Written by Christopher Berney

5 Legal Mistakes Made by Most Start-Up Businesses

My favorite practice area is advising people with a great business idea on how to get started and realize their dream.  Unfortunately, all too often, I am not brought into the mix until a “problem” has arisen.  Over eighteen years, I have seen businesses succeed while others fail.  Watching out for these pitfalls might move your business from the FAIL to the SUCCESS column.  Here are some of the “legal” mistakes I see new business owners make routinely and how to avoid them.

1. “I Incorporated My Company Myself and Saved Big Money!”  

In most cases it makes sense to create a business entity to own the business assets and operate the business.  Liability protection, transferability, credibility and tax benefits are all key to this decision.  Limited Liability Company or Corporation with a subchapter “S” are the two most common structures used by start-ups.  Beyond this, there is the decision to create a “Statutory Close Corporation”.  Most attorneys don’t even know what this is, so it’s fair to say nearly no lay people understand the importance of this decision.  I’ll cover these in another blog.

Filing for a charter from the Secretary of State is really easy and generally not very expensive.  Unfortunately, filing on-line for a charter is just ONE STEP in a much more comprehensive process.  The vast majority of start-up companies that do this without proper counsel are improperly organized.  What’s worse is they have no idea they are improperly organized until trouble brews and, by then, it is often too late.  This is important because it creates a gaping technical hole through which an experienced lawyer will drive a truck to assert liability against the owners of the Company personally.  Not a good result.

Often, I have seen clients bring in documents from one of the popular online incorporation services.  By and large, these documents lack the detail necessary to adequately reflect the business deal between the owners of the Company and/or they simply fail to fulfill all the state requirements to completely organize your Company.  We do a lot of forensic work in cleaning up these records and, in most cases, we start from scratch and keep only the corporate charter.  Paying a reasonable fee to have the Company properly created and organized is critical to piece of mind and liability protection.  Many firms, mine included, do this work on a flat fee.

2.  “But that Contract Was Between My Company and …..”

So you have incorporated your business and are marching your way to success when you are asked to sign a contract with a vendor, landlord or other entity.  Failing to make sure the contract reflects the proper Parties and is executed with the right formality is a great way to find yourself as a defendant named individually in a lawsuit on the contract.  First, you need to make sure the contract reflects the correct corporate entity as the Party.  Spelling and punctuation matter.  Often the parties are listed near the top of the contract. Next, you need to make sure the signature block reflects that you are singing this contract in your capacity as an officer of the Company and not in your individual capacity.  I instruct my clients to add the phrase “and not individually” after the title line on the signature.  The signature block should look something like this example:

ABC INDUSTRIES, LLC

_____________________

JOE SCHMO, PRESIDENT AND NOT INDIVIDUALLY

It may seem silly, but that simple phrase may just get you out of thousands of dollars in legal fees in defending a lawsuit based in your individual liability for a contract improperly executed.

3. “The Landlord Won’t Change the Lease – Why ask…”

For brick and mortar businesses, one of the largest, if not the largest, liabilities undertaken is the lease for the business premises.  For a five year commercial lease starting at just $3,000.00 a month with customary annual increases, the total liability is nearly $200,000.00.   When you add in CAM charges, utilities, taxes and insurance, all paid monthly, you are talking about real money.  Despite this truth, many people think that there isn’t much that can be done about the lease, that the leases always favor the Landlord and the Landlord won’t change any terms. So, why bother to ask.  This is a big mistake.  In my practice, I am generally able to make substantive changes to the lease that decrease the financial liability on the lease, avoid the technical defaults that are often disastrous, and level the playing field to some extent to make the deal a bit more tenant friendly.  You need an attorney who regularly drafts and negotiates commercial leases in your area, knows the going rates, and the customary terms.  From this base, your attorney should be able to nudge the lease in your favor often saving you money well in excess of the fee paid for him or her to do so.  The old addage:  “It doesn’t hurt to ask” rings true here, but I’d go a bit further and say “It never hurts to ask through an experienced attorney.”

4. “Do I Really Need a Business License?”

I have been sitting here trying to come up with a for-profit business in any metro Atlanta county that does need a business license of some type.  The answer – NONE!  I suspect this is the truth in virtually every jurisdiction in the U.S.  It’s safe to say, if you’re in business, you will need a business license.  Working out of your home?  No exception.  Not making any money?  Doesn’t matter.  Often the business license(s) needed are far more complex than the business owner ever expected.  You may need a license from the city where you are located and the State as well.  You may need a federal license.  All of these are possibilities, and yet, I am constantly amazed at the number of clients that do not actually have a business license.  Flying under the radar may seem cool, but eventually, it will cost you.  Visit your local government office.  Most have a licensing department that will walk you through the process and explain the license(s) needed.  Understanding the licenses required and other laws you must obey is mission critical to success for a small business.  Failure to do so can result in stiff penalties and, even worse, your business being shut down with a nasty visit for the licensing department.

5. Wait. What?  Trademark? Copyright?

Trademarks and Copyright registrations are both important tools every business owner should know.  Nearly every great business starts with an idea.  Often, this idea is worthy of protection.  Maybe its the name and logo that is awesome and needs protection.  Maybe its a book, video or other “tangible expression of an idea” that is basis for your business.  In any case, understanding intellectual property is critical for the small business owner.  From the start, the smart business should make sure they are not infringing on someone else’s existing rights.  The time to do this is before you order the $13,000.00 sign for your restaurant.  Sign manufacturers get paid whether you have to take the sign down or not.  This is a big area and one where an experienced attorney can help “audit” your business and determine the elements that may need to be protected.  Spending some money with an experienced attorney can save you a lot of money, and in the case of intellectual property, actually make you money.  Registered trademarks and copyrights are valuable assets and can be sold or licensed to bring in revenue.  You wont get the same money for these assets without the registrations.  

A Word About Fees

You might be thinking “Ok, Chris, all of this sounds great but every tip ends with me hiring an attorney.  This is going to be too expensive.”  While it is true that attorney time can be expensive, the savvy business owner will find an experienced business attorney in their area willing to perform most of the above services on a flat fee basis.  Nearly all of the legal work referenced above is performed regularly in my office on a flat fee basis.  While this does not mean that every attorney will be willing to take the matter on flat fee, it does mean that you should look until you find someone who will.  Flat fees are becoming more and more common.  They make a ton of sense for a start-up with limited financial resources operating pre-revenue (before you make any money).  Ask around.  Be straight-forward.  In my practice, I offer the flat rate, you wont have to convince me to take it for these types of start-up matters.  It’s good practice and good business sense.

Christopher P. Berney, JD, MBA, is the founder of The Berney Law Firm.  He has served as legal counsel to Atlanta’s finest businesses, artists and entrepeneurs since 1997.  The Berney Law Firm handles transactional and litigation matters at every stage in the business life cycle from choice of entity to exit strategies.  The Berney Law Firm engages on a variety of fee models custom designed for each specific case.

DISCLAIMER

This blog is for general information purposes only.  While I strive to make sure the information in it is accurate and informative, there is no warranty associated with the information.  It’s not legal advice and you are not entitled to rely on it as legal advice.  If you act on any of the ideas in this blog, you do so at your own risk.  Reading this blog does not create an attorney-client relationship with The Berney Law Firm.  All attorney-client relationships will be evidenced in a written retainer agreement and formally documented.  

The Bottom Line.  If you want to have an attorney-client relationship, call an attorney in your geographic area.  If you want to have an enthusiastic, experienced, down-on-the-mat, responsive, legal advocate in your business corner and are located within the State of Georgia, contact my firm. 

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