It Doesn’t Take a Scalpel to Pierce Your Medical Practice’s “Corporate Veil”

pierceAs “Captain Obvious” would no doubt note: doctors get sued. Medical malpractice lawsuits are filed every day in which a patient alleges that a physician failed to adhere to the appropriate standard of care. But doctors get sued for other reasons and by folks other than those they treat. Medicine is a business as well as a profession, and like other businessmen and women, doctors can get sued by people or entities they do business with, including the government.

That is one of many reasons physicians form medical corporations, limited liability companies, or professional service corporations. These specialized entities can shield the personal assets of physicians who act as officers, directors, or shareholders when lawsuits by creditors or other liabilities confront their business. But that protection is not absolute, and doctors can find their personal assets in the crosshairs of a determined litigant if they fail to adhere to the requisite “standard of care” in managing their entity.

“Piercing the Corporate Veil”

“Piercing the corporate veil” is the term used to describe imposing personal liability on a company’s owner(s) for a corporate obligation. Plaintiffs often attempt to pierce the corporate veil when the company they are suing is insolvent or would be otherwise unable or unlikely to pay any judgment entered against it.

Veil-piercing allows a court to “impose liability on an individual or entity that uses a corporation merely as an instrumentality to conduct that individual’s or entity’s business.” Fontana v. TLD Builders, Inc., 362 Ill. App. 3d 491, 500 (2005)

Illinois courts use a two-prong test to determine whether to pierce the corporate veil:

  1. there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and
  2. circumstances must exist such that adherence to the fiction of a separate corporate existence would sanction a fraud, promote injustice, or promote inequitable consequences.”

In determining whether the “unity of interest and ownership” prong of the test is met for a medical business entity, a court will consider many factors, including:

  • inadequate capitalization;
  • insolvency;
  • failure to follow corporate formalities
  • commingling of funds;
  • diversion of assets from the entity by or to a member to the detriment of creditors;
  • failure to maintain arm’s-length relationships among related entities; and
  • whether, in fact, the entity is a mere facade for the operation of the dominant members.

Medical Entities Do Not Shield Doctors from Malpractice Liability

While a properly organized and managed entity can protect a doctor’s personal assets from creditors and business-related claims, it affords no such protection against medical malpractice claims. The Illinois Medical Corporation Act specifically provides that it “does not alter any law applicable to the relationship between a physician furnishing medical service and a person receiving such service, including liability arising out of such service.”

Similarly, the Illinois Professional Service Corporation Act states that physician officers, shareholders, or directors “remain personally and fully liable and accountable for any negligent or wrongful acts or misconduct committed by him, or by any ancillary personnel or person under his direct supervision and control, while rendering professional services on behalf of the corporation to the person for whom such professional services were being rendered.”

If you are a physician who has an interest in an Illinois medical practice, it is critical that you understand that the protections afforded to your assets aren’t set in stone just because you formed a corporate entity. I work closely with physicians and their entities to implement programs and protocols designed to minimize risks, including the risk of personal liability for their business obligations. If you need assistance with your medical practice’s legal obligations, please give me a call at 312-236-2433 or fill out my online form to arrange for your free initial consultation.

Bad Online Reviews Can Hurt Your Business – But Responding in Kind Can Too

bad-online-reviewIf you own a small business or are a professional and have customers and clients, there is a good likelihood that someone has published an online review of your company and its goods or services. From Yelp to Angie’s List to TripAdvisor to any number of websites tailored to particular interests or industries, online reviews can have a profound impact on your business.  Even one negative review can be devastating.

You can find a lot of tips and do’s and don’ts online about how to handle such negative reviews from a strategic and business perspective. On more than one occasion I have had a panicked and apoplectic client ask me whether he can sue the author of a negative review for defamation.

The answer is, of course you can sue “IHateYourBusinesss123”” or whomever made the post. But the reality is that much of what is written in even the most scathing negative review will likely not qualify as actionable defamation. Furthermore, such lawsuits themselves can open up the business owner to further scorn, ridicule, and bad publicity in the fickle social media world.

As a preliminary matter, most online review sites and other platforms (Facebook, Yahoo, Google+, etc.) where comments may appear are immune from liability for defamatory comments in reviews as a matter of federal law. Section 230 of the Communications Decency Act shields such sites from claims based on comments posted by third parties.

What is Defamation in Illinois?

In Illinois, in order to prove defamation, including a claim based on an online review, a plaintiff has to prove:

  • the defendant made a false statement about the plaintiff;
  • there was an unprivileged publication to a third party;
  • fault by the defendant amounting to at least negligence; and
  • the publication damaged the plaintiff.

There is a special category of defamation that does not require a plaintiff to prove actual damages. Defamation per se, as it is called, involves specific statements that are deemed inherently damaging. These statements include ones which assert that the plaintiff:

  • is infected with a “loathsome communicable disease” (e.g. a sexually transmitted disease, HIV, hepatitis, etc.)
  • has a lack of ability to perform their professional duties, or otherwise harms the plaintiff in their professional reputation
  • lacks integrity in their professional duties
  • has committed fornication or adultery
  • has committed a criminal act

Provable Fact v. Opinion

The most common issue that distinguishes an actionable defamation claim based on online reviews from one likely to fail is the issue of whether or not a statement was false. Only false statements of fact can be the basis of a defamation claim, not opinions. A statement of fact has to be able to be objectively proved or disproved. Consider the two following hypothetical restaurant reviews:

“That was the most disgusting and flavorless meal I have ever had in my life.”

“The waiter spit in my food.”

The former is non-actionable opinion, as it cannot be objectively proven that the meal was the “the most disgusting and flavorless” one the reviewer ever had. Conversely, the latter is a statement of fact; it can be proven (perhaps not easily) whether or not the waiter spit in the diner’s food.

Additionally, Illinois courts emphasize the context in which an allegedly defamatory statement has been made in determining whether the statement can be the basis of a claim. Even if a single statement in a long rant is arguably a statement of provable fact, it may not constitute defamation if a reasonable reader would see it simply as invective.

Consider Brompton Building, LLC v. Yelp, Inc., a 2013 Illinois Appellate Court decision in which a building management company sued an anonymous former tenant who had posted a hyperbolic, scathingly negative, and extremely lengthy online review. Even though the rant contained a few objectively verifiable statements, the court found that it could not support a defamation claim because in context they would not be understood to be actual factual allegations. As the court noted, “The context of the defamatory statements is critical in determining its meaning. In determining the context of the defamatory statements, we must read the writing containing the defamatory statement ‘as a whole.'”

Careful How You Respond – Especially if You’re a Physician

The bottom line for business owners and professionals is that a lawsuit in response to outrageous internet reviews and comments that make their blood boil and their businesses suffer may not be the best course of action.  While certain false statements of fact in such comments can be the basis of a defamation claim, business owners and professionals should carefully consider how to proceed lest their response make a bad situation worse.

This is especially true if you are a physician. Doctors and other health care professionals are regularly reviewed online, and some of those reviews come from disgruntled patients who may publicly criticize the treatment they received. The problem is that in an effort to defend the care they provided, some doctors have revealed confidential patient information in comments they have posted in response to negative reviews. Such HIPPA violations, as with other online professionalism mistakes, have serious licensing and regulatory consequences. Any doctor wanting to post an online response to a patient complaint should think long and hard about how they do so – and whether they should respond at all.

6 Key Provisions to Consider in a Commercial Lease

leaseWhen you make the decision to rent commercial space for your business, the considerations involved go far beyond location, term, and rent. Failure to take into account a number of other important issues, or ignorance of the detailed terms of your lease, can come back to haunt you with devastating consequences for the continued viability of your business.

You should always retain and consult with an experienced commercial real estate lawyer before signing any commercial lease or agreeing to any terms. Boilerplate legal documents are rarely a good solution. Your business is unique; your legal documents should be unique as well. As you are evaluating your options for your business’s new home, here are some crucial issues that you should keep in mind as you make your decision:

  • Build-out. Most often, the space to be rented will require significant work to make it suitable and desirable for your business.  You of course will want to spend as little as possible on the build-out so you will want to negotiate a significant tenant improvement allowance.  In a “turn-key” build-out, the landlord covers all of the costs of the improvements and factors those costs into the agreed-upon rent. Alternatively, the landlord can agree to contribute a set amount to the build-out.  Either way, you need to ensure that you maintain as much control over the build-out process as possible.
  • Use Provisions. Use provisions within commercial leases are designed to prevent similar or competing businesses from renting and occupying nearby space in the same building. This is obviously more of a concern for retail space, but it is important that your efforts are not undermined by other leases, and that you have ensured that all of your intended uses for the space are allowable under the lease terms.
  • Assignment and Subletting. At some juncture, you may wish to assign or sublet your space to a third-party. Commercial leases almost always require that the landlord give prior approval before you can do so. Make sure that the landlord cannot unreasonably withhold its consent to a sublease and be careful to note that you will still likely be fully liable for all rents even if the lease is assigned or property sublet to another party.
  • Property and Facility Maintenance. It is critically important to define which party is responsible for maintaining the building and its interior. Although it may seem obvious that a landlord is in charge of repairing things like broken HVAC systems and leaking roofs, other items aren’t so clear-cut. If you bear the cost of new carpeting, shelving, and electrical wiring, is the landlord still obligated to fix these items if something fails? What if you install new signage? Who is responsible for repair costs pays for broken neon in one of the sign’s letters? These are all items that have the potential to create serious and costly conflicts if not addressed in the commercial lease agreement.
  • Gross v. Net Rent. Just like airlines tag on all kinds of fees on top of the base fare, your true monthly rental costs could be hidden if you don’t pay attention to whether you are signing up to pay “gross” or “net” rent. Gross rent is the rent calculated inclusive of all building costs. Net rent is the rent calculated excluding building costs. Make sure you understand what costs you will be on the hook for every month.
  • Default: Notice and Opportunity to Cure. You don’t want a technicality or an unexpected delay in making a rent payment to be an excuse for terminating your lease. You should seek to include provisions allowing for notice of default and an “opportunity to cure” before the landlord may begin exercising remedies.

These are just a handful of the issues that you need to consider as you engage in one of the most fundamental and impactful choices you can make for your business. With so much riding on the terms of a commercial lease, don’t make the mistake of thinking that form documents or your experiences as a residential tenant are sufficient to protect all that you have worked for. Meet with an experienced Chicago commercial real estate lawyer who can provide you with the guidance and peace of mind that will allow your business to thrive in its new home.

Louis R. Fine: Chicago Commercial Real Estate Lawyer

I invite you to learn more about how I might be able to help you with your business or real estate questions, issues, and concerns. Please give me a call at (312) 236-2433 or fill out my online form to arrange for your free initial consultation. I look forward to meeting with you.

Political Hack is a Stark Reminder of the Importance of Cybersecurity to Small Businesses

hackerThe hate and hope, hysterics and history of the political conventions are over. These editions of our quadrennial pageants put a great many things in stark contrast, even more than they typically do. But while many things were familiar – booming speeches, delegates in outlandish outfits, and thousands of balloons falling from the rafters – there was something new this year. The hacking, likely by Russians, of Democratic National Committee computers in order to undermine the Democratic candidate is a stark reminder of how vulnerable all of us are to cyberthreats. While this hack had serious political and national security implications, the threat to small businesses is no less real and can be no less devastating.

Companies big and small find themselves repeatedly under attack by sophisticated hackers who seek to gain access to trade secrets and personal customer information to use for their own gain. Such security breaches can cost companies millions of dollars in business and remediation costs and cause customers to lose faith in the ability of the company to maintain the confidentiality of their payment and personal information.

For small business owners, a robust cybersecurity program is no longer optional. Failing to implement a comprehensive strategy to protect valuable intellectual property and proprietary information is essentially business negligence. Failing to act swiftly and aggressively once a breach has occurred can be business suicide. A complex patchwork of state and federal laws establish notification requirements in the event of a breach and failure to follow those laws can expose businesses to fines and adverse regulatory actions that only add to the pain.

The U.S. Small Business Administration has a wonderful website dedicated to helping business owners prevent and respond to cybersecurity threats. The site includes these ten key steps companies should take as part of a comprehensive strategy:

  1. Protect against viruses, spyware, and other malicious code
  2. Secure your networks
  3. Establish security practices and policies to protect sensitive information
  4. Educate employees about cyberthreats and hold them accountable
  5. Require employees to use strong passwords and to change them often
  6. Employ best practices on payment cards
  7. Backup copies of important business data and information
  8. Control physical access to computers and network components
  9. Create a mobile device action plan
  10. Protect all pages on your public-facing websites, not just the checkout and sign-up pages

I recommend that all small business owners spend some time at the SBAs cybersecurity website (https://www.sba.gov/managing-business/cybersecurity)  and take all steps necessary to shore up this crucial aspect of their operations. A hack of your network may not attract national headlines, but it could repel customers and cost you your business.

The Law Offices of Louis R. Fine

As an experienced Chicago business lawyer, I know how important it is to get a deal done. I also understand how crucial it is to get a deal done right. That is why I take a balanced approach to business transactions, one that is meticulous and detailed, but that does not delay a closing or consummation of a deal. My role is to facilitate, not stand in the way. Please give me a call at 312-236-2433 or fill out my online form to arrange for your free initial consultation.

When It’s Business and It’s Personal: Small Business Ownership and Divorce in Illinois

business divorceIf you own your own business, you know that it can be hard sometimes to not take things personally. With so much cash, sweat, and tears invested in your company, its successes or struggles will impact you in ways far beyond what is reflected on a balance sheet.

Just as your business can impact your personal life, your personal life can have a huge effect on your business, especially if you are going through a divorce.

The ownership, valuation, and division of small business interests in a divorce can be a major source of conflict. Whether you own your business by yourself or with other partners or members, it is important to understand how the end of your marriage will affect your business, your ownership interest, and your wallet.

In an Illinois divorce, property is divided into “marital” property and “non-marital” property. The former is property acquired during the marriage and will be equitably divided between the spouses. The latter is the property of the spouse who owned it prior to the marriage and will be awarded to that spouse.

As such, if one spouse owned a business prior to the marriage, it will generally remain their business after the divorce. But this is where things get complicated.

Businesses aren’t pieces of furniture; they don’t just sit there stagnantly. During the course of a marriage, businesses grow; businesses pay salaries and make distributions; businesses incur debt; businesses obtain capital and investments from the owners; businesses may add owners, including a spouse.

Much of what happens to the business while a couple is married means that both spouses may be entitled to an interest in the value of the business. For example, the following will be counted as marital property to be equitably divided:

  • Business ownership interest acquired during the marriage
  • The gain in value in the ownership interest of a business established before the marriage which accrued by personal effort of the owner spouse during the marriage
  • Discrete, distinguishable assets acquired by a non-marital business during marriage

Furthermore, a non-owner spouse may be entitled to a right of reimbursement for contributions made toward a non-marital business during the marriage.

When a business or an interest in a business is deemed to be marital property, the valuation of the business or ownership interest becomes a big issue. Each spouse may wind up retaining accountants or other experts to establish the value of the business such that the cash value can be allocated as part of the larger division of assets. Rather than force a divorcing couple to remain business partners, courts will often offset the value of the business interest by awarding other assets to the non-owner spouse.

Of course, a valid pre-nuptial agreement that addresses the issue of business ownership upon divorce can take all of this out of the court’s hands and bring clarity to both the divorce process as well as business operations going forward.

Louis R. Fine: Chicago Business Division and Valuation Attorney

Illinois business division and valuation issues are complicated and can have a long term impact on the financial well-being of both spouses. As an experienced Chicago divorce lawyer, I understand the complexities and challenges involved in dividing business interests as part of divorce. I work to ensure that every client receives what they are entitled to while minimizing conflict and acrimony throughout the process.

If you have questions or concerns about how your business may be impacted by your divorce, please give me a call at (312) 236-2433 or fill out my online form to arrange for a consultation. I look forward to assisting you.

How to Lose Your LLC’s Personal Liability Protection in Two Easy Steps

piercingWhether you are just starting a new venture or growing your business beyond a sole proprietorship, you will inevitably reach a point where you want to ensure that your personal assets will not be vulnerable in the event that lawsuits or other liabilities confront your business. In the world of small business, there are two clear vehicles to accomplish that goal: a limited liability company (LLC) or an S-corporation (often shortened to S-corp).

As I discuss here, both LLCs and S-corps do what sole proprietorships do not, and that is remove your personal assets from the reach of your business creditors. However, if you are an Illinois LLC owner and you fail to maintain and treat the LLC as a separate entity or engage in fraudulent conduct, you expose yourself and your partners to the very personal liability for corporate obligations that led you to form the entity in the first place.

“Piercing the Corporate Veil”

“Piercing the corporate veil,” – though the concept applies to LLCs as well – is the term used to describe imposing personal liability on a company’s owner(s) for a corporate obligation. Plaintiffs often attempt to pierce the corporate veil when the company they are suing is insolvent or would be otherwise unable or unlikely to pay any judgment entered against it.

Veil-piercing allows a court to “impose liability on an individual or entity that uses a corporation merely as an instrumentality to conduct that individual’s or entity’s business.” Fontana v. TLD Builders, Inc., 362 Ill. App. 3d 491, 500 (2005)

Illinois courts use a two-prong test to determine whether to pierce the corporate veil:

  1. there must be such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist; and
  2. circumstances must exist such that adherence to the fiction of a separate corporate existence would sanction a fraud, promote injustice, or promote inequitable consequences.”

When You and Your LLC Are One and the Same

In determining whether the “unity of interest and ownership” prong of the test is met for an LLC, a court will consider many factors, including:

  • inadequate capitalization;
  • insolvency of the debtor LLC;
  • commingling of funds;
  • diversion of assets from the LLC by or to a member to the detriment of creditors;
  • failure to maintain arm’s-length relationships among related entities; and
  • whether, in fact, the LLC is a mere facade for the operation of the dominant members.

Failure to Follow Formalities Isn’t Enough

One of the reasons business owners form LLCs rather than S-Corps is that there are fewer corporate formalities that need to be followed. In some states, failure of LLC owners to follow corporate formalities can be a basis for piercing the veil.

In Illinois however, the state’s LLC Act specifically provides that “the failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of its company powers or management of its business is not a ground for imposing personal liability on the members or managers for liabilities of the company.” 805 ILCS 180/10-10(a), (c).

Failure Doesn’t Necessarily Equal Fraud

If a court finds that an LLC and its members were one and the same – “that there was a unity of ownership and interest” – it still must find that failing to pierce the veil would “sanction a fraud, promote injustice, or promote inequitable consequences.”

Simply because an LLC goes under doesn’t mean that shielding the owners from personal liability would be inequitable. Sure, it would be unfortunate for the suing creditor, but without an intent to defraud or other conduct that makes it clear that the owners were acting in bad faith, a court will not pierce the veil.

The Law Offices of Louis R. Fine

If you are an Illinois LLC owner, it is critical that you understand that the protections afforded to your assets aren’t set in stone just because you formed an LLC. I work closely with my small business clients to implement programs and protocols designed to minimize risks, including the risk of personal liability for their business obligations. If you need assistance with any small business legal matter, please give me a call at 312-236-2433 or fill out my online form to arrange for your free initial consultation.

You Need Structure: The Importance of Picking the Right Corporate Form for Your Business

qInsulating Yourself from Personal Liability and Other Considerations

If you’re an entrepreneur or small business owner pouring your heart and soul into building and growing your enterprise, the dream is that all of that hard work and investment will be rewarded with success. The nightmare is that you expose your personal finances to significant risk and tax liability that can bring that dream crashing down. One of the ways to minimize those risks and protect yourself is to pick and form the right business entity.

For small businesses, this choice often comes down to two potential corporate structures: a limited liability company (LLC) or an S-corporation (often called an “S-corp”).

As alluded to above, perhaps the most fundamental reason business owners form LLCs or S-corps is to protect their personal assets from business creditors or other liabilities arising out of the operation of the business. Both of these entity types can accomplish this crucial goal, giving owners much needed peace of mind.

However, that protection can be lost if the business owners conduct their affairs in such a way as to render the company a mere “alter ego” of its owners or if they engage in fraudulent conduct. Additionally, both entities provide the benefit of treating your business income as your personal income for tax purposes.

How LLCs and S-Corps are Different

While both LLCs and S-corps provide the benefit of protecting personal assets, there are several key distinctions between LLCs and S-corps. A few of those differences include:

  • Both LLCs and S-corps are “pass-through” entities for tax purposes, which means business profits pass through the business entity and get taxed as the personal income of the owners. Here’s how it works:
    • Single Owner LLCs. If you run a single-owner LLC, you are taxed like a sole proprietorship, which means you can simply attach a Schedule C form to your personal tax return.
    • Multiple Owner LLCs. If your LLC has several owners, you can choose to be taxed as a corporation or a partnership.
    • S-Corps. In an S-corp, the corporation’s income is reported on the shareholders’ personal income taxes, based on their percentage of shares owned, regardless if they received distributions of the corporation’s income.
  • Allocation of Income. If you have others who will have an ownership share in the business, you will have to figure out how income will be allocated between you and your partners:
    • S-corps don’t give you much of a choice, as income must be distributed evenly among all owners regardless of how much labor or money each owner has contributed to the enterprise.
    • In an LLC, however, you can distribute income however you wish.
  • Corporate Formalities. One of the appealing things about an LLC is that, as a general rule, fewer corporate formalities are required than in S-corps and certainly fewer than in regular corporations. But being too casual can lead to serious problems:
    • As noted, failure to treat the LLC as a distinct entity by commingling funds, undercapitalizing the company, failing to hold meetings, etc. can result in the loss of that all-important personal liability protection.
    • While Illinois LLCs are not required to have written operating agreements, I strongly recommend that a written operating agreement be drafted and signed by all members to clarify the parties’ rights and obligations and avoid future conflicts as to its provisions.
  • Ownership Restrictions. An S-corp can have no more than 100 shareholders. By contrast, LLCs can have any number of owners and can even be owned by corporations and other LLCs.

There are numerous other nuances and distinctions regarding ownership, management, and operation of both LLCs and S-corps, and there are special types of LLCs called “Series LLCs” and “Low-profit LLCs” that may be best suited for your business. Additionally, there are other potential entities available, including general partnerships, limited partnerships, and specialized partnerships for the provision of professional services.

The Law Offices of Louis R. Fine

I understand that every business is different and that the goals and concerns of every business owner are unique. That’s why I work closely with my clients to evaluate their specific situation and determine which business structure will best set them up for success and growth. Please give me a call at 312-236-2433 or fill out my online form to arrange for your free initial consultation.

Your Choice of a Lawyer Matters. Here are Four Qualities to Look For.

What-To-Look-For-in-a-LawyerI meet with new clients and potential new clients on an almost daily basis. When I do, I know that the reason they are in my office is because they have important issues that need to be addressed; issues that can have a profound impact on their career, family, and future.

I also know that the decision as to which attorney they hire to assist them is one that they don’t, and shouldn’t, take lightly. There is no question that the quality and competence of an attorney can play a significant role in the outcome of a given matter, and how that attorney approaches his practice and relationship with clients can make the difference between peace of mind and constant worry.

Based on my experience, here are some qualities you should consider if you are in the process of looking for an attorney:

  • Knowledge of the Law. It goes without saying that your lawyer should know what he’s doing, and that includes keeping up to date on new developments and approaches. The law is constantly changing; new legislation, court decisions, rules, and guidelines come out all the time. It is crucial to hire a lawyer who not only understands the law as it is but who is aware and alert to the impact of changes which may take place.
  • Experience. So much of what happens in a legal matter is not based on things that can be found in books; knowing the nuances of both the law and the reality of practice is crucial to obtaining successful results. Look for a lawyer who knows their way around the courthouse, hearing room, or conference room. Look for a layer who knows how things work, and knows how things get done. Sound judgment and insight isn’t learned at a seminar. That is something that only comes from years of experience.
  • Communication. You no doubt have many questions about your situation, what may happen next, and what the plan should be going forward. Throughout your case, you’ll want to know that when questions and concerns come up, your attorney will be there, available and ready to answer and resolve them. You also want a lawyer who will actually listen to you and who will take the time to understand your needs and goals.
  • Empathy and Trust. When you meet with a lawyer, you are not there necessarily to discuss a case or a file; you are talking about your life. You want an understanding and compassionate lawyer who you can speak to about your concerns and issues and you want to feel as if they truly care and understand what is at stake. Choose an attorney who makes you comfortable, who is trustworthy and ethical, who you feel will truly expend all necessary efforts on your behalf, and who gives you a feeling of peace of mind every time you leave his office or hang up the phone after speaking with him or her.

The attorney-client relationship is a unique and important one, and the trust you place in your lawyer is something he or she should value and work every day to earn.

“How Much is This Going to Cost Me?” – Understanding How Attorney’s Fees Work

feesEither you or someone you know has likely found themselves in one of these situations at some point: you’re facing a health problem and want to see a doctor, or you know it’s been way too long since you’ve been to the dentist, or that leaky roof, broken air conditioner, or sputtering car is in desperate need of repair – but you put it off or never take care of one of these vital needs because you are worried about how much it’s going to cost.

The same thing happens when people are facing a problem or issue that requires the assistance of an attorney, often for the first time in their lives. But just like the foregoing problems won’t go away on their own, and likely will only get worse, ignoring a legal problem or failing to get help because you are worried about how much a lawyer will cost you may only end up costing you more in the long run. The reality is that a lot of folks don’t understand how attorneys charge for their work; sometimes, speaking with or even retaining an attorney to handle your matter won’t cost you anything at all.

Before you make a decision as to whether or not to reach out to a lawyer for help, it is important to understand the different kinds of attorney’s fee arrangements and which one may apply to your case. Here are the most common fee arrangements:

  • Initial Consultation. The first step in your relationship with a lawyer is usually your first meeting, or initial consultation, in which you discuss your specific problems, concerns, and questions with the lawyer and explore whether or not to retain the attorney to handle your matter. While some attorneys may charge you for that first meeting at a flat rate or an hourly rate (as discussed below), many attorneys, including myself, provide for free initial consultations regardless of whether or not you choose to hire the lawyer after your meeting.
  • Contingency Fee. When you see a lawyer in a TV commercial exclaim something like “You pay nothing unless we recover damages for you,” they are speaking about a contingency fee arrangement. Primarily used in personal injury, medical malpractice, Social Security Disability, and workers’ compensation matters, this arrangement means that if the attorney fails to recover any compensation for you either through trial or settlement, you are not obligated to pay any attorney’s fees (though you may be on the hook for out of pocket costs). If you do obtain a recovery, the attorney will take a percentage of that amount (most often 33⅓%, but sometimes higher or lower depending on the law or the agreement) as their fee and also reimburse themselves for any costs incurred during the case.
  • Flat Fee. For simpler matters like preparing a basic will, a standard bankruptcy matter, or uncontested divorces, an attorney may charge a flat fee, that is, a set amount up front for completing the requested work or for particular aspects of the matter.
  • Hourly Rate. This is perhaps the most common fee arrangement, and the one used most often in litigation matters. The attorney will charge you a dollar amount for every hour of time they work on your matter. How many hours your matter will require and how much per hour the attorney may charge for their work will depend on a number of factors, such as the complexity of the matter, the attorney’s experience, and the average rate in the community in which the attorney practices.
  • Retainer Fees. A “retainer” is essentially a deposit a client gives to an attorney at the beginning of the attorney-client relationship, with the funds being drawn upon to pay the attorney’s fees as the matter proceeds. These funds are usually deposited into a client trust account only to be applied to fees incurred for that specific client’s matter. At the conclusion of the case or relationship, any unused portion of the retainer will be returned to the client.

For those who are involved in a lawsuit, it is important to understand that most of the time (unless a contract, court order, or specific statute says otherwise), the prevailing party will not recover or recoup their attorney’s fees and costs from the losing party at the conclusion of the case.

Whatever the fee arrangement, it is important that you discuss and fully understand how the attorney will bill you for their time and their work, and that a written agreement be executed clearly explaining how the fee arrangement will work. Don’t simply ignore or put off any pressing legal matters; contact an attorney to see what arrangements can be made that will allow you to address your needs.