Do I need a startup lawyer for my business?

Choosing an LLC, Corporation, or Other Business Form

The most popular form of business (“entity”) has become the limited liability company (LLC). Unless the entrepreneur plans to raise money from investors, an LLC is the better choice. At a later time, when your new company is ready to raise money, the entrepreneur can convert the LLC into a corporation. One good rule of thumb is that if the entrepreneur doesn’t know whether to choose an LLC or a corporation, they should choose the LLC. 

Entrepreneurs should consult with attorneys specializing in securities law if they plan to raise money even from “friends, family, and fools.” Once the entrepreneur has a corporation, they may need to consult with an attorney to negotiate a shareholder agreement, which works like a prenuptial agreement between owners. Otherwise, if the entrepreneur is forming an LLC, they will not require an attorney unless there are concerns about forming it with other people involved. 

Filing with the State

An attorney is not required to file a certificate of formation for an LLC or a certificate of incorporation for a corporation in Delaware. In simple cases, forming a single-member LLC can be done through a commercial registered agent service. Entrepreneurs starting a multi-member LLC should strongly consider engaging an attorney to draft the LLC’s operating agreement. Likewise, the founders of a corporation with multiple shareholders should strongly consider engaging an attorney to draft the corporation’s shareholder agreement. Shareholders and founding partners are often the ones who end up suing you, not your business creditors. Having an ironclad agreement is an ounce of protection worth a pound of cure.

Obtaining an EIN

An EIN is an Employee Identification Number and is issued by the  Internal Revenue Service (IRS). An attorney is not required to obtain an EIN. 

Tax Election with the IRS

The IRS treats LLCs as “pass-through” entities by default. In practice, the IRS effectively ignores LLCs and treats all revenue in a single-member LLC as if it were self-employment income. If an LLC has two owners, the IRS will treat it as a partnership. 

Ultimately, a good CPA will help the entrepreneur decide the best tax election with the IRS, such as having an LLC taxed as an S-Corp. Only specialized attorneys in the United States focus on tax planning. 

Obtaining a Business License

States and municipalities issue business licenses. The complexity of the application process and the type of license required determine whether a business needs a lawyer. In the state of Delaware, obtaining a business license is fairly straightforward.  

Buying a Business

Buying a business is complex. For starters, there are different ways to accomplish the purchase, such as asset purchase agreements, buying shares or membership interests, or a merger. Anyone considering the purchase of a business should absolutely consult an attorney. Someone planning to buy a business worth $1 million to $7 million should expect to pay the attorney around $10,000 to $100,000, depending on how complicated the transaction is.

Hiring Someone

If the business is hiring an individual to perform services for the business, then it will want to consult with an attorney about whether the business should treat the prospective hiree as a contractor. The state where the hiree performs the services will determine how to characterize the employee, not where the business is incorporated or has its headquarters. California, for example, has a much lower threshold for what is considered an employee as opposed to a contractor. An employment lawyer can assist with drafting the employment agreement, handbooks, and compliance issues generally.

Filing a Trademark

Trademarks protect a word or set of words, images, sounds, or even smells. It is a brand for a producer of goods or provider of services representing to the prospective customer the source of origin. The goal of a Trademark is to protect the goodwill associated with a business’s brand name. Federal (15 USC Ch. 22) and state laws govern Trademarks. The USPTO administers federal trademarks. It is almost always a good idea to consult with an attorney before registering a Trademark. The cost to file a trademark with an attorney can vary, but a business should expect to pay between $2,000 and $5,000.

Participation in a Lawsuit

No question that having an attorney assist with a lawsuit is advantageous to achieve a more favorable outcome in court. The bigger question is whether it is worth the fees to have an attorney get involved. If the business has insurance and gets sued, then usually, the insurance company will provide the defense. However, if a business decides to sue, then the business owners should take into account that, aside from small claims matters, very few lawsuits proceed through trial for less than $100,000 in attorney fees. The business owner should ask themself if this is out of principle (pride) or for principal (money). 

Buying Real Estate

All real estate transactions involving Delaware property require a Delaware attorney. The attorney must represent the buyer, conduct the closing, and administer the escrow. 

Conclusion

Deciding whether to hire an attorney hinges on many considerations, including the financial value, complexity, and experience of the entrepreneur. An experienced attorney should save a client money or prevent a future lawsuit by clearly establishing expectations between contracting parties. Creative attorneys can offer solutions for a prosperous startup.