis helps businesses compare current performance with desired goals, identifying inefficiencies. This method aids in developing action plans to bridge performance gaps.
SWOT Analysis Example

SWOT Analysis Example

Conducting an HR SWOT analysis helps identify strengths, weaknesses, opportunities, and threats within and external to an organization. This process aids in developing strategic HR actions aligned with the company's objectives.
HR Career Pathway

HR Career Pathway

Discover how to shape your HR career pathway effectively, utilizing insights on skills, gaps, and tools available for your professional growth. Learn strategies for navigating various HR career routes to enhance your development and impact.
Certifications For HR

Certifications For HR

Explore nine HR certifications to enhance your career prospects and demonstrate your knowledge of best HR practices. Discover how certifications can increase your earning potential and make you more competitive in the HR field.
HR Roles

HR Roles: Key duties and responsibilities in today’s workplace

Explore how HR roles have evolved from basic administrative functions to strategic tasks that enhance organizational performance and employee engagement. Learn about the crucial roles in HR that drive company success and adapt to technological and workplace changes.
Succession Planning

Succession Planning: Why is it essential for your business

Understand why effective succession planning is crucial for organizational continuity and competitiveness, and how a lack of planning can impact businesses. Discover how structured succession plans can benefit organizations by preparing future leaders and ensuring role continuity.

Costco Hot Dog Price Story

The story about Costco $1.50 hot dog price began in 1993 when the Costco merged with Price Club. Costco's $1.50 hot dog price remains unchanged in 2024.

Request for Production of Documents, RPOD, CCP 2031.280

Starting January 1, 2020, California's civil litigants face stricter discovery rules under Cal. Civ. Pro. § 2031.280(a). All produced documents must now be labeled by request number, impacting both new and ongoing cases.
What is a default judgment

What is a default judgment

A default judgment is issued when a defendant fails to respond to a lawsuit, allowing the plaintiff to win by default. Understanding this process is crucial for both parties involved in litigation.
What is a quitclaim deed

What is a quitclaim deed

Quitclaim deeds offer a quick way to transfer property ownership without guarantees, distinct from warranty deeds. Ideal for non-sale property transfers among family or into trusts, they require careful legal consideration.
Combined Assurance

Combined Assurance: Enhancing internal auditing practices

Combined assurance enhances internal auditing by fostering collaboration across departments, improving efficiency, and reducing overlap. It boosts risk mitigation and confidence in governance, crucial for organizational success.
Sole Proprietorship Business License

Sole Proprietorship Business License

Sole proprietorships offer simplicity and fewer formalities for new business owners, with benefits like no separate taxes. Remember, personal and business assets aren't distinct, impacting liabilities and the need for proper licensing.
What is the most important part of your business plan

What is the most important part of your business plan

The executive summary shines as the pivotal element of a business plan, serving as a decisive factor for readers to delve deeper. A comprehensive guide on crafting an impactful business plan, focusing on unique strategies and essential components.
Easy Businesses To Start

Easy Businesses To Start

Unleash your entrepreneurial spirit with these straightforward home-based business ideas, from e-commerce to creative pursuits. Embrace the flexibility and potential for financial independence with diverse options suited for various interests and investment levels.
What is the standard deduction

What is the standard deduction

Understand the IRS standard deduction, a straightforward option for reducing taxable income without needing detailed documentation. Delve into eligibility, amounts for 2023-2024, and considerations for itemizing versus standard deduction.
How to get a business license

How to get a business license

Grasp the essentials of obtaining a business license in California, focusing on local and state-level requirements. Uncover specifics on when and why different types of business licenses are needed.
Why Do Businesses Fail

Why Do Businesses Fail?

Uncover the key factors contributing to small business challenges, including financial obstacles, inadequate management, and flawed marketing strategies. Understand the role of a comprehensive business plan in ensuring long-term success.
How To Start LLC

How To Start LLC

Navigate the process of creating an LLC in California, from naming your entity to fulfilling state tax obligations. Highlighting key steps including selecting a registered agent and drafting an operating agreement.
What is a BOC 3

What is a BOC 3

Understand the essentials of a BOC-3 filing for transportation businesses in California, detailing the designation of process agents for FMCSA certification. Learn the requirements, costs, and benefits of choosing the right process agent for your business.
What is an S corporation

What is an S Corporation

Explore the benefits and considerations of electing S corporation status for your business, focusing on tax advantages and eligibility criteria. Determine if an S Corp is the right choice for you with insights on structure and taxation.
Standard deduction vs itemized deduction

Standard Deduction vs Itemized Deduction

Understand the key differences between standard and itemized deductions to effectively reduce your taxable income and potentially save on taxes. Choose wisely to maximize your tax benefits based on personal financial details.
How to calculate net income

How to calculate net income

Unveil the significance of calculating net income for business profitability, a key indicator for financial health and decision-making. Understand the formula and practical applications for determining net earnings.

Contact our attorney.

Please tell us your story:

0 + 1 = ?

20230102