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  • Vitaly Gashpar

Does my business need a lawyer?

I’ll answer as follows: If you were to take 100 of the top practicing partners in Northern California and take a poll, asking: “when should a company hire its first general counsel?”; most of them will say, “as soon as possible!” The justification for this response is virtually universal – it makes cleanup a lot easier, or unnecessary. Starting a business is not at all like building a house, except in one very important way: both require a solid foundation. This is why it is important to engage with outside legal counsel early and as often as necessary when the company is not yet ripe to have its own in-house counsel.

Let’s take this hypothetical: An entrepreneur, let’s call him Andy, sets up a business using one of the online services, to avoid paying legal counsel (which is understandable for someone starting out on a budget), and successfully incorporates his small business in California. It being a small, closely held corporation, when it’s time to file his taxes, Andy files an S-election to be taxed as a pass-through entity, again using one of those online services. Years go by, Andy grows his small business into a successful enterprise; and then the inevitable happens – a tax audit. What Andy finds out is that the online service neglected to mention that because Andy is incorporated in a community property state, his S-election needed to also be signed by his spouse, which it was not. Now, Andy faces an uphill battle to prove that in fact his election is valid and should be honored. If he complied with all formalities and crossed all the Ts, in all likelihood, he will be able to maintain his S-election, but that’s many attorney hours and dollars later.

"You should always know how much the legal services will cost you, and it should never cost you anything to ask."

This is just one of numerous “small” details that can fall through the cracks early on simply because someone like Andy doesn’t even know to look for them. The moral of the hypothetical is fairly straightforward: spending a little money upfront can save a lot of legal costs down the line and avoid unnecessary headaches.

The most common reason for not hiring counsel early is cost. The perpetuated stereotype out there is that lawyers cost a lot of money. This is far from always the case. You should always know how much the legal services will cost you, and it should never cost you anything to ask. There is no reason not to reach out to counsel, and do not feel bashful about saying “no” and looking elsewhere until you find a good fit. The work you need done may be surprisingly affordable and save you a lot of time and money in the future.

Another key principle to keep in mind is that late is better than later, or never. In those first few months of getting things off the ground, you had not time or money for lawyers. As your organization reaches its first anniversary, consider allocating some funds to have qualified counsel look over the previous year and make sure all your affairs are in order. After all, if you intend to follow the same business model in the future, you want to know you are on solid legal ground. This shouldn’t cost very much – there hasn’t been much time to screw things up! However, even if mistakes were made, at this early stage they can often be fixed by an easy amendment and a letter to the relevant authority. Having a professional review the legal work you did yourself will only strengthen the foundation mentioned in the opening paragraph.

This is as many words as this topic requires, but if you feel like geeking out over how early stage companies are most frequently legally underserved, here's a great resource from UC Hastings College of the Law.

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