Starting a new business involves several moving parts, which can become quite overwhelming. There are so many things to take into consideration, making overlooking little details a very common occurrence.
Sometimes missing a slight detail in the early stages of a startup can come back to bite you down the road, causing major problems and creating obstacles. Something as simple as registering a new trademark can help you avoid problems in the future. I asked ten lawyers to provide their best piece of advice for new startup founders. Read below to see what they suggest.
1. International entrepreneurs: pay attention to your visas.
Besides the general rules that all business owners should follow, international entrepreneurs should pay special attention to their visas. Before starting any business, they must make sure their current visa allows them to work legally in the U.S.
Specifically, international students cannot operate a business under F1 or J1 visas. If they want to work in the U.S., either as a boss or an employee, they need to apply for visas that include work authorization, such as CPT (Curricular Practical Training), OPT (Optional Practical Training), H-1B (visa for skilled workers), and EB-5 (visa for foreign investors).
Merium Malik, Managing Partner of Malik Law Firm
2. Understand all aspects of the law.
Understand the law because it will permeate everything you do. Law should be the structure from which you build your business. It will cover every aspect of starting and running your business. For example, your choice of a legal entity (e.g. LLC or corporation), your compliance with federal, state, and local registration requirements, paying of federal, state, and self-employment taxes within the specified time period and at the specified rate, your hiring and firing of employees, and your contracts for business property or equipment are all legal considerations.
If you fail to recognize and protect against liability, your business can suffer a devastating loss. It is therefore highly recommended that you understand the law. Your lack of understanding is a sure predictor of failure, but your understanding is a strong predictor of success.
Evan Walker of The Law Office of Evan W. Walker
3. Tread carefully before entering into a commercial lease.
The most important legal advice I can give entrepreneurs starting a new business is to be careful when signing a commercial lease. Many new businesses choose to rent commercial space, but decide not to have the leases professionally reviewed and instead do it themselves. Although that is a good way to keep expenses down, it can be very dangerous.
Commercial leases are heavily weighted to favor the landlords. Issues such as net vs. triple net rent, responsibility for repairs and replacements, good-guy guarantees, renewals and dispute resolution can be make-or-break for new companies with tight budgets.
Understanding and being able to negotiate these many items in commercial leases can save you mountains of expense in the future, and can help save you if things don’t work out as planned. Having an experienced and knowledgeable attorney on your side during these crucial beginning stages can be immensely valuable to both the company and the entrepreneur.
Sruli Szpigiel, Junior Partner at Stern & Szpigiel LLP
4. Have an attorney review all contracts and agreements.
Starting any new business is an exciting venture, but enthusiasm may cause precipitous actions with long-term consequences. It is essential to memorialize any agreement with a signed writing, and consult with an attorney before signing important legal documents, such as a lease, partnership agreements, and any contracts.
What was said, promises made, and terms of an agreement are subject to interpretation, unless they are clearly set out. Memories may fade and when disputes arise, a written contract will help resolve disagreements. Legal documents have important and enduring ramifications, so it is imperative to discuss and review documents with an attorney before signing.
Properly drafted agreements provide important legal protection and avoid conflict, and encompass all potential legal ramifications and unanticipated circumstances.
Many states have laws regulating sales transactions over a certain monetary figure and last over one year. These are governed by the Statute of Frauds and the exact requirements vary from state to state. Other contracts, involving the sale of goods, may also be controlled by the Uniform Commercial Code, known as the UCC. An attorney, who is familiar with these laws can provide you with important legal advice and assistance.
Michael Kaplen of De Caro & Kaplen, LLP
5. Make sure you have proper funding.
Starting a business comes at a high cost, so anyone looking to start a business should be well capitalized. In addition to the physical build-out of a business startup expenses can include everything from business licensing, operating systems, technical infrastructure and much more.
That’s why it’s critical to establish a true understanding of what your business startup is going to cost before moving forward on anything. Developing a thorough and highly detailed business plan, with a comprehensive financial analysis, is a good first step.
Harold Kestenbaum of Harold L. Kestenbaum, P.C.
6. Consider initial legal costs as an investment.
The number one piece of advice I can offer is to view initial legal costs as an investment with high ROI. If you are serious about starting a business, and by serious I mean that the answer to “Why start?” is “I have no choice,” then spending capital up front is worth every penny.
Depending on your space, the most likely areas where you should be investing capital early on are business formation, employment, and intellectual property. Too many startups view legal costs as premature and not worth the money, but this thinking is myopic and usually damaging.
Yes, you could go cheap and pay for auto-filled forms online, but any errors will be much more expensive to fix down the road. In the case of business formation, aside from selecting the right entity (LLC, S-Corp, C-Corp, etc.) and place of incorporation (CA, DE, etc.), it is essential that you determine ownership structure early on.
Ownership can be painful and divisive to founders, and avoiding having to amend the ownership structure later in the game is invaluable. Regarding employment, it may seem easy to bring someone on board, but the legal exposure related to taxation, contractor versus employee interpretations, and wage and discrimination related disputes is enormous.
Regarding intellectual property, failing to have a patent on file before a statutory date is irreversible and often fatal. The take home is clear, upfront capital spent on solid legal counseling is worthwhile and ought to be viewed as a solid investment.
Amir Adibi of Imperium Patent Works LLP
7. Consult an attorney regarding proper registration and structuring.
Don’t assume that structuring your new business as a Limited Liability Company (“LLC”) is the best option, despite what the internet says. LLCs are very useful entities but are not appropriate for every new business, especially those that may qualify for special tax incentives.
For example, recent legislation has made permanent many of the benefits associated with qualified small business stock, including a potential 100% capital gain exclusion when the stock is sold. However, the small business stock must be in a domestic C corporation and not an S corporation or LLC. The stock must also have been held for more than five years and issued by a “qualified small business,” which generally requires that the issuer have less than $50 million in gross assets.
Another example of a tax benefit not available to an LLC is the potential savings on self-employment tax for S corporations. S corporations can make distributions and payments of salary to owner-operators. Owners pay self-employment taxes on the salary payments but not on the distributions. LLC owner-operators pay self-employment taxes on their entire distributive share of LLC profits.
Joshua Wu of JW Law, PLLC
8. Prioritize your legal efforts according to risk.
Early on, you should adopt a risk-based approach to legal and compliance. Think practical, rather than perfection. While the business is still getting off the ground, it does not make sense to devote a lot of time, energy or money to set up complicated legal structures and flawless compliance processes.
Growing the business is the priority. That does not mean turning a blind eye to all things legal. Instead, you should prioritize your legal efforts on your biggest risks. For most entrepreneurs, this means taking steps to shield themselves from personal financial ruin. This can mean taking steps as simple as incorporating your company, rather than running the business in your name, and ensuring that employee payroll deductions are properly withheld and remitted to the government. Later, if the business proves to be successful, you’ll be able to devote more resources to bolstering your legal and compliance systems.
Fraser Hartley of Edwards, Kenny & Bray LLP
9. Surround yourself with a great team.
Build a great team around you. I recommend starting with an accountant, an insurance agent and an attorney (in that order). A great accountant is key to any successful business, particularly early in the process. Your accountant should be able to advise you on issues related to entity choice, tax elections, deductibility of expenses, asset depreciation, employee and contractor classification, etc. A great accountant not only prepares your tax returns, but also guides you through the day-to-day decisions in a way that is tax advantageous.
I recently had a client incur a $40,000 tax liability because a colleague told him that he should form an S corporation. If he had instead used an LLC, the transaction would have been tax-free. Each business is unique and the process of creating a new company is not one-size-fits-all.
Attorneys and insurance agents are also great resources for educating new business owners during the formation process. Interview your team and pick wisely. They will likely save you a lot of time and money in the years to come.
Casey Gocel of Mandelbaum Salsburg
10. Hire an attorney.
Sure, this statement sounds a little self-serving, but getting an attorney involved while you’re in the beginning stages of your business lifecycle will be critical for your success. From the beginning, an attorney can direct you to the appropriate legal entity for your startup, reduce chances of a fallout between owners, identify and mitigate risks present in your startup and develop strategies for the inevitable conflicts that will arise with third-parties.
Simply put, the assistance an attorney will allow you to focus on the startup activities you prefer to be doing instead of the ones you despise. It’s true that hiring an attorney may be out of budget for some startups, so if you fall into this situation, go ahead and set up a free consultation with one. Prior to your meeting, let him or her know you know you need an attorney to be successful, but you don’t have the current budget for all the work and you would like to see if you can work out something. You’ll be surprised at how many attorneys will be open to reasonable payment plans or provide pro bono work to help serious startup founders get going.
Christopher McCauley of McCauley Investment Risk & Legal Consulting PLLC