The Low-Down On Legal Costs
If you’re starting a freelance business while at home or have an existing business you’re running/adapting, making sure you have the right legal protections is important. But in these times (and let’s be real, in general) trying to budget for legal costs can be tough. So in this post we’re going to talk about how to triage your legal needs and ways to approach tackling them.
First, let’s talk about some basic business needs that come up. Some of these are for when you’re starting a business and some may not be as applicable right now during Covid19 but are a common legal consideration, so we wanted to hit the highlights!
When starting a business you often need an entity for liability protection. This can be a limited liability company (LLC) or other form of entity that you must file with the State and make sure you have the proper documentation.
If you’re taking on clients you’ll want to have a client contract.
If you are considering collaborations or business relationships where you may exchange confidential business information you may want a non-disclosure agreement.
If you’re working with subcontractors and independent contractors you’ll need an employment offer or independent contractor agreement (check out our blog on employees vs independent contractors)
Finally, if you’re eventually looking to open a storefront or negotiate with your landlord over rent issues you may need lease review and negotiation.
We will talk about these topics generally below but be on the lookout for future blog posts where we will discuss in more detail!
Forming an entity can be an important part of starting or protecting your business. Depending on the complexity of your situation, this may be a place to make some room for legal costs because correctly forming an entity can provide significant protection for both you and your business and save additional costs down the road. But, there are ways to reduce the legal costs of formation.
There are several entities you can choose from. LLCs are a great entity option for small businesses in PA that provide personal liability protection and have relatively low administrative requirements. We break down more information on LLCs in our posts: HERE and HERE. You may also consider forming a corporation, but they often are for larger, more scalable companies that are looking to take on investment in their earlier stages. Either way, after doing the research and choosing an entity type, the question comes, how do I form it? Do I do it on my own? And the answer is: you can do some DIY legal work, but you may want to talk to a lawyer if possible. You will want to confirm that you chose the right entity and how to properly account for multiple business partners, if you have them.
If you’re a single owner looking to form an LLC, get some quotes from lawyers and weigh their quoted cost of forming an entity against any other legal needs you may have, such as employment agreements, client agreements, commercial lease agreements, etc. If you determine that you don’t have a budget for an attorney, you can, and typically should, still incorporate your business. Using an online formation service may be a way to cut costs because you will not be paying for personalized legal advice and customized documents. You can also file the LLC with the State yourself and then use templates for your formation documents, such as your operating agreement.
Either way, it is recommended you carefully review all documents provided by an online formation service and/or those you draft yourself. Particularly with online formation services, make sure you understand everything they are charging you for. Research all services they offer you to make sure you understand them. Often these formation services will encourage you to have a “registered agent”, however, Pennsylvania doesn’t specifically have a registered agent requirement. Pennsylvania simply gives you the option of using a commercial registered office provider (CROP), which is a physical location that is authorized to receive all legal mail related to your business.
CROPs can be helpful if you don’t have an office address and also don’t want to list your home address publicly (when you file an LLC you must have a publicly listed address). Therefore, if you have an office address you might not need a CROP or if you do need a CROP, you might want to shop around for more affordable commercial registered office providers (like Trellis!). It’s usually recommended that if you use a service or draft documents on your own, once you have a little more room in your budget, add partners, or change or expand your business, you should have an attorney review them for you.
If you are starting a business with multiple owners, this is where you will want to budget for legal costs from the beginning. Attorneys can help walk you through the important legal considerations that come with multiple owners such as, ownership percentages, payments to owners, decision making procedures, and buyout provisions. You can use an online formation service or draft your own operating agreement, but it’s important to make sure it actually reflects what you and the other owners agree. Having an attorney review this later on is important, even moreso than with a single member LLC.
So in sum, entity formation shouldn’t be taken lightly and it’s good to do proper research or consult with a lawyer. That said, if you’re on a tight budget it’s something you may be able to create on your own with a little extra work. Just be cautious that if you’re creating a more complicated entity or have multiple partners, you may want to weigh the risks versus cost and try to have a lawyer review your documents when you can!
When it comes to contracts for your business, like the ones we mention above (e.g. client contracts, terms & conditions, non-disclosure agreements), it can be a balance as to how to best budget for them. But as discussed in the entity section, whether or not to hire a lawyer can come down to the complexity of the situation.
The starting point is that you should always have an agreement or terms in writing. So if you don’t have the legal budget, try to use online contract templates or get the basic terms in writing (even in email!) so that you have something to back you up if things go south. When using online templates, make sure it is one that represents your side and your interests. Too often do we see a client who used a template, but the template was actually designed to protect their client rather than them.
Also make sure you know if your contract is designed for Pennsylvania. Make sure to read any templates and do research on provisions you aren’t sure about. And if you are confused - ask! Like with entity formation, drafting your own contracts and then reviewing them with a lawyer can be a great way to reduce legal costs because a lawyer will spend less time reviewing than they would drafting a custom document for you. And remember if you create a solid contract template, you can use it over and over again.
If you’re dealing with a more complex transaction, issues of intellectual property, or have a high liability business, you may want to budget more for an attorney. Having a proper agreement can save you lots of money in the long run and may be worth the initial investment. Too often do we see clients who didn’t realize they sold their intellectual property to their client - intellectual property that they wanted to reuse and are now unable to due to the agreement. Remember, a budget friendly approach may be creating a draft yourself and then just paying to have a lawyer review and edit the document.
Be on the lookout for future blog posts in which we will dive into different types of contracts and how they can be used.
There are also cases that arise in your business where you may deal with legal issues that involve negotiation, such as commercial leases. This is especially true if you’re looking to open a storefront or trying to navigate your lease terms in times of crisis. This is an area where if you’re trying to figure out what to budget for, commercial leases are it. Leases can be complex, and if you’re negotiating your lease or trying to negotiate a rent reduction or landlord issue, it’s important to understand your legal standing and potential implications.
Lawyers often know where you have the strongest negotiating power and what provisions to look out for. Not fully understanding your lease or provisions can put huge responsibilities and liabilities on you and could have costly implications down the road. It’s also important to know what implications your negotiations could have and how to approach negotiations. Therefore, hiring a lawyer to help with these types of situations can be worth the cost.
Tackling legal considerations is never easy, but we hope this blog helps you figure out how to stretch those dollars and triage your legal needs. Knowing how and when to use a lawyer is a powerful tool and so is educating yourself on different legal components that come with running a business. And remember - lawyers can be accessible too, so don’t be afraid to reach out to help you navigate things. Stay strong out there!
DISCLAIMER: This blog post is meant for informational purposes only and does not constitute specific legal advice or create an attorney-client relationship. Readers should discuss their specific situation with an attorney.