Basics and Legal Representation
Business entities such as LLCs, corporations, limited partnerships, and limited liability partnerships are treated at law as individuals. As legal persons, they are entitled to bring and defend lawsuits in the courts of law. However, certain requirements must be met for them to secure legal representation. Unlike living individuals, who have a constitutional right to legal representation and generally have the ability to represent themselves in court, an LLC (and other business entities) does not necessarily have that right. An LLC’s right to represent itself may depend on what is at stake, the complexity of the legal issues involved, and the state of incorporation.
Under the U.S. Supreme Court’s decision in Rowland v. California, 506 U.S. 194, 202-203 (1993), an LLC must be represented by an attorney before the court. The policy reasons behind the rule are to prevent individuals from circumventing the rules regarding representation, to enable the government to control the quality of representation, and to ensure that attorneys are subjected to disciplinary rules.
Other states, including Ohio, follow the holding of Rowland, determining the right of an LLC to represent itself in court on a case-by-case basis. In Ohio, R.C. 4705.01(B) governs the unauthorized practice of law. See, e.g., State v. Barley, 10th Dist. Franklin Cty. No. 06AP-1127, 2007-Ohio-6856, ¶30. This statute states, in relevant part, that the practice of law without a license includes "the appearance as an attorney at law or in any other fiduciary character" without the authority of law. The consequences for engaging in the unauthorized practice of law can similarly result in contempt of court , as well as civil and/or criminal penalties.
As with other statutes, the Ohio legislature has determined that certain provisions of R.C. 4705.01(B) shall not apply to limited liability companies. See R.C. 4705.01(A). Neither gold nor platinum level LLC status confers on it the right to represent itself in court. An exception may be available where the suit is a suit in equity. See, e.g., Zimmerman v. Carter, 4th Dist. Scioto No. 16CA3677, 2017-Ohio-1039, ¶15 (an LLC can appear pro se in a suit in equity).
In some cases, the policy considerations may lead a court to allow an LLC to represent itself – but only when the nature of the case is simple and the outcome will not affect the rights of others and is worth less than $3,000. State ex rel. Fisher-Bentley Devs., Inc. v. Harrison, 8th Dist. Cuyahoga No. 55729, 1990 Ohio App. LEXIS 204 (Aug. 23, 1990); see also, In re Clouse, 98 Ohio St. 3d 299, 2003-Ohio-4403, 785 N.E.2d 1101; El-Theory v. Kwan, 1998 U.S. Dist. Lexis 12384 (N.D. Ill. Aug. 15, 1998) (where defendant received direct notice of suit and was aware of all legal proceedings, there would be no prejudice to defendant by plaintiffs’ mistaken entry of default judgment).
An LLC should be represented by an attorney whenever possible. However, if it cannot afford legal representation in a case where the amount at stake is minimal and is fully within its control, and no unusual issues are presented, the court may allow it to represent itself.
Legalities: Can an LLC Represent Itself?
In many states, the rules governing whether an LLC (Limited Liability Company) can represent itself in court are relatively clear. Generally, the ultimate decision of whether an LLC can represent itself, or whether it has to hire a licensed attorney is state specific – but usually, these decisions come down to whether a party is involved in a case as an individual, or whether it is acting in a representative capacity. In that same spirit, if a party is appearing in a case as a representative of the LLC, rather than as a private, personal party – then the courts that determine whether a party has to hire an attorney generally will require a licensed attorney to appear.
In a majority of states, this principle is codified into the statute, with a general and particular language in the relevant legal code sections governing whether a party can represent itself. For example, in the state of California, this can be found in the following: "A corporation or association may appear in a judicial proceeding only by an attorney who is a member of the State Bar of this state, except that a corporation may appear in limited circumstances without such an attorney." A similar section applies to limited liability companies.
In many ways, this phrasing can be interpreted to be similar to the issue of whether the party is proceeding pro se or in a representative capacity on behalf of the LLC. That is, while a party representing themselves pro se – can do so without an attorney, a party acting in a representative capacity on behalf of the LLC – will be required to be represented by a licensed attorney.
The Risks of LLC Self-Representation
Despite the desire of an LLC to save money on legal fees, even if it is allowed to appear pro se, this option may result in significant risks and long-term issues. The law may be extremely complicated and require assistance by someone who understands and has experience in the particular practice area at issue. Judges can be sympathetic or hostile to a business pro se and may give them a hard time or might give them extreme leniency. An inexperienced lawyer (or a well-intentioned, but untrained, non-lawyer) may do an inadequate job, or harm the interests of the LLC, either through inexperience, misunderstanding, or lack of knowledge of the business entity laws that apply to the LLC itself.
Just because the company could theoretically represent itself in court does not mean that it should. Indeed, even experienced commercial litigators may have difficulty representing themselves.
As an aside, in non-litigation matters, as evidenced by the tremendous number of LLCs, particularly single member LLCs, formed in recent years with no real regard to business goals, LLCs were typically formed in a hasty manner by telephone or online without significant consultation from an experienced business lawyer. The purpose of obtaining professional help in forming a business entity is to enable the LLC to have a clear understanding of it purpose and its operating rules. LLC managers, members and other stakeholders may be unclear on their roles or understanding of what is reasonable compensation to take from the business or how to determine unfair compensation. There may be a dispute as to what constitutes a valid corporate opportunity, the ownership of distributions or contribution obligations.
Since many LLC operations are governed by contracts, the operating agreements are often complicated, ambiguous, or poorly written and would benefit from professional drafting or interpretation to clarify and protect the interests of the parties involved. Such agreements can help make the expectations of the parties explicit and explicit, detailed rules and procedures can identify and eliminate potential points of contention. Although an LLC is only a legal entity created by statute, much of the operations are like that of a partnership or of a small corporation. An LLC operating agreement is a contract and the interpretation of the language in such a contract is governed by the law particularly under New York law. Judges attempting to interpret such contracts may not be familiar with the LLC law or tend to construe the contracts strictly, particularly against the entity in favor of an individual. So from the beginning, an LLC may have less than ideal documents or agreements, which results in the need for a lawyer to help interpret the documents, particularly if the need to go to court arises. It is better to prevent the need for litigation in the first place and achieve clarity up front than to attempt to resolve disputes per the contract language after the fact with the risk that the terms may not be enforceable in the way the parties intended.
It is tempting to think that this time the business deal is straightforward and uncomplicated and does not require the costs of hiring outside legal counsel. However, it is important to remember that you will only face greater risk and a more daunting task later should the LLC be forced to raise these issues in court. The adage that "an ounce of prevention is worth a pound of cure" may never ring more true than when it comes to having qualified legal representation in order to protect the company’s interests.
The Type of Court Matters When Can an LLC Represent Itself
The function of the court may likewise serve to dictate whether or not a limited liability company will be permitted to appear in a lawsuit without a lawyer, essentially permitting the LLC to be its own legal representation. There are various types of courts from small claims court to higher courts that will impact the ability to appear without legal representation.
In the state of Tennessee, the issue of whether a limited liability company can appear in small claims court without legal representation was addressed in KDS Trucking, LLC v. AAA Cooper Transportation, Court of Appeals, M2017-00749-COA-R3-CV, (Tenn. Ct. App. June 7, 2018). In this case the Tennessee Court of Appeals did discuss that in small claims court a limited liability company would have been permitted to begin the lawsuit on its own. The Appellate court went on to state that whether the LLC could continue to litigate the lawsuit without legal representation was a more difficult question. This meant that the issue was not something that the small claims court had to address as it was beyond the scope of the issues dealt with by that court. So, in small claims court, a limited liability company would be permitted to open a case pro se but not permitted to continue with the case pro se.
Other cases and courts will not permit an LLC to appear in any court without legal representation. In Teloma Enterprises , LLC v. Pulse-LV, LLC, 2011 WL 2611370 (Tenn.Crim.App.6/30/11), while not directly stating the LLC could not proceed pro se, Court stated that they made it perfectly clear in their decision of whether or not to proceed pro se. This means an LLC will not be able to appear in any court without legal representation.
The Florida Bar Association has a position on limited liability companies and other corporations appearing in court without the representation of a lawyer. Their opinion states that private corporations, LLCs and professional corporations cannot appear in Court without a lawyer representing them. These corporations or LLCs can only make an appearance in Court through its officers and agents and any pleadings or paper filed without a lawyer will be stricken from the records of the court. Florida Bars Opinion 74-32, November 28, 1974.
This opinion also states that a corporation must appear through a licensed attorney and a non-lawyer officer of the corporation cannot make court appearances to present evidence in person, i.e. a non-lawyer cannot act as a lawyer would act in a court of law. The corporation acts by and through its attorney in fact, any type of representative, an employee or anyone else that the corporation chooses to appear in court. Fla. State Bar Ass’n, Op. 74-32 (Nov. 28, 1974).
Steps for LLCs When Self-Representing
- Determine Suitability: Before proceeding, LLCs should consult state laws to see if they are permitted to represent themselves in the specific court or matter at issue. Even if self-representation is allowed, consider whether it is in the best interest of the LLC.
- Review Statutes and Rules: Familiarize yourself with the relevant statutes governing the case and the procedural rules of the court, including any specific rules for business entities.
- Understand Your Case: Make sure you have a solid grasp of the facts and law that pertain to your case, as well as necessary legal procedures and documentation requirements.
- Communicate with Other Parties: If applicable, discuss your intent to represent the LLC with the other parties involved beforehand to avoid surprises.
- Prepare for the Hearing or Trial: Develop a clear understanding of the arguments you intend to present, evidence to submit, and witnesses to call. Be organized and prepare thoroughly.
- Observe Court Procedures: If possible, attend hearings for other cases and observe how they are handled by the judge and other attorneys. This will give you insight into courtroom procedures.
- Record Keeping: Maintain thorough and accurate records of all proceedings and communication surrounding the case; this will be helpful both in court and for reference later.
- Re-evaluate as Needed: As the case progresses, it may become increasingly clear that self-representation is not in the LLC’s best interest; be flexible and don’t be afraid to seek professional legal assistance if necessary.
Alternatives for Legal Representation
Unfortunately, self-representation is not the only option for litigating a claim in court.
LLCs are permitted to hire attorneys to represent it in a lawsuit. This alternative allows an LLC to take advantage of an attorney’s expertise, experience, and resources. In addition, if the LLC manager is named as an individual defendant in a lawsuit (for example, if a member alleges that the manager committed fraud) the LLC can reimburse the manager’s legal expenses during the litigation. So, if the manger was planning to file a motion to dismiss or state a counterclaim, the LLC can do so on his behalf.
However, obtaining the services of an attorney can be prohibitively expensive , especially for a small business owner, but there are other alternatives to self-representation that could help resolve a dispute. A company can ask the opposing party to agree to arbitration or mediation as an alternative to court. The company would need to weigh the costs and benefits of this option. Often the results can be cheaper and faster if the parties agree to waive the chance for a jury trial and contractualize in advance that the mediation or arbitration will be binding. Conclusively, the most important thing to remember is that in most states (at least 29), an LLC cannot represent itself in court, i.e., by a member or an agent.