Attorneys are often mocked for what seems to outsiders as excessive caution in making definitive statements. A typical legal opinion rendered by a corporate attorney is approximately 10% opinion and 90% caveats, exclusions and limitations. The one caveat I think I have provided to every single one of my clients at one time or another is “but I’m not a tax attorney and am not providing tax advice.” Even though I took courses in basic income tax and corporate tax in law school, this area of the law is uniquely complex, and I’ve always been careful to defer to the experts. My uncle got an LLM degree in tax law and practiced in the areas of tax, corporate, real estate and trusts and estates. That sort of generalization isn’t really possible anymore, as all of those areas are exponentially more complex today, so most corporate lawyers today are like me very reticent about making grand pronouncements about tax matters.
More than any other legal specialty, it’s important in planning transactions to ensure that tax advisors are involved right from the start, in the conceptualization of the structure. When forming an entity, tax considerations will primarily drive whether the entity will be an LLC, C-corporation or S-corporation. Acquisitions of companies can be done on a tax-free basis when stock is used to pay the purchase price, but there are a number of technical requirements in structuring this that need to be done correctly. The same holds true for tax-free spinoffs of companies.
When your legal advisor is a large law firm, the obtaining of proper tax advice happens seamlessly (if expensively): your primary contact is typically a corporate attorney, who will rope in the tax person to assist. However, for startups and smaller companies using someone like yours truly, there tends not to be an appetite by the client for $800/hour advice on tax matters. For these situations, many of my clients already have a company accountant engaged, and for straightforward tax matters such as reviewing a startup’s LLC operating agreement, using the accountant for this is a cost-effective way to proceed.