SHOULD ONE ATTORNEY REPRESENT BOTH PERSONS FORMING A NEW BUSINESS?

In Kootenai County, and elsewhere in Idaho, it is not uncommon for persons seeking to form a new corporation or Limited Liability Company to seek the services of a single attorney in drafting the documents needed to form the new business. Is this a good idea?

THE BARE MINIMUM

The Idaho Code of Professional Responsibility, which spells out the ethical standards to be followed by attorneys, contains the following language in its commentary section regarding conflicts of interest governed by Rule 1.7:

For example, a lawyer may not represent multiple parties to a negotiation whose interests are fundamentally antagonistic to each other, but common representation is permissible where the clients are generally aligned in interest even though there is some difference in interest among them. Thus, a lawyer may seek to establish or adjust a relationship between clients on an amicable and mutually advantageous basis; for example, in helping to organize a business in which two or more clients are entrepreneurs, working out the financial reorganization of an enterprise in which two or more clients have an interest or arranging a property distribution in settlement of an estate. The lawyer seeks to resolve potentially adverse interests by developing the parties’ mutual interests. Otherwise, each party might have to obtain separate representation, with the possibility of incurring additional cost, complication or even litigation. Given these and other relevant factors, the clients may prefer that the lawyer act for all of them.

BUT IS IT A GOOD IDEA?

Okay, this means that it is not always unethical for a single attorney to represent two or more persons who wish to form a business. But that does not answer the bigger question; namely, is it a good idea?

For example, assume John Smith and Mary Brown wish to form a new business which will sell garden supplies. Mary Brown is relatively wealthy, whereas John Smith has had a number of recent financial troubles. In the early years of a new business, it is often necessary for the owners to contribute capital to keep the business afloat until it starts earning a profit. In drafting the articles of incorporation or creating the LLC, a decision must be made about the obligation of the owners to contribute funds in the event the new business needs an influx of cash.

In this example, an attorney is torn between drafting language that requires significant capital contributions and language that does not. John Smith may simply not have the funds to pour into the new business until it reaches profit-making status.  It is for this reasons that it may be more prudent for the attorney drafting the documents to represent only one client, and the other client can have those documents reviewed by a separate attorney.