NATIONAL BUSINESS INSTITUTE
ISSUES OF LEGAL ETHICS IN FORMING LLCS
Instructor: John M. Cunningham, Esq.1
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SEMINAR OVERVIEW
Part 1
INTRODUCTION TO THE SEMINAR ............................................................................................................................ 1
Part 2
THE TEN ISSUES ............................................................................................................................................................... 2
ISSUE 1.
WHEN DOES AN ATTORNEY-CLIENT RELATION EXIST IN AN LLC FORMATION? .......................................... 2
ISSUE 2.
COMPETENCE IN FORMING LLCS ................................................................................................................... 3
ISSUE 3.
DEFINING THE SCOPE OF REPRESENTATION IN LLC FORMATIONS ............................................................... 5
ISSUE 4.
DILIGENCE IN FORMING LLCS ........................................................................................................................ 6
ISSUE 5.
COMMUNICATION WITH CLIENTS IN FORMING LLCS .................................................................................... 6
ISSUE 6.
FEES FOR LLC FORMATIONS ........................................................................................................................... 6
ISSUE 7.
CONFIDENTIALITY IN LLC FORMATIONS ....................................................................................................... 7
ISSUE 8.
CONFLICTS OF INTEREST IN LLC FORMATIONS—IN GENERAL ..................................................................... 7
ISSUE 9.
CONFLICTS OF INTEREST IN LLC FORMATIONS—JOINT REPRESENTATIONS ............................................... 7
ISSUE 10.
UNAUTHORIZED PRACTICE OF LAW IN LLC FORMATIONS ............................................................................ 9
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Part 1
INTRODUCTION TO THE SEMINAR
1) Welcome to the seminar
2) Subject matter of the seminar. This seminar is about issues of legal ethics in forming
LLCs. In my view, there are 10 such issues that often arise in these formations. The
template rules of legal issues addressed in the seminar are the ABA Rules of Professional
Conduct as currently in effect (the “ABA Rules”). These rules apply, with only minor
changes, in all U.S. jurisdictions except California (which, I understand, has a unique set
Biography and contact information of John M. Cunningham. Attorney John M. Cunningham is of counsel to
McLane, Graf, Raulerson & Middleton, P.A., Manchester, NH, www.mclane.com. His e-mail address is
john.cunningham@mclane.com. His phone number is (603) 628-1315. He is licensed to practice law in New
Hampshire and Massachusetts. His practice is focused on LLC formations and conversions. Mr. Cunningham
publishes a weekly blog on how to draft LLC operating agreements. The link is
http://www.cunninghamonoperatingagreements.com/. His general LLC formation website is
www.llcformations.com.
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Mr. Cunningham is the author of Drafting Limited Liability Company Operating Agreements, the leading U.S.
general (i.e., non-state-specific) LLC practice manual and formbook. With Vernon R. Proctor of the Delaware
bar, he is the co-author of Drafting Delaware LLC Agreements, a practice manual and formbook under the
Delaware Limited Liability Company Act. Both books are published by Wolters Kluwer Law & Business, a
global publisher of professional treatises and manuals.
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of rules of professional conduct for lawyers).
3) My background as relevant to the seminar
a) The McLane firm. I am of counsel to McLane, Graf, Raulerson & Middleton, P.A., a
New England law firm based in Manchester, NH. I am licensed to practice law in
New Hampshire and Massachusetts.
b) My practice. My law practice is focused on forming LLCs and converting
corporations and other non-LLC entities to LLCs. Ethical issues are central in my
practice.
c) My writings and seminars about legal ethics
i) I am the author of the leading “general” (i.e., non-state-specific) LLC formbook
and practice manual, and, with Vernon R. Proctor of the Delaware bar, I am the
co-author of an LLC formbook and practice manual under the Delaware Limited
Liability Company Act (the “DLLC Act”).
ii) In both books, I write extensively about issues of legal ethics in forming LLCs.
iii) I have taught scores of LLC seminars nationwide to bar associations, CPA
societies, law firms and CPA firms. In all of these seminars, I give substantial
attention to issues of legal ethics in forming LLCs.
4) Seminar format; questions
a) I will follow the revised outline. In this seminar, I will follow this outline closely.
b) Questions. If, during the seminar, you have questions relating to the subject matter of
the seminar, you can submit them by e-mail at any time if you have registered for the
seminar via Westlaw or, at the end of the seminar, you can submit them by phone if
you have registered via NBI.
c) Post-seminar contacts. After the seminar, please feel free to call me or e-mail me
with questions relating to the seminar. I do not charge for brief consultations. My
contact information is in footnote 1 of this outline.
5) This outline does not provide legal advice. The ideas in this outline represent only my
personal views. They are not intended as legal opinions, and they may possibly conflict
with ethical rules in one or more jurisdictions.
Part 2
THE TEN ISSUES
Issue 1.
WHEN DOES AN ATTORNEY-CLIENT RELATION EXIST IN AN
LLC FORMATION?
1) The importance of the issue as to whether an attorney-client relation exists. Obviously, if
there is no attorney-client relation between you as an attorney and a particular participant
in an LLC formation, you are not subject to any rules of professional conduct with regard
to that person. Thus, the first issue you must ask in order to ensure that you are
complying with these rules is whether such a relation exists.
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2) When does an attorney-client relation exist? In general, a person has an attorney-client
relation with an attorney if the person seeks and receives legal advice or legal services
from the attorney.
3) Ethical duties. If you are forming an LLC, you will have many different ethical duties
toward any persons who are your clients with respect to that formation.
4) Malpractice. In addition, if you are negligent in forming an LLC, you may be liable to
your clients in a malpractice suit.
5) What factors determine whether an attorney-client relation exists? In general, whether a
person is your client in an LLC formation is a question of fact that depends on the
subjective perception of the relevant purported clients.
6) Determining whether an attorney-client relationship exists; disclaimers to non-clients.
Thus, it is critical that, before you begin forming an LLC for parties to an LLC formation:
a) You determine in advance in your own mind whether an attorney-client relation
exists between you and one or more of the parties; and
b) You make expressly clear to the parties which of them is and which is not your client.
The best way to do this is, of course, in an engagement letter.
7) Examples
a) IRS filing statistics suggest that about one-third of all LLC formations are formations
of single-member LLCs whose members are individuals. I generally advise
individuals for whom I am forming single-member LLCs to appoint non-member
assistant managers in their operating agreements in order to provide their LLCs with
continuity of management if, by reason of death, illness or otherwise, the members
are unable to manage the LLC. If you follow this practice, you should consider
expressly mentioning to the member and the person whom the member wants to
appoint as the assistant manager that the latter person is not your client.
b) It is even possible (I’ve seen it happen) that a bank or other entity that has referred its
customer or another person to you for an LLC formation may believe that it is one of
your clients in the formation. If this is the case, you must talk with representatives of
the entity and dispel this belief.
8) Other situations. There may be many other situations in which a person who you believe
is not your client thinks himself or herself to be your client.
Issue 2.
A.
COMPETENCE IN FORMING LLCS
Introduction
1) Rule 1.1; the four components of competence. Rule 1.1 of the ABA rules provides that in
handling legal matters for clients, lawyers must be competent. The rule provides that to
be competent in a matter, a lawyer must have the necessary knowledge, skill, diligence
and thoroughness.

Knowledge means substantive knowledge—i.e., knowledge of the statutes and cases
relevant to the matter in question.

Skill means know-how—i.e., knowledge of how to perform the tasks necessary in
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handling the matter.
B.

Diligence means, among other things, due preparation. Preparation means two
things—it means (i) general study of the law relevant to the matter; and (ii) study of
the law and facts specifically relevant to the matter.

Thoroughness means (i) identifying all of the tasks relevant to the matter and
(ii) performing each of these tasks diligently.
The Tasks You Must Perform in Forming LLCs; the Knowledge You Need in
order to Perform These Tasks
1) Non-tax choice of entity. You should be able to perform non-tax choice of entity
analyses for your business start-up clients; that is, you should know how to determine for
your client which of the various types of business organizations available to them under
the law of the relevant state will be best for their business on business organization law
grounds and other relevant non-tax grounds.
a) Types of business organizations. Under Delaware law and the law of most other
states, there are seven principal types of business organizations—namely, sole
proprietorships, divisions (i.e., administrative units of entities), business corporations,
general partnerships, limited partnerships, business trusts and LLCs. LLCs under
most LLC acts have 11 or 12 chief statutory features. In order to determine
competently whether an LLC is the best type of business organization for a business
start-up client from a business organization law viewpoint, it will be useful to you:

To know all of these features in reasonable detail;

To know the chief business organization law features of the other principal types
of business organizations in the relevant jurisdiction; and

To you to know how to compare the various business organization law features of
each of the above seven types of business organizations with those of each other
type.
2) Choosing between your state act and other LLC acts. You need to know how to choose
which of the various LLC acts potentially useful to the parties to the LLC formation in
question will be best for your client. In order to make this choice competently, it will be
useful to you to have a detailed comparative knowledge of the chief statutory features of
each of the relevant LLC acts and of the case law interpreting them. However, in the
remainder of this article, I will assume that the correct choice is the Delaware LLC Act.2
3) Planning, negotiation and drafting LLC operating agreements. The key constitutive
documents of LLCs are their operating agreements. Thus, you need to know how to plan,
negotiate and draft these agreements for your clients’ LLCs. There are five main types of
business organization law knowledge that are likely to be useful to you in order to
perform these tasks competently:
i) Knowledge of the provisions of the governing LLC act relevant to LLC formation
I have recently published in the Massachusetts Lawyers Journal a brief article on how to decide
whether to form an LLC for Massachusetts LLC formation clients under the Delaware Limited Liability
Company Act or the Massachusetts LLC Act. See John M. Cunningham, Choosing the Right LLC act:
Massachusetts vs. Delaware, MASS. LAW. J. 10 (Aug. 2010).
2
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practice. It will be useful to you to know the provisions of the governing LLC
Act that are relevant to LLC formation practice in your jurisdiction. This means:

Identifying and understanding each of these provisions;

Accurately characterizing each as definitional, mandatory, default, non-selfenabling permissive or self-enabling permissive; and

Knowing the tactical significance of each of these characterizations for your
clients in the LLC formation in question.
ii) Knowledge of the case law relevant to LLC formations. It will be useful to you
to know the case law relevant to the LLC formation in question.
iii) Knowledge of the gap issues in LLC statutory and case law. It will be useful to
you to know the “gap issues” in the governing LLC law—that is, the business
organization law issues potentially significant in LLC formations on which the
governing act and the relevant case law are either silent or ambiguous.
iv) Knowledge of the principal business organization law issues relevant to your
client’s LLC. It will be useful to you to know:

The principal business organization law issues relevant to the type of LLC
you are forming for your client;

The various alternative ways of resolving these issues; and

Which of these resolutions will be best for your LLC formation client.
v) Knowledge of the impact of the governing LLC act law on “informal” LLCs. In
order to explain to your LLC formation clients why they need a comprehensive
written operating agreement for their LLC and to draft this agreement properly:
Issue 3.

It will be useful to you to know the LLC law that governs LLCs that have
filed valid certificates of formation (or similar required documents) but that
lack oral or written operating agreements (referred to in this article as
“informal” LLCs); and

On the basis of your knowledge of the specific needs and interests of your
LLC formation clients with respect to the LLC in question, it will be useful to
you to know how to point out to your clients, on the basis of the above
“informal LLC” law, the specific adverse impacts of this law on their LLC
and on them as its members.
DEFINING THE SCOPE OF REPRESENTATION IN LLC
FORMATIONS
1) Rule 1.2. Rule 1.2 of the ABA Rules requires that, in handling legal matters for their
clients, lawyers define the scope of their representation.
2) Tax disclaimer. For business lawyers who are competent in LLC business organization
law but who lack LLC tax expertise, this means disclaiming any responsibility as to the
tax issues of their LLC formation clients and any responsibility for the tax provisions in
the LLC’s operating agreement.
3) Other disclaimers. LLC formations often raise issues in fields of law other than LLC
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business organization law and LLC tax. You should do your best to identify these other
issues and, if you lack competence in them, to disclaim that you are handling them.
Issue 4.
DILIGENCE IN FORMING LLCS
1) Rule 1.3. ABA Rule 1.3 requires that in handling legal matters for clients, lawyers must
be diligent. The duty of diligence is also imposed by Rule 1.1, and is briefly discussed
above.
2) Commitment, etc. Diligence means, among other things, that a lawyer “must act with
commitment and dedication to the interests of the [client] and with zeal in advocacy upon
the [client’s] behalf.” Rule 1.3, Model Code Comments.
Issue 5.
COMMUNICATION WITH CLIENTS IN FORMING LLCS
1) Rule 1.4. ABA Rule 1.4 provides that, in order to meet professional conduct standards
for effective communication with clients in handling an LLC formation, you must:
a) Keep your clients reasonably informed about the status of the formation;
b) Promptly respond to their requests for information about it; and
c) Explain all relevant issues to the extent necessary to enable them to make informed
decisions regarding them.
2) Planning memos
a) In my experience, few clients are willing or able to meaningfully review draft
operating agreements. For this reason, I usually recommend to clients that, before
drafting an operating agreement for them, I provide them with a plain-English
planning memo (i) identifying the issues in the agreement, (ii) summarizing the
alternatives available to them in addressing these issues, and (ii) advising them as to
which alternative will be best for them.
b) Needless to say, I advise them that I will charge them for the time it takes me to
prepare this memo—usually about two hours. Despite the additional cost, a majority
of them request that I prepare this memo.
Issue 6.
FEES FOR LLC FORMATIONS
1) Rule 1.5. ABA Rule 1.5 provides that in order to meet professional conduct requirements
concerning fees in handling LLC formations, you must charge your clients fees that are
“not unreasonable.”
2) Fees for LLC formations vary widely from state to state.
a) In case it’s useful by way of example: Legal fees in Manchester, New Hampshire,
where I practice, tend to be substantially lower than in larger cities, such as Boston
and New York. My hourly rate is $350. I generally charge about $750 for the
formation of a single-member LLC (including a planning memo) and about $1,600
for the formation of a multi-member LLC.
b) However, for forming larger LLCs, I’ve charged many tens of thousands of dollars.
3) Forming a Delaware single-member LLC. I know of a case in which a major U.S. law
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firm charged a foreign client $10,000 for forming a simple Delaware LLC. In my view,
this fee was grossly “unreasonable” under Rule 1.5. (Furthermore, the LLC agreement
for this LLC was incompetent.)
Issue 7.
CONFIDENTIALITY IN LLC FORMATIONS
1) Rule 1.6. Under ABA Rule 1.6, you must maintain the confidentiality of confidential
information of which you become aware in an LLC formation.
2) Joint representations. As discussed further below, complying with Rule 1.6 can be tricky
in a joint representation, since in such a representation, it may be argued that you are
required to disclose to each of your clients any information disclosed to you by any of
your clients. You need to advise your joint representations clients about this duty clearly
and in advance of your work for them.
Issue 8.
CONFLICTS OF INTEREST IN LLC FORMATIONS—IN
GENERAL
1) Conflicts of interest. In order to comply with professional conduct requirements
concerning conflicts of interest in LLC formations, you must comply with the rule in
your state corresponding to ABA Rule 1.7. This rule provides in general that you may
not undertake a representation:
a) Without full disclosure to the relevant parties concerning any conflicts potentially
relevant to the representation and concerning the risks that these conflicts may
involve for them; and
b) Without a written consent by these parties to waive the conflict.
2) Joint representations. As noted above, a key conflict-of-interest issue in many LLC
formations involving two or more parties is to identify which, if any, of these clients are
your clients in the formation and which are not.
Issue 9.
CONFLICTS OF INTEREST IN LLC FORMATIONS—JOINT
REPRESENTATIONS
1) The statistics. IRS filing statistics suggest that about two thirds of all LLC formations
involve two or more prospective members. In my experience, these members usually
want you to represent all of them jointly in the formation.
2) Why parties to formations of multi-member LLCs want joint representations. There are
three main reasons why parties to LLC formations often want the same lawyer to
represent all of them in the formation.
a) Joint representations save the parties legal fees.
b) The parties believe that their interests are “substantially aligned” and that they don’t
need individual representation.
c) They believe that if two or more lawyers are involved in the representation, there will
be needless complexity and disharmony.
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3) Rule 1.7. ABA Rule 1.7 provides, in essence, that in order to conduct a joint
representation, lawyers must obtain the written and signed informed consent of all
relevant clients.
4) Disclosures. In my view, it is unclear what disclosures lawyers must make to potential
clients before handling joint representations in order to meet the above “informed
consent” requirement. I suggest that these disclosures include at least the following:
a) No duty of loyalty. The lawyer will have no duty of loyalty toward any of the clients.
Rather, the lawyer’s task will be to reach accommodation among them about
potentially contentious issues.
b) Duty to disclose to all clients information obtained from any client. As indicated
above, the lawyer will have to disclose to all clients any information disclosed to the
lawyer about the formation by any of the clients.
c) No attorney-client privilege. None of the clients will have an attorney-client
privilege in any claims they may make against other clients after the formation.
Rather, the lawyer may be called upon to disclose in testimony in any such claim all
information relevant to the claim possessed by the lawyer.
d) Attorney withdrawal. If conflicts arise among the clients in the course of the
representation, the lawyer must withdraw (but the clients must pay the lawyer fees
accrued to the date of the withdrawal).
5) “Substantial alignment”—doing mini-formations. In my view, lawyers cannot represent
multiple clients in an LLC formation unless they first ascertain whether the interests of
the potential clients are substantially aligned. This means doing a mini-formation in
which you determine the views of the parties about all matters that may be contentious
among them, including:
a) Issues concerning contributions, allocations and distributions;
b) Issues concerning member voting rights;
c) Fiduciary issues; and
d) Issues concerning the LLC’s method of dispute resolution (generally, an issue of
arbitration vs. litigation).
6) My practice of avoiding joint representations.
a) Because of (i) the difficulty and complexity of the process of obtaining written
informed consents from clients in a joint representation and (ii) the risk of postformation malpractice claims by irate clients (which may come years after the
formation), I generally try to avoid these representations.
b) Instead, I prefer to have only one client in the representation and to advise the other
parties to the formation that they are not my clients. However, my client generally
wants me to structure the LLC so as to accommodate all of the parties to the
formation.
7) Representing the “entity in formation.” In my view, it is not valid for lawyers to the
parties to the formation of a multi-member LLC to advise the parties that in the
formation, the lawyer is representing only the “entity in formation” and not any of the
parties.
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a) For one thing, an entity in formation does not exist.
b) For another, what does it mean to represent the “entity in formation”? I think it
means to do a joint representation.
c) Well-reasoned recent law journal articles support my view, but many experienced and
thoughtful lawyers disagree with it.
Issue 10.
UNAUTHORIZED PRACTICE OF LAW IN LLC FORMATIONS
1) Unauthorized practice of law. The rules concerning unauthorized practice of law are set
forth in ABA Rule 5.5. In general, a lawyer not admitted to practice in a particular state
will be treated by the relevant state regulatory board under Rule 5.5 as engaging in the
unauthorized practice of law in that state only if:
a) The lawyer establishes an office or other systematic and continuous presence in that
state for the practice of law; or
b) The lawyer holds out to the public that he or she is admitted to practice in that state.
2) Advising clients about LLC law in a state in which you are not licensed. However,
merely advising clients about the law of a particular state in which you are not licensed or
causing documents to be filed for clients with the secretary of state of that state will not
generally constitute the unauthorized practice of law by lawyers not licensed in that state.
See ABA Rules 5.5(b)(1) and (2). The issue here is one of competence, not licensure.
3) Sample v. Morgan.
a) Lawyers not licensed to practice law in Delaware should be aware that in certain
circumstances, they may be subject to the long-arm jurisdiction of the Delaware
courts in malpractice suits, “aiding and abetting” suits and other suits on the basis of
their advising their clients on Delaware legal matters and retaining agents in
Delaware to file documents relating to those matters, even those these lawyers have
never set foot in Delaware. See generally, Sample v. Morgan, 935 A.2d 1046 (Del.
Ch. 2007).
b) However, this case should probably be read to provide that lawyers will be subject to
long-arm Delaware jurisdiction only if the documents they file through Delaware
agents are elements of the alleged misconduct. It seems doubtful that merely filing a
Delaware certificate of formation can constitute an element of malpractice in forming
a Delaware LLC.
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