Solving the Everyday Problem of Client Identity in the Context of Closely Held Businesses
38 Pages Posted: 10 Mar 2004
Abstract
Lawyers often overlook or trivialize the subtle distinction between representing a closely held business and its owners. But because the duties owed by a lawyer generally extend only to individuals and entities that are classified as clients, this distinction is of great importance.
This article rejects the two predominant theories of client identity in this context. The entity theory, which provides that the lawyer represents only the entity, fails to guide the lawyer on matters involving the entity's owners. The aggregate theory, which provides that the lawyer represents the entity and all of its owners, often creates irreconcilable conflicts of interest between the owners.
The alternative solution proposed by this article divides the lawyer's world into internal and external matters. Internal matters involve the inner workings of the entity and the relationships among its owners; external matters involve the entity's dealings with third parties. The lawyer has both an internal client - an owner - and an external client - the entity. The gap left by the entity theory is filled, and the conflicts of interest among owners produced by the aggregate theory are eliminated.
Keywords: Corporation, closely held, ethics, professional responsibility, representation
JEL Classification: K22
Suggested Citation: Suggested Citation