Off To a Strong Start
6 Reasons New Businesses Need a Lawyer
There you are, on the cusp of starting your new business or launching your latest product, equipped with your million-dollar idea and limitless determination and drive. Only, that million-dollar idea is just a seed, for now, and nurturing it to its fullest potential is dependent on what steps you take next.
So, why should that first step be consulting with a lawyer?
It might not strike the budding entrepreneur as the most practical choice; legal fees can be expensive, and starting a business is already a costly, resource-depleting process. But with all the moving parts — and in turn, legalities — necessary to sustain a business, seeking a lawyer’s guidance can ultimately save money and free up resources in the long term.
Three New Orleans-area attorneys shared with Biz New Orleans their top reasons why entrepreneurs should start their professional journeys with expert legal advice — and how doing so can increase the odds of that seed growing into a thriving business.
1. Choice of Entity
“This is really the first question to ask: How do you want your company to be formed?” says Kathy Conklin, member at McGlinchey Stafford.
Choosing whether to structure your business as a sole proprietorship, a partnership, a corporation or a limited liability company (LLC) is a decision made on the state level, and it determines what specific laws your business must follow. It’s also a separate decision from how your business will be recognized as a tax entity.
Conklin says that deciding what kind of entity to establish isn’t where new business owners might encounter difficulties: It’s correctly observing the formalities of what they’ve chosen. Here, consulting a lawyer to ensure that the legal nuances of your entity are honored is a smart move for business owners — because at stake, she explains, are your personal assets.
“You might choose an LLC or a corporation because you don’t want your house, or assets that you own outside of your company, to be at risk for your company’s legal expenses,” Conklin says. “As a sole proprietor or as a partnership, your personal assets are at risk. If you don’t observe the formalities of your entity, a creditor can say, ‘You don’t really have an LLC here; you really are just a mom and pop, so your house is not protected.’”
Conklin recalls a situation where her legal expertise was critical in determining whether a restaurateur lost just one business or many.
“Very early in my career, a restaurateur was opening a side business, and I was charged with setting up their corporation,” Conklin says. “Somebody got a bad oyster at that restaurant and died. That particular business failed, but because it was established as a corporation, and because I set it up correctly, that protected them from liability. Their other restaurant was fine, and their personal assets were fine, too.”
2. Early-Stage Funding
“Anybody who is investing money with your company,” says Abid Hussain, a partner at Sternberg, Naccari & White, LLC, “is going to want some say in how you spend it.”
Hussain practices in a number of areas including asset protection, early-stage funding and intellectual property. The term ‘early-stage funding,’ he explains, encompasses a broad array of topics dealing with money received to get a startup off the ground.
“Once you get outside your group of friends and family, you have to limit yourself to accredited investors for substantive raises,” Hussain says. “‘Accredited investors’ is a term defined by the SEC and is a requirement of selling securities in a startup company. And unless you’re under certain safe harbors within the SEC statutes that allow you to seek investment money, a private placement memorandum may be required.”
He says that while money received earlier in a company’s lifetime often seems more valuable than later money, it is important to be strategic in how much money a company accepts and from whom, especially in the early stages of growth.
“Each round of investment has restrictions on what you can do with the next round or has potential conflicts with the next and future rounds,” Hussain says. “Getting more money from investors is always inversely proportional to the control you have of the company. It’s a balance; there’s no hard-and-fast rule. But some of my more successful clients are the ones who have been stingy with how much of the company they sell to investors, taking less money upfront and building their company as much as possible on their own.”
Thinking ahead several steps down the road with an attorney, Hussain says, can both legally protect business owners and prevent them from limiting their own potential for making money.
“My happiest clients are the ones who have consulted with me from the beginning, because we can get them to where they are successful at far less expense than what it costs to fix a big mistake, and far, far less than it would cost to face a lawsuit.”
3. Intellectual Property
Intellectual property law, or the protection of artistic work through copyrights, trademarks, patents and trade secrets, is another arena where mistakes are much easier–and much cheaper–to prevent than to correct.
“The product brand or company name you picked might be OK on GoDaddy or in the state of Louisiana, but if you didn’t do proper searches with the U.S. Patent & Trademark Office, there may be a nationally registered trademark issue or conflict,” Abid Hussain says. “Imagine that you’ve built your website, and you’ve created all your marketing materials, signs, logos, etc., all of which have cost you thousands of dollars. Now imagine having to take all that down because someone, somewhere else in the country, sues you because there is a conflict you didn’t search for earlier in the process.”
Hussain explains that it can also be difficult for a business owner to backtrack after formally launching because they’re emotionally tied to their chosen brand. For this reason, paying a lawyer upfront to properly check for intellectual property conflicts can prevent both headaches and heartache down the line.
In addition, Hussain says the prevalence of digital media in building a brand should have business owners considering intellectual property through an often-overlooked lens: social media.
“A growing area of litigation,” he says, “is over social media accounts and the content posted. Suppose somebody in your company creates social media accounts, on behalf of the company, but through their personal email accounts. Who owns that social media account? And if they’ve used that account to post photographs that were taken on their personal smartphones, it becomes even more ambiguous. Who owns what, and what the company’s rights are versus the rights of the employee, all need to be spelled out in the company operating agreement and in your employee agreements. It’s the kind of stuff nobody thinks about in the beginning, but everybody fights about in the end.”
4. Employment Law
As much as business owners might like to oversee every aspect of their new venture themselves, growing your operations means growing your workforce — and that means understanding the labor laws you must honor, both at the state and federal levels.
Kathy Conklin explains that the laws a business must observe evolve as the number of employees grows, and because those thresholds vary between laws, consulting with a lawyer will ensure you remain compliant as you scale your company.
“A lot of the federal rules that you have to observe don’t apply until you have about 15 employees,” Conklin says. “It doesn’t mean you can sail free, but you’ll have a lot more freedom of movement. At the point of more than 15 employees, you’re subject to the Americans with Disabilities Act and Title VII. The health care continuance act, COBRA, is at 20 or more employees, and FMLA (Family and Medical Leave Act) has a different number at 50 employees within a 75-mile radius. And at that 50 mark, you do have to have a health benefits plan. The rules are complex, and you can easily fall afoul.”
Conklin says that a major point of error for new companies is misclassifying employees, and thereby failing to honor both labor and tax laws.
“A lot of people say, ‘I’m just going to hire using independent contractors, and I’ll report that as a 1099, and I won’t have to withhold taxes,’” she says. “That sounds great because it sounds like you can save money, but just because you say somebody is an independent contractor, it doesn’t mean they are. If you’re really controlling what they do, they’re your employee. You should pay them on a W-2 and withhold taxes. Otherwise, the IRS can look at you and say, ‘You failed to withhold taxes, and now you owe back-taxes for all these people.’ When you try to get too clever is when you get in trouble.”
5. Lease Agreements
Even once you’ve secured funding, vetted your brand name and built your workforce, there’s still a major piece of the puzzle to take on: finding a home for your business.
“A purchase or lease of a commercial property is one of the most significant commitments an emerging business might make,” says Violet Obioha, an associate at Stone Pigman Walther Wittmann LLC. “In most instances, the business is making a long-term commitment for which there is no easy exit. Moreover, purchasing real estate is a major and expensive investment.”
Obioha says that a real estate attorney will consider and mitigate risks a new business owner might not consider, such as default rules under state law that, if not addressed properly in a lease, could place responsibility for maintenance on the tenant. They can also ensure that a selected property is zoned for a business’s intended use and is free from environmental hazards.
“Many standard leases include clauses favorable to the landlord that could be traps for the unaware if not adequately reviewed and negotiated,” Obioha says. “During the worst of the pandemic shutdowns, many small retailers and other businesses found themselves with operating covenants and with lease obligations that were guaranteed by the individual business owners. Although a small business may have limited leverage to negotiate a lease or financing terms for a purchase, it is important to know the implications of the documents being signed.”
Flexibility, she says, is also vital for a new business, and real estate attorneys can draft lease agreements that allow for space expansions or reductions that align with a business’s needs and resources.
“By helping businesses anticipate and overcome potential problems,” says Obioha, “an attorney can play a pivotal role in a business’s stability, growth and longevity.”
Common among all the topics discussed so far is contracts: they’re just as important to a business as cash, and Obioha says business owners should be thinking about them from day one, especially if you’ve chosen to establish a partnership.
“The ideal time for business partners to draw up a governing document, such as a partnership agreement or operating agreement, is when the company is formed,” she says. “Governing documents clearly define the rights and responsibilities of the partners as well as how they make decisions, divide profits and loss, and handle liability and debt. Having a written agreement at the outset of a business venture ensures that partners are on the same page about important details and can reduce the risk of disputes in the future.”
She says that attorneys should also be involved in the development of all commercial contracts, whether the client is the buyer or seller, to ensure there is no ambiguity around the services being performed, the products being provided and what is being paid in exchange for those services or products.
“If the client is the buyer, the lawyer will help the client determine appropriate protective provisions, such as representations and warranties concerning the services performed or products provided, insurance requirements and indemnities,” says Obioha. “Alternatively, if the client is the seller, the lawyer will help the client determine appropriate protective provisions to limit the seller’s liability, including provisions that cap the seller’s total liability or afford the seller the opportunity to cure a default.”