Startup Flight Checklist Item #12: Legal and Corporate Matters January 1, 2012Posted by Jim Price in Business, Entrepreneurship.
Regarding any legal matters, I strongly recommend that business people to seek a lawyer’s advice. (I am not a lawyer.) But with that caveat, let me touch on a few of the most common legal-oriented questions I hear from people when they’re launching a new business:
When should I retain a lawyer?
Early. Before you form the business, and before you start doing business transactions with multiple individuals or entities. And certainly before you take in money from investors.
How do I find the right attorney?
There’s no replacement for networking. Ask for referrals from other startup executives, entrepreneurs, as well as from complementary business service providers (e.g., business accelerators, economic development agencies, accountants, marketing firms). When you’re referred to attorneys, ask them what other startups they’ve worked with in your field. Ask for references you can talk to. Find a firm, and an attorney, for whom your startup will be an important client. (The big-name firms may schmooze you over dinner, but ultimately they’ll assign an inexperienced associate to your account who’ll be pressured to bill lots of hours – at the same billing rate at a partner from a small firm.) Seek a small-firm attorney who is not only focused on business law, but has extensive experience with startups. (For more thoughts on this and the previous question, see my earlier post here.)
What are the top “to do” items I should address with my attorney?
First of all, take the time to tell your whole story to your lawyer. I find that a good lawyer can only do his or her job if they know what questions to ask, and they can only do that if they have the deep background. Then, your lawyers can help you with the following startup items:
- Legal formation
- State and federal tax filings
- State DBA (“doing business as”) filings
- Development of standard “form” legal agreements for your business
- Advice regarding the structure of shareholder agreements and capitalization
What kind of legal entity do I form, and why?
Even if you’re the sole owner of the business, you might want to consider operating the business as a limited liability company (LLC) rather than a sole proprietorship, since the former offers you the liability protections of a corporation. (Awhile ago, I took a more in-depth look at this topic here.)
How do I protect my ideas and brands?
Basic business concepts are rarely if ever legally protectable by patent. That said, there are some straightforward – and inexpensive – things you can do to protect your business’s ideas. First, you can use nondisclosure agreements (NDAs): have your employees and contractors sign them, and be sure to sign them with people you meet with outside the company. Second, you should copyright all written, graphical video and/or multimedia content that you put out in front of the public (e.g., “Copyright © Goofball, LLC 2012”). You should also put trademark (TM) or service mark (SM) symbol, as appropriate, adjacent to your brands – company name, product names, logo, and tag lines. You may wish to inexpensively file with the U.S. PTO to register a name or mark for the right to use the registered trademark symbol (®).
What should I expect to spend on attorney’s fees?
That said, if you’re the only owner, total legal fees and state filing fees associated with getting a new LLC organized and set up may be as low as $500-1,500, depending on the attorney and the specifics. If the business has 2-4 partners but the structure is pretty straightforward, you might expect total legal startup and filing fees to be more in the range of $1,500-2,500.
It’s important to note that a reasonable startup-oriented attorney ought to be willing to: (a) give you a budget estimate and a not-to-exceed quote before starting on any project; and (b) put you on a payment plan, understanding that your business is cash-poor.
Can I save money by using standard legal forms on the Internet?
You might save money in the short-run, but in my experience, entrepreneurs who use such off-the-shelf form agreements regret it and pay far more later on to repair the damage done. You can download forms – e.g., for an LLC operating agreement – off the Internet, but you get what you pay for. The problem is that the standard forms are, by definition, designed for the lowest-common-denominator situation, and can’t possibly anticipate any specific current or future circumstances in your business. In addition, they typically won’t be tailored to your state’s laws (although some are).
My brother-in-law (or parent, or neighbor, or old school friend, etc.) is a lawyer, and he/she is willing to do the legal work for cheap or free. Is that a good way for my startup to save money?
No! As with using standard forms, you get what you pay for. Attorneys specialize – and accumulate specialized career expertise – just as physicians do. Would you rather have your child’s pediatrician, or your dermatologist, perform complex brain surgery on your loved one, or a neurosurgeon who performs that specific brain-surgery procedure dozens of times per year? The answer’s obvious with doctors, and it ought to be just as clear with attorneys. Paying a modest amount of legal fees early on as you’re setting up your business entity will save you many headaches, and major expenses, in the long-run.
The value proposition of a good startup attorney: mistake avoidance
Even though I’ve started and run a number of businesses myself and know more than I care to admit about business law, I would never dream of launching a new business without the active assistance of an experienced, startup-oriented attorney. And yet I find it challenging at times to explain to first-time entrepreneurs the cost-benefit of lawyers – because the value proposition is one of indirect savings and avoided hazards. In other words, a modest amount of money invested in attorney’s fees now is very likely to pay great dividends later on when bad things don’t happen to your business.
But “mistake avoidance” is a difficult value proposition to self-assured entrepreneurs, because they tend to think they can figure things out for themselves. Unfortunately, I’ve seen quite a number of otherwise high-potential entrepreneurs commit what ended up being company-killing mistakes because they didn’t have the benefit of wise guidance in the early stages – and in the end, they had nobody to blame but themselves.
The comments and suggestions in this post do not represent legal advice. The author is not an attorney, and recommends that entrepreneurs and other readers seek an attorney’s advice to address any legal matters.