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Do You Need a Lawyer to Start a Business?

Written by Chris Daming, J.D., LL.M.

 

 

Handsome lawyer in the law library at the university

Do You Need a Lawyer to Start a Business?

Written by Chris Daming, J.D., LL.M.
12 min read

Legal can feel overwhelming when you’re starting a business. Some people spend days researching if they should be an LLC or an S Corp. Others try to go to 1-hour classes that cover legal issues when starting a business. But ultimately, almost everyone always hears the same thing -- “You need to hire a lawyer.” 

Well…  here’s the truth. Most of the time, that’s simply not true. 

Think about it for a second-- if something happens again and again and again -- millions of times -- isn’t there a way that you could figure out how to do it on your own rather than needing to hire a specialist?

Turbotax and Quickbooks did exactly that with taxes and bookkeeping. Yet, CPAs and Accountants still play a valuable role for many companies. 

Just like in any business, there are times when "bringing in the experts" makes a lot of sense. But as a business owner, you've probably figured out that there are constantly new tools or concepts you need to learn to remain viable.

In this post, we'll "pull back the curtain" and help you make the best decision for yourself and your business.

 

Whether You Need a Lawyer or Not is a Balancing Act


Finding out if you need a lawyer is all a balancing act -- just like with every decision you make as a business owner.

Imagine for a second that you’re a grocery store owner. Your one objective is to ensure the store never gets sued for slip-and-falls. So, you hire a “cleaning team” that is on standby to clean up any spill. You station an employee in every aisle to monitor the possibility of a spill. And you discontinue selling hundreds of products, like anything with a glass jar, because if someone dropped it, then it would spill.

Great news! After you implemented those measures, you were never sued again for slip-and-falls. But the bad news is that you went out business within a few months because your expenses were through the roof.

Everything is a balancing act. And if you understand the “why” behind when hiring an attorney makes sense, when using online legal tech makes sense, and when doing neither makes sense, you’ll be able to make a much more informed decision.

 

Start with Why Legal is Important

So first, you’ll want to know why legal even matters -- if legal was negligible to businesses, then it would almost never make sense to hire anyone nor spend any time on it.

Think of starting a business like a basketball game. You’re a player in the game. And you get really good at playing -- specifically, dribbling and shooting. Maybe your athleticism and defense are like operations, and dribbling and shooting are like marketing and sales.

So what’s left? The rules. You have to know the rules to be able to play. No matter how good you get, if every possession you travel, step out of bounds, or foul -- you’ll be awful.

"Legal is like the rules of a game."

Legal is like the rules of a game. It eliminates ambiguity. Except business laws have a rule book about 1,000x bigger than the rules in the NBA. Imagine focusing all your energy on learning how to shoot, assuming you can carry the ball (without knowing to dribble) anywhere you go -- when you play your first game, you’ll be at a huge disadvantage and have to stay in one place.

That’s like legal -- if you don’t know what entity is right, you might end up paying way too much in fees and taxes or, alternatively, opening yourself to liability in the future. You might lose your brand if you infringe on someone else’s trademark. You might lose your company if you comply with certain government regulations. 

 

Why Does Legal Matter So Much in the Beginning?


If you wait too long, then when you need the contract, it’s too late. No one’s soon-to-be ex-spouse is going to agree to a prenup when she’s about to get a divorce. And no one will agree to a contract after the conflict has already occurred. 

Waiting too long to write down your agreements means -- you start your company, agree generally on terms with your co-founder, employee, contractor, advisor, etc. -- but never write it down. It’s “too long” when a problem pops up and you don’t have an agreement to resolve the conflict. 

Think of it this way -- if you have a co-founder, what happens when one of you thought a voting decision was majority but the other thought it was unanimous? Or if a contractor thought he was just designing a couple pages of your website and not the back-end or other pages you assumed were included? 

Most entrepreneurs assume people will do what they say in the beginning until they’ve been burned. Then you learn that it’s not necessarily someone trying to be malicious. Instead, it’s most often a case of miscommunication where one person thought they only needed to work 20 hours a week for the company but the other person thought everyone was working full-time. 

If you “wait too long” and the problem presents itself without a written contract, it’s too late and the costs to fix the problem are exponentially higher.

 

Why You Might Not Need a Lawyer

First a caveat. My goal in this guide isn’t to talk anyone who was planning to hire an attorney out of doing so. Those are roughly about 1 in 4 businesses. It’s the other 3 in 4 businesses I seek to educate -- those who probably wouldn’t have hired an attorney anyway. To say, “If you wouldn’t anyway, here’s some things to think about, maybe sometimes you should, but sometimes it’s probably fine to not hire one.”

Biggest Reason Not to Hire a Lawyer: Cost

The biggest reason lawyers can make less sense generally is cost. If you have unlimited capital, then you can save time by hiring a great lawyer (in the same way you’d hire an expert for everything else, like SEO, marketing, design, sales, etc.).

If you have no money, then hiring a lawyer doesn’t make sense for two reasons: (1) you can’t afford it; and (2) if something went wrong early with your company, you’d be considered “judgment proof” -- meaning if someone sued you, they wouldn’t be able to get any assets from you (so they probably wouldn’t sue you). 8 million businesses start with less than $5,000 so it’s okay to start without a lot of money -- most people do. 

But if you’re somewhat in the middle, then read the rest of the points to learn more about when lawyers make more or less sense.

Single Owner Businesses Often Don’t Need a Lawyer

This is a big one. Many times if you’re the only owner of the business, you might not need a lawyer initially. 

A huge part of initial legal problems people encounter that attorneys could help prevent is in 2+ owner businesses. If you have more than one owner, it’s still worthwhile to understand how law works--knowing the “why” and general “how” behind it all will save you money and make you a smarter business owner. 

But with 2+ owner businesses, hiring a lawyer is usually the smart move with maybe an exception if it’s your spouse and the company is a hobby with little-to-no liability problems.

Service-Based Businesses Often Don’t Need a Lawyer

The vast majority of US businesses are service-based businesses. In general, service-based businesses face less liability. If you’re in a field with high malpractice concerns, you’re exposed to more liability but at the same time -- insurance often covers that.

The most common service-based businesses are freelancers, with more than 57 million in the US. If you’re not sure where your business falls, it’s almost definitely a service-based business.

On the other hand, if your business creates and sells goods, your exposure to liability greatly increases. More regulations apply (e.g. Consumer Product Safety Commission, health departments, and many others). You have more patent and copyright issues. 

Recap

If you read this and find that you’re a service-based business with one owner, chances are that regardless of your income, you might not need a lawyer.

But if you’re a business with two or more owners, definitely consider strongly hiring an attorney. Same goes for goods-based businesses. So then the question, how do you find a good one? We cover that here.  (LINK: I’m Convinced I need a Lawyer -- How do I find a good one?)

If you’ve made it this far without necessarily needing an attorney, let’s look at specific “starting a business” legal issues that most of the time don’t need an attorney but sometimes do. 

And if you’re feeling overwhelmed, you can always use tools like Legal GPS to help you “do legal” on your own without needing to hire an attorney. 

 

Why You Might Not Need a Lawyer:
Specific Legal Issues


It's not just number of owners, amount of capital, or type of business (i.e. service-based or goods) that affects the analysis. It's also specific types of legal issues that sometimes need a lawyer's help, sometimes not. Let's go over the most common issues when starting a business.

Sole Proprietorship, LLC, S Corp? Nonprofit or L3C -- Where do I Start?

Starting off, it can feel overwhelming trying to figure out what legal entity is best for your business. And a lot of times the more you learn about it, the more complex it becomes (I once had an entire semester of law school on just LLC v S Corp v C Corp that only scratched the surface of the topic). 

But this gets into the “rules of the game” concept. For the vast majority of the businesses, the rules are a lot easier to learn and identify what applies. For a few of them, the rules can be 100x more than others.

If you have multiple owners or your business, starting off, makes more than about $100,000/year in the first year, your rules exponentially increase and you want to consider hiring an attorney. Same goes if you’re a tech startup that plans to seek venture capital and pay equity compensation.

Cost Analysis: 

To hire an attorney to help you pick the right entity, it should cost somewhere between $500-$4,000, depending on your level of complexity.

Chances are that if it's simple enough to be resolved for about $500, it's also simple enough that you could DIY, but not always.

 

Company Formation Documents (e.g. Operating Agreement)

When you start off, no matter what entity you choose, there are certain forms and contracts your business needs.

If you choose to be a sole proprietorship and want to do business under a different name, you have to file a d/b/a (sometimes called “fictitious name registration.”). 

For an LLC, it’s Articles of Organization (sometimes called “Certificate of Formation”) and an Operating Agreement.

And for corporations, it’s Articles of Incorporation (a/k/a “Certificate of Incorporation”) and bylaws, possibly a shareholder’s or buy-sell agreement (if 2+ owners), and a few other documents depending on a number of factors. 

Do you need a lawyer for help with any of those documents? As every lawyer says, “It depends.”

If you have 2+ owners, it almost always makes sense to hire a lawyer. The amount of variations in a customized operating agreement for multi-member LLCs are exponential -- the fact that it should take a specialized attorney 8-16 hours to write a customized operating agreement (even when starting from a template) should speak volumes. Same goes for shareholder agreements for 2+ owner corporations.

But if you’re the only owner -- the variations in an operating agreement are much, much less. You should still have one, but most people could do it on their own. 

Cost Analysis:

As a single-member LLC, you should expect to pay between $500-$1500 for help with these documents. For multi-member LLCs & corporations, it will likely cost anywhere between $1500-$10,000. 

 

Common Contracts Every Business Needs

Most new businesses business starting off need most or all of these contracts:

  • NDA
  • Terms of Use/Privacy Policy for Website
  • Services Agreement (sometimes called "independent contractor agreement")
  • Lease
  • Purchase Order

It's important to get the right templates for these -- but in general, most of these are exactly that -- templates. For NDAs, there are very few changes companies make. But you can learn more in our Complete Guide to Nondisclosure Agreements.

For the terms of use and privacy policy, this depends on the purpose of your site. Most websites are like a "business card website" where you advertise what you offer and your services.

But -- are you selling products or technology through your site? And not using a third party website builder like Shopify? In that case, you have a more unique situation where more customization with a lawyer's help might be smart.

The lease is a potential exception -- if you're renting out a commercial space for a high dollar amount, having an attorney review your lease is probably smart. But if you're working in a coworking space or similar arrangement, the leases are always the same -- and always provided by the landlord, not you. 

Cost Analysis:

Most simple agreements drafted by an attorney cost between $300-$1,000/document. A custom set of terms of use and privacy policy agreements will likely cost between $1,500-$5,000. And a lease is highly situation-specific. 

Trademark Issues Related to Choosing a Business Name

Most new businesses overlook trademark implications that exist from the start. When you register your business, it can't infringe on another business's trademark. Just because your name was available in your state doesn't mean it's not infringing on a trademark. 

Example

The names "Google Legal, Inc." "Google Schools, Inc." etc. are available for any corporation to form in Missouri. But, Google has a trademark for the name "Google" across the United States -- so if you formed, spent money on branding, a website, a logo, building goodwill, etc. on any of those names, eventually Google would discover and require you to stop doing business under that name.

 

I use the example of Google because it's painfully obvious -- but that same scenario would hold true for any other company that had already trademarked the same or similar name that you formed your business under. 

So -- do you need an attorney to help you avoid that? Not necessarily. Instead, you can do a trademark search on your own and in most cases, be able to identify potential problems. Then later, if your company really starts to take off, it might make sense to hire a trademark attorney to button everything up. But you don't want to be paralyzed by the prospect that you could be doing something wrong -- and as a result, never even start the business. 

 

How do I Choose the Best Solution to Help Me "Do Legal"?

You have a few options.

Unlimited Capital + No Time

If you have unlimited capital and no time, then hiring an attorney almost always makes sense. It can be useful to understand the background to legal aspects of your business, but most importantly you want to make sure you hire the right attorney. 

 

Limited Capital + Wanting to Know the "Why"

If your capital is limited and you like to understand the “why” (like in Simon Sinek’s best Start with Why) and “how”, then using Legal GPS to help you “do legal” on your own makes a lot of sense. Legal GPS “pulls back the curtain” on how easy and intuitive a lot of legal aspects are in the beginning and gives you the tools to empower you to do it all on your own.

It takes a little more time initially but saves you considerable time and money in the long term and helps you make better deals understanding all the components, including legal aspects, that are involved. 

 

Limited Capital + Don't Want to Spend Another Minute on Legal

Companies like Legal Zoom and Rocket Lawyer can be effective if you don’t think care as much about the “why”, know exactly what you need to do legally, and don’t want to spend another minute learning about legal. They have limitations because they offer “starting a business” help in piecemeal fashion -- meaning you’d need to know how all the pieces and packages they offer fit together. But if you know all that, they could save you time in the same way hiring an attorney does so.

Chris Daming, J.D., LL.M.

Written by Chris Daming, J.D., LL.M.

Chris is the founder and CEO of LegalGPS. Previously, he served in the Army (82nd Airborne), then went to law school and got his J.D. and LL.M. He practiced law and ran the Startup Legal law firm before founding LegalGPS.