May 1, 2018 Legal & Taxes en_US Small businesses should engage legal counsel early to navigate potential pitfalls, notify of relevant laws, and create preventive measures for eventual emergencies. Fortunately, getting legal advice doesn't have to be as tedious or as expensive as you might think. When should small businesses engage legal counsel?
Legal & Taxes

When should small businesses engage legal counsel?

By Eric Carter May 1, 2018

When growing your business, hiring an attorney is the last thing you want to do.

Attorneys are expensive. They don’t understand your business. They will slow you down, not help you grow. Right?

While attorneys might be perceived as business blockers, engaging an attorney sooner, rather than later, can help protect your growth.

When is the right time to engage an attorney? On what matters?

Because attorneys can be expensive, you need to narrow your early-stage legal spend to the highest priority areas. There are three areas where businesses of all sizes should at least consult legal counsel: business set up, core business operations, and core business assets.

Choose the Right Setup Now, or Pay for it Later

Setting up a business is easier than ever.

State business offices are often online allowing you to register your new business with a few clicks of a mouse.

However, business set up should include more than officially registering with your state. To protect you, your business partners, and your business as a whole, implementing basic corporate governance documents, and selecting the correct organizational structure are key. Rushing through the business set up process might save you time and money on the front-end, but down-the-road consequences can catastrophic.

The Devil’s in the Document Details

Before you hit the ground running to grow your business, you need to pause and get some ground rules in place. Basic business ground rules are set through your corporate governance documents. Whether it’s an Operating Agreement for an LLC, or a Charter and Bylaws for a Corporation, business owners often take their first misstep with improper drafting of these documents. Unfortunately, in most cases, you won’t know you went wrong until it’s too late. Corporate governance documents set the basic structure, and procedures for running your business.

From ownership rights and responsibilities, to winding the business down in the event the business doesn’t work out, corporate governance documents create the framework for your business. A good portion of these documents are dedicated to addressing how the business operates in the event that things go wrong (a topic that no new business owner is excited about discussing when trying to get a business off the ground). Where you might be tempted to rush through corporate governance documents, an attorney can ensure you aren’t missing critical elements.

LLC, Corp, S-Corp? Who Cares?

When you opened your business, what steps did you take? Did you fill out any state forms, or did you just dive right in?   If you didn’t fill out any state forms, you by default created a sole proprietorship (if you launched your business by yourself), or a general partnership (if you launched your business with at least one other person). Surprising to some, simply adding the words “LLC” or “Inc” to your business name won’t create a limited liability company or a corporation. You need to fill out the appropriate government forms to create a specific business form. An attorney can help you both select the appropriate organizational structure, and fill out the proper forms.

As an example, assume you decided an LLC was the best organizational structure for your business.  You must file Articles of Organization (or your state’s equivalent) with the state.

Within the Articles of Organization, you will encounter a number of questions that might not make any sense to you. However, they are simple, quick questions for a business attorney.

These  questions should take no more than five minutes to answer with the assistance of a business attorney. But, if you don’t understand how you have answered these questions, you could face unexpected personal liability, or management inflexibility in the future.

Basic organizational decisions include:

  • Choosing the organizational structure (eg. partnership, LLC, C-Corp, S-Corp, etc.)
  • Filling out the appropriate forms to elect your organizational structure.
  • Obtaining a Federal Tax Identification Number (FEIN)
  • Registering in the states where you intend to do business
  • Selecting and disclosing a registered agent

These basic organizational steps are critical, and can be confusing to business owners. But, with the guidance of a business attorney, they are simple, quick, and should be cheap.

Stand your House on a Solid Foundation

Your business has core business needs to operate. You need a place to run your business; some standard office resources; and the appropriate licenses, certifications, and permissions. While these resources might seem secondary to your core business assets, protecting these resources are vital to ensuring the ongoing success of your core business.

Where Will You Run Your Business?

Most businesses choose a physical space to operate. The most common legal relationship to a physical space is a lease or the purchase of property. Leases are notorious for including unbalanced and unfair provisions that give landlords wide discretion to act unilaterally against lessees’ interests. A common scenario being creeping and unsustainable increase in rent, or making the business tennant unnecessarily  liable for damage to the building.

This could leave you will unforecasted costs, or worse, without a building altogether. Even if you don’t have any leverage to negotiate with a landlord, an attorney can make you aware of the a lease’s risks that would otherwise remain buried in small print.

If you take a more modern approach, and operate through a fully virtual workforce , consulting an attorney could save you heartache down the road. Many distributed workforce companies have been hit with massive class action lawsuits because they started building their distributed workforce without considering the legal ramifications of working with multiple virtual employees. With some basic policies and procedures in place, you might keep your locationless business dreams alive, while ensuring you are legally protected

What Will You Use to Operate Your Business?

Once you have locked down your location, you have some basic resource needs. Whether its virtual IT resources, or physical equipment, you will face terms and conditions to obtain or use such resources.

With many online resources, these terms and conditions are presented to you with take it or leave it, clickwrap license agreements. With equipment, or larger IT deployments, you may see terms and conditions attached to a purchase order or statement of work.

Similar to a lease, you may or may not have any capacity to negotiate these terms. But, at the very least, it helps to know what you are getting yourself into, and when the resource provider can revoke your ability to use the resource. If the basic operation of your business relies on one of these resources, you must have precise understanding of what your rights to the equipment are. You wouldn’t want a key piece of equipment yanked from your warehouse after missing one payment. You wouldn’t want to lose access to your CRM software because of an email marketing campaign.

An attorney can help identify some basic red flags in terms and conditions, or may help you negotiate out of some harsher terms. Even if you can’t change the terms, you can at least prepare yourself for the consequences of certain actions

What Permissions Do You Need to Run Your Business?

If you run a business in a specialized field (e.g. healthcare, construction, accounting), you might be required to obtain certain licenses or certifications from local, state, or federal governments. The same applies for the sale of certain products such as  alcoholic beverages, firearms, chemicals to name a few. Certifications and licenses can be tricky. Most likely, if there is a specialty license or certification, there is a specialty attorney who deals with these agencies on a frequent basis.

Even if you think you can figure most of it out, a quick discussion with a specialized attorney can help you double check your work, and flag some common pitfalls in the particular area. As an added benefit, specialized attorneys often have relationships with the licensing or certification agencies that can help streamline your approval process.

Build a Moat around Your Castle

You want to spend your time and energy in building your competitive advantage. To help secure the competitive edge you build, you need to take legal steps to protect your core assets. The most obvious core business asset is intellectual property. Whether you have developed written content (copyright), a new invention (patent), or the next killer brand (trademark), the best way to ensure your intellectual property is adequately protected is to engage an intellectual property attorney who specializes in the applicable area of intellectual property.

However, the best method to protect your core assets might not be through a copyright, patent, or trademark. Your intellectual property might not be protectable, or it might not be worth fighting others in your space for such IP protection. In these instances, the best way to protect your assets might be through terms of use which governs the way your users engage or consume your product. Or, it might be agreements with your employees and subcontractors on how they protect your core assets.

If you provide a physical service (e.g. construction, dentistry, etc.), there may be no core asset to protect. Rather, getting paid might be the core asset. In that case, a strong purchase order agreement, or invoice terms and conditions might be the most critical method by which to protect your core business assets.

Core business assets will vary greatly from business to business, but an attorney can help you identify the asset itself, and how to best protect it.

You Know Your Business, So You Call the Shots.

Keep in mind that these suggestions are based on rules of thumb. Business legal needs will fundamentally depend on the nuances of the business.

If you don’t know what unique legal aspects your business requires, schedule, a high level conversation with an attorney to help you identify potential stumbling blocks, and direct you to the appropriate contacts.

Before you get spooked about a bunch of legal bills piling up before launch, rest assured, most of these examples are basic, time-limited engagements with attorneys.

A good attorney should be able to provide a firm estimate for the amount of time, and cost, associated for these examples. Luckily, the legal world is shifting to give the client more ability to limit fees.  Remember: you are the client, and you call the shots. If your budget allows for a limited amount in legal fees, communicate that to your attorney. If one attorney won’t work within your budget, there are plenty of others who will. In the end, legal fees spent upfront to protect you from future legal action is inevitably cheaper than legal fees spent to defend you in the midst of legal action.

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Eric is the founder of Dartsand and Corporate Counsel for a global technology solutions provider. He is a frequent contributor to technology media outlets and also serves as primary legal counsel for multiple startups in the Real Estate Development, Virtual Assistant and Mobile App industries. Read more