How to Address the Costs of Legal Services for Your Business

Calculating legal expenses

The fact of the matter is that, in the U.S., having to pay for legal advice is a cost of doing business.

As a follow up to my last article about the importance of obtaining the right kind of legal advice for your business, here I discuss how to address the costs of those services.

Lawyers usually charge by the billable hour. In New York City, one of the world’s most prestigious legal hubs, firms can charge over $1,000 per hour, with solo practitioners charging, on average, in the range of $350-$450/hour. That said, many lawyers familiar with representing start-up enterprises understand that money can be tight and may be willing to negotiate a more cost-effective deal. Such arrangements could include monthly flat fees for a specified range of legal services, or flat fees for a specific project.

Under certain circumstances, in lieu of fees, an attorney may agree to take a percentage of a transaction or equity in the enterprise, although the latter arrangement may be subject to specific requirements mandated by a state’s Rules of Professional Responsibility. In general, depending on the attorney, the more an enterprise is perceived of as being a potentially valuable long-term client, the wider variety of arrangements that may be possible.

But an enterprise should not count on being able to cut advantageous deals with attorneys and so should include as part of its financial plan a budget for legal fees. The fact of the matter is that, in the U.S., having to pay for legal advice is a cost of doing business. One way to approach building a legal fees budget is to have a consultation with a legal counsel to vet the legal issues even before the enterprise is launched so that the entrepreneur can learn about what the legal landscape for the enterprise might look like. Among the questions posed to the attorney that should be considered are the following:

  • What kind of taxes might the company be responsible for?
  • What is the most tax efficient structure for the enterprise, i.e., a limited liability company, a standard corporation, a Sub-Chapter S corporation?
  • Where should the company be incorporated and what are the pros and cons of incorporating in that jurisdiction?
  • Will my company need to have licenses and what might the challenges be to obtaining such licenses?
  • Aside from licensing regulations, are there any other regulations my company may be subject to, such as having to report to state or federal agencies?
  • What legal risks issues should I consider when it comes to how the company is expected to be owned and managed, i.e., how should decisions be made and who should be responsible for making them; should owners be able to transfer their ownership interests to a third party; If we need to terminate an owner, or an owner withdraws from the enterprise, or becomes incapacitated, or dies, how should these events be handled.
  • How do I protect my business’s intellectual property; what and how much should I disclose to potential investors and candidates for employment about my business ideas, and under what circumstances should insist on such persons executing non-disclosure agreements?
  • What legal issues arise in the context of having a workforce; should I have my employees enter employment agreements; do I need an employment manual; what are the pitfalls I need to consider in retaining contractors instead of employees?
  • If my plan is to sell the company off or merge with another company within five years, how might this plan affect your answers to any of these questions?

These are not all the questions to ask but they are among the questions I have been most frequently asked.

After the initial consultation, which one should budget for two hours or so, the entrepreneur should have a better understanding of what the legal issues are that the business will be confronting and then be in a better position to decide how best to address such issues, whether it be by retaining legal counsel for the longer term or engaging a legal vendor.

The bottom line is that however the entrepreneur approaches understanding the legal issues attending the development of her enterprise, she must take steps to learn about them. To re-emphasize the point:  What counts is not only what you know, but what you may not know and should know. Having an initial consultation with knowledgeable legal counsel, even before launching an enterprise, can be an investment worth making as it will afford the entrepreneur a better understanding of the legal landscape confronting her, potentially saving significant legal costs down the road.

In my next article, I will deal with the question of how best to locate competent counsel to help vet the legal issues the entrepreneur is concerned about.

Related content:

How to Use Your Lawyer and How Not To

When a Small Business Becomes a Multi-Owner Enterprise

Is a Chapter 13 Bankruptcy Right for Me?

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