Perhaps the most challenging part of starting a small business is covering all your legal bases. "The law increasingly affects every aspect of small-business operation, from relationships with landlords, customers and suppliers to dealings with government agencies over taxes, licenses and zoning," says Fred S. Steingold, an Ann Arbor, Michigan, attorney and the author of Legal Guide for Starting & Running a Small Business.
When do you need a lawyer? Although the answer depends on your business and your particular circumstances, it's generally worthwhile to consult an attorney before making any decision that could have legal ramifications. These include setting up a partnership or corporation, checking for compliance with regulations, negotiating loans, obtaining trademarks or patents, preparing buy-sell agreements, assisting with tax planning, drawing up pension plans, reviewing business forms, negotiating and drawing up documents to buy and sell real estate, reviewing employee contracts, exporting or selling products in other states, and collecting bad debts.
If something goes wrong, you may need an attorney to stand up for your trademark rights, go to court on an employee dispute or defend you in a product liability lawsuit. Some entrepreneurs wait until something goes wrong to consult an attorney, but in today's litigious society, that isn't the smartest idea. "Almost every business, whatever its size, requires a lawyer's advice," says James Blythe Hodge of the law firm Sheppard, Mullin, Richter & Hampton. "Even the smallest business has tax concerns that need to be addressed as early as the planning stages."
In a crisis situation--such as a lawsuit or trademark wrangle--you may not have time to thoroughly research different legal options. More likely, you'll end up flipping through the Yellow Pages in haste . . . and getting stuck with a second-rate lawyer. Better to start off on the right foot from the beginning by choosing a good lawyer now. Many entrepreneurs say their relationship with a lawyer is like a marriage--it takes time to develop. That's why it's important to lay the groundwork for a good partnership early.
How Do You Find the Right Attorney?
Ask for recommendations from business owners in your industry or from professionals such as bankers or accountants you trust. Don't just get names; ask them for the specific strengths and weaknesses of the attorneys they recommend. Then take the process one step further: Ask your business associates' attorneys whom they recommend and why. (Attorneys are more likely to be helpful if you phrase the request as "If for some reason I couldn't use you, who would you recommend and why?") If you still need more prospects, contact your local Bar Association; many of them have referral services.
Next, set up an interview with the top five attorneys you're considering. Tell them you're interested in building a long-term relationship, and find out which ones are willing to meet with you for an initial consultation without charging a fee. Cover the following areas in your interviews of each attorney:
- Experience. Although it's not essential to find an expert in your particular field, it makes sense to look for someone who specializes in small-business problems as opposed to, say, maritime law. Make sure the lawyer is willing to take on small problems; if you're trying to collect on a relatively small invoice, for example, will the lawyer think it's worth his or her time?
- Understanding. Be sure the attorney is willing to learn about your business's goals. You're looking for someone who will be a long-term partner in your business's growth. Sure, you're a startup today, but does the lawyer understand where you want to be tomorrow and share your vision for the future?
- Ability to communicate. If the lawyer speaks in legalese and doesn't bother to explain the terms he or she uses, look for someone else.
- Availability. Will the attorney be available for conferences at your convenience, not his or hers? How quickly can you expect emergency phone calls to be returned?
- Rapport. Is this someone you can get along with? You will be discussing matters close to your heart with this person, so make sure you feel comfortable doing so. Good chemistry will ensure a better relationship and more positive results for your business.
- Reasonable fees. Attorneys charge anywhere from $90 to $300 or more per hour, depending on the location, size and prestige of the firm as well as the lawyer's reputation. Shop around and get quotes from several firms before making your decision. However, beware of comparing one attorney with another on the basis of fees alone. The lowest hourly fees may not indicate the best value in legal work because an inexperienced attorney may take twice as long to complete a project as an experienced one will.
- References. Don't be afraid to ask for references. What types of businesses or cases has the attorney worked with in the past? Get a list of clients or other attorneys you can contact to discuss competence, service and fees.
Legal Savings Strategies
For many entrepreneurs, the idea of consulting a lawyer conjures up frightening visions of skyrocketing legal bills. While there's no denying that lawyers are expensive, the good news is there are more ways than ever to keep a lid on costs. Start by learning about the various ways lawyers bill their time:
- Hourly or per diem rate. Most attorneys bill by the hour. If travel is involved, they may bill by the day.
- Flat fee. Some attorneys suggest a flat fee for certain routine matters, such as reviewing a contract or closing a loan.
- Monthly retainer. If you anticipate a lot of routine questions, one option is a monthly fee that entitles you to all the routine legal advice you need.
- Contingent fee. For lawsuits or other complex matters, lawyers often work on a contingency basis. This means that if they succeed, they receive a percentage of the proceeds--usually between 25 percent and 40 percent. If they fail, they receive only out-of-pocket expenses.
- Value billing. Some law firms bill at a higher rate on business matters if the attorneys obtain a favorable result, such as negotiating a contract that saves the client thousands of dollars. Try to avoid lawyers who use this method, which is also sometimes called "partial contingency."
If you think one method will work better for you than another, don't hesitate to bring it up with the attorney; many will offer flexible arrangements to meet your needs. When you hire an attorney, draw up an agreement (called an "engagement letter") detailing the billing method. If more than one attorney works on your file, make sure you specify the hourly rate for each individual so you aren't charged $200 an hour for legal work done by an associate who only charges $75. This agreement should also specify what expenses you're expected to reimburse. Some attorneys expect to be reimbursed for meals, secretarial overtime, postage and photocopies, which many people consider the costs of doing business. If an unexpected charge comes up, will your attorney call you for authorization? Agree to reimburse only reasonable and necessary out-of-pocket expenses.
No matter what type of billing method your attorney uses, here are some steps you can take to control legal costs:
- Have the attorney estimate the cost of each matter in writing, so you can decide whether it's worth pursuing. If the bill comes in over the estimate, ask why. Some attorneys also offer "caps," guaranteeing in writing the maximum cost of a particular service. This helps you budget and gives you more certainty than just getting an estimate.
- Learn what increments of time the firm uses to calculate its bill. Attorneys keep track of their time in increments as short as six minutes or as long as half an hour. Will a five-minute phone call cost you $50?
- Request monthly, itemized bills. Some lawyers wait until a bill gets large before sending an invoice. Ask for monthly invoices instead, and review them. The most obvious red flag is excessive fees; this means too many people--or the wrong people--are working on your file. It's also possible you may be mistakenly billed for work done for another client, so review your invoices carefully.
- See if you can negotiate prompt-payment discounts. Request that your bill be discounted if you pay within 30 days of your invoice date. A 5-percent discount on legal fees can add thousands of dollars to your yearly bottom line.
- Be prepared. Before you meet with or call your lawyer, have the necessary documents with you and know exactly what you want to discuss. Fax needed documents ahead of time so your attorney doesn't have to read them during the conference and can instead get right down to business. And refrain from calling your attorney 100 times a day.
- Meet with your lawyer regularly. At first glance, this may not seem like a good way to keep costs down, but you'll be amazed at how much it reduces the endless rounds of phone tag that plague busy entrepreneurs and attorneys. More important, a monthly five- or 10-minute meeting (even by phone) can save you substantial sums by nipping small legal problems in the bud before they have a chance to grow.
Source: Start Your Own Business, Entrepreneur magazine and Biz Start Ups
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