Work + Money

All three of our Seeds For Success finalists recently had the opportunity to sit down for meetings with Nina Kaufman, Esq., a New York attorney who specializes in small business and entrepreneurship. Nina’s website is www.askthebusinesslawyer.com. She has generously provided all of us with six vitally important matters to consider when launching a business.

Entrepreneurship is a wild ride. You’re riding high with the rarefied air of possibility and creativity. Add to that the blessing of the Yahoo! Seeds for Success grant, and you might even start feeling invincible. It’s at that point that entrepreneurship meets law . . . and you feel like a bucket of ice-cold water has just been dumped on your head.

As a business attorney who has advised thousands of entrepreneurs, including our Seeds for Success finalists, I’m used to being the “wet blanket” in the business equation. But starting and running a successful business involves more than a wing and a prayer: it takes “management.” That’s where the pesky details of legal (and accounting) issues come in.

Our finalists (I’ll keep the specifics of our conversations confidential) had a number of questions that many entrepreneurs face. They include concerns about the legal form of business, how to work with freelancers, trademarking a logo, business partners and investors, and finding a good attorney. Here’s a quick tidbit on each one.

1. Form of business – how to choose?

Many small business owners are trying to choose between an S Corp (so-called because it is a corporation taxed under the rules in Subchapter “S” of the Internal Revenue Code) and a limited liability company (LLC). Which is better? The short and obvious answer is . . . it depends. It depends on who will own the business. If you want to have passive investors who are not part of the day-to-day management of the company, then an LLC will let you structure that more easily. If you’re a sole owner who would prefer to stay that way, then (from a legal perspective) either form would serve you. However, S Corps and LLCs are taxed slightly differently and have different financial and tax advantages. An LLC may have a lower tax rate (depending on your state), but an S Corp may allow you greater leeway in dealing with self-employment taxes. An LLC may cost less than an S Corp in annual accounting fees but more than an S Corp in formation fees.

Like the old scales of justice, there’s no hard and fast answer. You need to weigh and balance the different considerations to come to the decision that’s right for your situation. That’s why it’s so important to have an accountant on your team who understands the ins and outs of these issues too.

2. Legal issues with freelancers

Freelancers are an amazing resource for small businesses. Freelancers enable them to get quality service without having to hire staff full-time (and take on all the costs of employment taxes, overhead, benefits, training, etc.). But freelancers are business owners too. So there are several points you want to make in writing with any freelancer.

· Services. What do you have the right to expect? How many revisions will you get of the work (if applicable)? What’s the deadline – when can you expect to receive it?

· Price. What is the fee you will pay and how is it calculated? By the hour? By the project? Is payment at milestones or on certain dates?

· Satisfaction. What happens if you’re not satisfied with the work? Can you cancel the contract early? Are you entitled to a refund?

· Work for Hire. Don’t pussy-foot around with this language. Your agreement should clearly state that the work is being done as a work for hire for you and that you are entitled to all the rights.

· Confidentiality. To enable the freelancer to do the best work for you, you may need to divulge some of your company’s sensitive and proprietary information. Make sure your agreement states that they cannot use the information for any purpose but the work done for you. Also make sure the agreement has “teeth” – penalties if the freelancer breaches that provision.

· Independent Contractor Status. Don’t mess with this either. Make it clear that you’re treating your freelancer (especially if the person is operating his/her business as a sole proprietor and not as a corporation or LLC) as an independent contractor and that the freelancer is the one responsible for paying employment taxes.

Did I say agreement? I sure did. J Don’t dismiss me because I’m an attorney – agreements dealing with the transfer of intellectual property rights (in this case from freelancer to you) MUST be in writing.

3. Trademarking a logo

When’s the right time to do so? Hard to say. Your logo is like a website – it can change and develop and your company changes and develops. But each time you change it, you need to file anew. So there’s definitely a financial investment. On a shoestring, decide what’s an absolute necessity. And understand that for trademark purposes, there’s a subtle difference between your company name and your “trademark.” The two are not necessarily identical. What will bring more “bang for the buck,” as it were? How do you want to be known in the community? You may want to start with one tag line or logo and roll out the others over time as cash flows in. An intellectual property/trademark attorney can help guide you through a strategy that fits your needs. Remember too, that the quest doesn’t end once the Trademark Office grants you the ® -- you then need to monitor the mark for the rest of the life of the mark to make sure no one it using it. And that costs money, too.

4. Business partners

People use the term “business partner” loosely . . . which makes attorneys cringe. “Partner” is a word that has a legal connotation. If you refer to someone as your business partner, there is an assumption that that person will have an ownership interest in your business and be responsible for a commensurate share of the debt. There’s no rule of thumb as to when it’s right to bring on a business partner. However, budding entrepreneurs are often feeling so grateful for whatever helpful ideas, concept-honing, and moral support comes their way, that they fritter away pieces of their company before they realize it. Once a business partner is in your midst, it’s a torturous process to get them out (unless you’ve worked out the formalities in an agreement).

Here are examples of potentially problematic business partner arrangements:

· A former colleague, who works full-time for another company, “helps out” with product design on occasion. Is her contribution really worth 50% of the company?

· A family member was promised a small share of equity as “thanks” for his role in shaping the concept for the company’s first product. There are now several more products to which the family member contributed no intellectual capital (or financial, for that matter). Does Uncle Joe continue to deserve the same percentage of what’s now a bigger pie?

· Two owners agreed to spit the business 50/50, but now one is making noises that she deserves a bigger piece because she’s the “face” of the business, whereas the other is the “back office.” Is that fair?

That’s why a partnership/shareholder’s/operating agreement is so important. It answers these questions from the outset – before they fester. A business partner may need to leave the business for any number of reasons – they could die, become disabled, feel a calling to do different work, or hate your guts. When they leave, it’s not as simple (legally or financially) as, say, chopping down a tree. You have to uproot the tree. The partnership agreement will outline exactly how you can do that.

5. Doing business online

Doing business online is not as different from doing business face-to-face as people think. You still have a purchaser and a seller. You still have a good or service to be offered/provided. And, if something goes awry in the relationship, you still need to have a method and a place for resolving disputes.

That’s why having privacy policies (“what CAN we do with the email addresses we collect?”) and terms and conditions (“where will we go if we have a disagreement?”) are so important. If you don’t have those on your website, you leave yourself vulnerable. For example, if your business is in Maine and your dissatisfied purchaser in is California, you leave yourself open to having to schlep to California for the lawsuit . . . unless you indicate in advance that all disputes will be resolved in Maine. For ideas for what to include in your privacy policies and terms and conditions, take a look at what others in your industry have included. And then run them by an attorney to make sure there’s nothing else that should be included that hasn’t been.

6. Finding an attorney who’s right for my needs

Sometimes, it feels as elusive as trying to find the Holy Grail. Or the perfect boyfriend/girlfriend. How can you find the right attorney for your business needs? What should you ask? Here are a few guidelines:

· Ask for referrals from other business owners. Not all attorneys have the right match of skills for you. An attorney specializing in anti-trust litigation for Fortune 500 publicly-traded companies is not likely to also be dealing with brand-new start-ups, or conversant with the issues they face (like business formation). An accountant who works primarily filing tax returns for W-2 employees may not be as savvy about the ins and outs of small business taxation as you need – or have the mindset to work proactively with you. If you ask other business owners who they use or know of, at least you have a fighting chance (over the Yellow Pages) of reaching one with the experience you need.

· Consultation Fees. Before setting up an appointment with an attorney (or any professional) ask first whether you will be charged for the consultation and if so, how much. [I actually made that mistake once – I was billed for a 20-minute telephone consultation – because I assumed that my own willingness to assist a fellow/sister lawyer gratis was something others would abide by, too. Guess there’s no professional courtesy among sharks. J]. Also ask if the consultation fee is eventually deducted from any retainer payments, should you choose to work with that attorney going forward). Do not assume that the attorney will give his/her time for free.

· Rates and payments. Assuming you’ve found an attorney with the area of specialty you need, make sure you’re clear about how he/she charges for services. Hourly rate? Project basis/flat fee? Monthly retainer? Payments in advance? Asking these questions may be awkward, but a lot less awkward than being surprised by a bill you didn’t anticipate.

· Listen to your gut. Attorneys and other professionals are a crucial part of your advisory team. You want to feel good about having them on board. You want to feel that they respect the efforts you are making to create something new; but you also need to respect them for their expertise and (sometimes) be willing to set your own headstrong ideas aside and liken to expert advice. What does your gut tell you about the attorney you’re meeting? Would you enjoy working with them? Would you feel comfortable asking them seemingly simple questions (if not, you may deprive yourself of an opportunity to glean valuable information)?

Nina L. Kaufman, Esq.

AskTheBusinessLawyer.com