On occasion, I get asked to write blog posts or submit my thoughts on topics of interest related to corporate law, starting your own business, and the like for other websites or blogs. A version of this post was originally written for The UpCounsel Blog and appeared on October 3rd. You can find it here.
So you’ve decided to form your own business. Congratulations! And you’ve heard enough horror stories about folks losing their shirts (or houses) to know that you want an entity between you and all that potential business liability. Congratulations again!
But where do you begin? Corporation or LLC? Board of Directors? Managers? Advisors? Employees or Consultants? Interests or Units? Vested or Unvested? S-corp? C-corp? No-corp?
The great news about forming a U.S.-based business in the 21st century is that you literally have more options than ever before. That’s also the bad news.
While the Internet can offer an almost unlimited bank of terms, precedent materials, and even some very good advice on the formation process itself (like blogs, for instance), regardless of how “off the shelf” you believe your new enterprise to be, there are risks to mitigate and questions to consider that no amount of filling in blanks on a pre-prepared form can properly account for.
That’s where a good attorney comes in.
Expertise – Navigating the Sea of Options
The modern world is a specialized one. That business you’re starting? It probably isn’t aimed at being a multinational conglomerate (at least, not from the start). Instead, chances are you’ve decided to start a business because you’ve identified a hole in the market or an underserved customer base; a place where your specialized knowledge or skill will help differentiate your brand from everyone else’s.
Just like in your business, an attorney’s value comes from the specialized knowledge or skill that he or she brings to the table. In the case of company formation, there are literally thousands of options for founders to consider: from where to form their entity to how it should be governed. Attorneys have spent their entire careers learning and understanding those options. You’ll have 1,001 things to do already to get your business up and running, having an expert there to help you get through the process just makes sense.
Experience – They’ve Seen it Before
You probably didn’t get your great business idea just from reading books about great business ideas, and attorneys didn’t get where they are solely by reading statutes, case studies, and bar review articles. Depending on the attorney, chances are they have worked on dozens if not hundreds of company formations.
There is significant value in that experience, in knowing how to read between the lines and the difference between how things can be done and how they actually are done. A good attorney can give you the benefit of that experience without your having to build 100 companies yourself.
Cost – Saving More than You Spend
No one wants to spend money on things they don’t need, especially a brand new start-up paying every single cost out of pocket. But while it is easy to approach legal fees as a “cost center”, especially in the early days, for the most part it is anything but.
Consider the average company. Your company. Consider the time and expense needed to (i) ship a product or service exactly as ordered vs (ii) repairing and replacing a product or service that doesn’t perform or operate as intended. Which is the more expensive?
As is likely the case in your business, in the law “repair or replacement” is absolutely the more expensive, because any mistakes made at the outset of formation must be reviewed line by line and corrected either through new documentation. Even mistakes that may have appeared “correct” at the time (such as in respect of the structure of the company) will need significant drafting if you need to modify it later on. Because of this, what may have cost only a small amount at the outset can easily cost five times as much (or more) when it needs to be revised.
Having an attorney on board at the start of your new endeavor can help mitigate (or eliminate) this additional expense, at relatively low cost.
Consigliere – A Sounding Board
Whether you are starting your first company or your fiftieth, early days generally bring long hours, hard work, and a multitude of questions both legal and not, often in what amounts to a vacuum for the new founders.
Having a good attorney on call can be useful for more than just asking questions about the Delaware General Corporation Law. Your attorney will have seen many businesses grow and succeed, and, likely, many more falter and fail.
Especially in those early days, your attorney can be an invaluable source of advice and wisdom on the simplest matters to the most earth shattering , and an excellent sanity check on the multitude of choices you will be making to get your business up and running.
Networking – The First Professional (Among Many)
Running a business (and funding one), is not an easy task. In the course of a given year, the average small business might need: (i) general company counsel, (ii) accounting services, (iii) banking services, (iv) payroll services, (v) labor counsel, (vi) IP counsel, (vii) real estate services (or counsel), (viii) funding sources (angel, institutional, or otherwise), etc., etc.
For the same reasons that an attorney is useful for his or her legal or business experience, they are useful for the contacts in the community that such experience represents. Chances are, when you contact your attorney and ask them for a lead on a local accountant that specializes in start-up work, they will have someone to send your way.
Every company is backed by a group of trusted professional advisors and interested parties. A good attorney helping to form your company can be a great first step in establishing just such a group for you.
Limited Liability – The Reason for All This
Though last on this list, the concept of “limited liability” is perhaps the most important one to discuss. In general, you are putting yourself through all the effort, expense, and time commitment of creating a separate legal entity because you don’t want your new business’ liabilities to be your own. The entire purpose of the corporate (or LLC) structure is to limit an investor’s exposure solely to the assets it puts into the entity. In other words, to make sure you don’t lose your house.
While the concept is easy enough (you are not liable for the acts of your entity), there are innumerable perils and pitfalls to consider and watch out for. How should documents be signed? How should the bank accounts be managed? How should the entity be capitalized? If these and similar items are not handled properly, the law allows creditors to “pierce the corporate veil” and attach their claims to the assets of the founders (and other equity holders).
Because of that, it is very important that the proper “formalities” are followed, and there is no better person to aid in that, than a good attorney.
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So whether you need help navigating the sea of options that makes up a modern business, advice on how to follow the formalities necessary to make sure you don’t lose your house, or you simply want a sounding board off which to bounce your latest genius business move, it’s always a good idea to talk to an attorney.
And as with everything else you do in your business, today is always better than tomorrow.
Contact Rick Hoeg at rhoeg@hoeglaw.com or by phone at 734-263-1001.
Rules of the Game 