– Matthew Baciak, Esq. –
Starting a business is difficult for a variety of reasons. One of the most challenging is often money. The stress associated with raising enough capital to start your dream business, to keep it going, or to expand it to accommodate new ideas or a new direction can put a strain on your mind and wallet very quickly. It is this strain that often deters entrepreneurs from seeking legal counsel. Many believe the added cost – and therefore the added stress – is not worth the minimal benefit derived from legal representation. What many entrepreneurs often tell themselves is that they will cut costs by forming their business online or draft their own governing documents thinking that these small things, in the end, won’t matter, or when they eventually do matter, the business they started will be successful enough to pay for an attorney when he/she is needed.
This brief article/checklist is intended to show you, the entrepreneur, that not only is getting an attorney critical, but getting a good attorney who can intelligently address the following questions, is equally important and will actually save you money and stress throughout the process.
Question 1: Which Business Entity Form Is Right For Me?
The corporate form under which you choose to start your business can greatly affect the amount of taxes you and/or your business pay, where the power in your company is located, how interest in your company can be transferred (to your descendants or to potential buyers), and who in your company bears all the risk of things like bankruptcy and lawsuits associated with your product or service. Certain partnerships, for example, make all partners equally liable for each others’ actions, even when that partner’s actions were not authorized. Likewise, some entity forms require you to pay taxes on the earnings your business has even though you do not take any money out of the business, while others will require the money made by the business to be taxed twice – once when the business earns the money, and once when the owner takes money out of the business.
While it is easy to find the differences between the various corporate forms on the Internet, it takes a trained professional to determine which form is best for you, taking into account your financial situation, the amount and type of investors you have, and the amount and type of partners you have. Your attorney should not only be able to tell you the difference between these corporate forms, but also show you how your particular situation is benefited and harmed by each form. Often, the two biggest factors in determining your corporate form will be your financial situation and how taxes will impact your financial plans, and the amount and type of control you want your partners to have.
Question 2: Do I have to Worry About the SEC?
While you may think your business is small and therefore of no concern to the Securities and Exchange Commission (SEC) (and related state agencies) many actions taken by a small business can cause many problems for both you and your business. The SEC’s regulations are extensive and complex and, while many of them will not affect a small start up, a few can. For example, if you plan to solicit money indiscriminately, try to raise over a certain amount, or try to receive money from out of state, you could be subject to federal securities laws. Even if you qualify for an SEC exemption and you do not need to register with the SEC, if you do not fill out the proper forms and go through the proper procedure in notifying the SEC of your intention to use that exemption, you may become ineligible and will have to report to the SEC anyway. While reporting is not a death sentence – and in fact may become a necessity when your business reaches a certain level of success – it is often an unnecessary, time consuming, labor intensive, expensive obligation for a start up that can be easily avoided. While it is not necessary for your attorney to be a SEC guru and know every SEC regulation, he/she should be able to red flag certain activities you may be thinking about engaging in as potentially causing problems with both state and federal securities law.
Question 3: Funding
Starting a business can drain your bank account very quickly. It is during this time that many investors can swoop in, knowing you need the money, and take a lot from you. Speaking to an attorney about various programs, loans, crowd funding, and a variety of other sources can not only result in you getting the money you need, but can ensure that you do not give up too much of your company’s control in the process. Because time is money, an attorney can help you find, apply for, and receive these investments quickly while you are using your time to run, build, and make your business more attractive to investors. In the end, less time will be spent searching and applying for investments and you will be confident that all investments comply with SEC exemptions and do not require you to give up too much interest in your company.
Question 4: Real Estate?
Very few people would buy a home without consulting either a broker or an attorney, so why should your business be any different? When a business owns or rents property many issues ranging from premises liability to secured lending arise. There is also a question of whether the real estate itself should be owned by a separate corporate entity in order to protect your business and yourself from unneeded liability. An experienced attorney can walk you through the process of finding, acquiring, and protecting the property you need to run your business. You should discuss with your attorney his familiarity with environmental issues, premises liability, and secured lending (among other things) so that you can be confident he/she knows what he/she is doing. You do not want to buy a piece of land and find out there are environmental problems that you (and not the seller) is responsible for cleaning up, or finding out that you are personally liable for someone’s slip and fall lawsuit on your rental property.
Question 5: How Should My By-Laws or Operating Agreement Be Drafted?
Some of the most common problems attorneys face occur when the partners of a business disagree or have had a falling out and no corporate documents exist that help resolve the issue. Many people start business with friends or family and believe that any problems that may arise in the future will be handled as all problems have been in the past – either at the dinner table or over a drink at the bar – and therefore a detailed governing document is unnecessary. What many entrepreneurs fail to realize, however, is that when a large portion of someone’s money is tied up in a risky endeavor or business, that person’s mindset changes and they stop thinking like a friend or family member, and start acting as a self interested profit seeker.
It is often curious to think about how entrepreneurs would never consider not obtaining insurance to protect their new business or building, but seldom think twice about the generic operating agreement they downloaded off the internet. Properly drafted by-laws, operating agreements, and partnership agreements are an insurance policy against any number of bad or unexpected things that may arise in the course of your business. What will happen to a partner’s interest upon his death? What if someone wants to sell – do the other partners have the right to buy first, and if so, for how much? Who will run the business? Who, if anyone, has the final say? What are each partner’s responsibilities and liabilities? These and a number of other questions can all be answered by properly customized governing documents. If the governing documents are not specific or customized to your particular business you may be inadvertently allowing a silent partner to have much more responsibility and power than either of you originally intended, or you may be subject to much more liability than you agreed to be responsible for, or someone may try to sell an interest in your company to a competitor or someone you dislike and you will not be able to stop them. Governing documents also allow you to “customize” the financials and liabilities of your company in an almost infinite number of ways. For example, if you and your partner decided that certain profits and losses from one income property will go to one partner, while the profits and losses from another will go to the other partner, then you can do that and the IRS will honor your agreement, even if you are not 50/50 partners. Likewise, you can restrict the resale of any interest in your company to a select group of people and even set out the means by which price will be calculated so a disgruntled departing partner cannot break up your business.
A detailed and comprehensive governing document is insurance against the numerous pitfalls and obstacles a business can and will face. It is critical you lay out all the cards for your attorney so that he can customize your governing document to suit you and your partners’ financial and legal needs.
Question 6: Who Are You Representing?
Many entrepreneurs are not aware that an attorney can either represent them either as an individual owner or can represent their business. This distinction can make a world of difference down the road. For example, if the attorney is representing you, he/she has your best interest at heart and not the interest of your partners or even the business. As a result, if you ask him to draft governing documents that shield you as much as possible from liability and still give you all (or most) of the power to run the business, then he/she can do that. If, on the other hand, he/she represents the business, his/her priority is the business’s interests and not yours. Therefore, if there is a disagreement between you and a partner, he/she will not assist you or your partner, but will take steps to protect the business and suggest courses of action that benefit it and not necessarily you.
While a good attorney should be able to pick up your intentions from the course of your conversation, it may not hurt to make clear who he/she will be representing. It is important to keep in mind that if he/she represents the business, and you eventually want to do something that hurts the business, and tell him/her about it, he/she is not bound by the attorney-client relationship to keep what you told him/her secret because you are not his/her client, the business is!
Question 7: What About My Intellectual Property?
Every business is unique and tries to stand out in its own creative way. Everything from logos and slogans to color schemes and designs can be protected. When most people think of intellectual property (IP), they think patents. Patent law is a highly technical area of law that, for all intensive purposes, demands the attention of a patent attorney. Many business, however, do not need the added costs of a patent attorney. What most entrepreneurs really need is advice regarding copyright, trademarks, licenses, and trade dress issues. Speaking to an attorney on these topics is critical for two reasons. The first reason is that you want to make sure that your line of code, your logo, or your slogan is protected so no one else can use it or steal it. How would you feel if you built your business from the ground up and just when you started becoming profitable, someone tries to come in and trick the public into buying their goods or services by making them think that, in reality, it’s yours? You do not want to have to spend your long awaited profits on fighting a lawsuit that could have been prevented with a few filings in the relevant government agencies. The second reason you should speak with an attorney about IP issues is to make sure you are not accidently infringing upon someone else’s rights. The last thing any entrepreneur needs is the added cost of getting sued or finding out – after he invested a great deal of his/her money into a project – that he cannot pursue his/her dream because someone else protected something he/she needs.
Question 8: What Does The Future Hold?
While entrepreneurs often have many reasons for wanting to start a business, the common denominator among all entrepreneurs is that they want to make money. While accountants are great resources to help you manage and reinvest your money, attorneys can help you maximize your money when the business is coming to an end. This can include anything from passing your business down to a child, merging or being bought out by another company, or bankruptcy. You may be asking yourself why you should be thinking about the end of your business before it has even started. While it is true that many of the specifics by which your company will end cannot be dealt until that end is near, there are steps that you can take at the formation of your company to protect you from bankruptcy, for example, or that you can do to make the inheritance of your interest in the business transition to your heirs more smoothly and for less money.
The above eight questions I recommend to ask an attorney hopefully impressed upon you what a valuable resource an attorney can be. They can save you a great deal of money and stress when forming your business. The most important thing, however, that you have to ask yourself is whether or not you trust and feel confident in the attorney’s abilities. After all, the decisions you two make could stay with you for a long time and will shape the direction in which your company goes.
No one attorney can be an expert in all of these areas. I recommend that you find an attorney you are comfortable working with and who is part of a firm that has the resources to address the issues I mentioned above. If the attorney is worth his/her salt, he/she will have certain areas of expertise and will have the wisdom and humility to know when you need help that he/she cannot/should not provide. Its times like these when a firm with attorneys specialized in various areas of the law is beneficial. You will have one “go to” attorney, but he/she will be able to give your file to his/her colleagues in order to get you the best advice possible. This will also save you time and money because you will not have to go all over town looking for a new attorney to handle one issue for you.
Matt Baciak is an attorney at Smith Haughey Rice and Roegge (SHRR) in Grand Rapids. Most of his practice centers around non-patent IP work and funding issues, but he also assists businesses in the formation of governing documents and tax issues. SHRR is a full service law firm with experts in mergers and acquisitions, commercial real estate, bankruptcy, succession planning and a variety of other areas. The firm is committed to helping Grand Rapids grow, which is why it is involved with organizations such as Startup Weekend and Start Garden. SHRR offers affordable rates to small business knowing that the start up period is both stressful an expensive.
We encourage you to give us a call at any time to see how you may benefit from legal representation.