Starting a business is no small undertaking whether it’s to bring world-famous chili to the mass market or to manufacture a revolutionary medical device. From product development to business development, a founder has an ever-growing and never-ending, to-do list. When it comes to legal issues, those are the items that are usually pushed to the bottom of the list.
There are a number of reasons founders put off addressing legal issues. Costs are certainly a significant concern but not necessarily the only reason. Founders often do not realize the importance of having a strong legal foundation for their businesses until it’s too late.
Certain legal issues need to be addressed almost as soon as the idea for a business is hatched. Like nature, the law abhors a vacuum. Issues related to ownership of the business as well as intellectual property will be settled by state and federal law unless the founders take affirmative steps to address them. For example, where two or more people are involved with developing a business concept, it is possible that they will be considered partners under state law if there is no agreement otherwise, even if the founder does not intend that to be the case.
Founders should also take heed to address intellectual property matters earlier than later. Recently, patent law in the United States changed from extending rights to the first to invent to providing them to the first to file. Therefore, the window of opportunity available for inventors to file for a patent has significantly narrowed. Similarly the copyright belongs to those who create the works subject to its protection unless either (a) the creator is an employee of the company or (b) there is a written assignment of rights to it.
What’s a founder to do? Founders have limited bandwidth, as well as resources, to deal with all that it takes to start a company. It’s easy to understand how legal issues fall to the bottom of the list.
One way founders try to save money is by handling legal matters on their own. Services like NoLo, Rocket Lawyer, and LegalZoom provide consumers with do-it-yourself tools to form companies, protect intellectual property rights, and manage on-going legal matters. The services provide generic, one-size-fits-all forms for its users to customize. Cost savings are the primary benefit of using self-help legal services. In some situations, the services might be appropriate, but it’s important to understand the limitations of self-help legal services.
Self-help legal services assume a lot about consumers and their understanding of the law. For example, the basic operating agreement from one of the self-help services provides that members’ interests are fully transferable without consent of other members. The risks to both the company and the other members are great. The remaining members might be forced to manage the company with individuals or entities with whom they do not want to work (e.g. the former member’s creditor).
Providers of self-help legal services go to great lengths to maintain that they are not practicing law through offering the services. Providing legal advice is considered the practice of law in every state. Therefore, the self-help legal service providers do not provide any substantive advice to those who use their forms. Significantly, the self-help legal service provider does not provide any notice of the risks related to allowing one owner sell her interest without the permission from, or knowledge of, the owners.
When using a self-help legal services provider, the assumption of risk is on the user. If a patent application filed through one of the services doesn’t state the claims in a manner that affords the applicant the protection desired, it’s the applicant’s fault, not the service provider’s. Similarly, the services seemingly make it easy to set up a new entity, but users are expected to know which type is the best one for their purposes. Choosing the wrong type of entity for a business, or failing to comply with state and federal regulations, can be costly (even deadly) to a startup. Although unable to give users legal advice, the self-help legal service providers rely on a tried and true legal principle to limit their exposure, caveat emptor (buyer beware).
The risks inherent in the use of self-help legal services are completely avoidable. Going at it alone on legal matters is not the only option available to founders, entrepreneurs, and small businesses even when controlling costs. There are attorneys across the country, from big firms to solo practices, who have practices that focus on the legal needs of entrepreneurs and startups.
A lawyer should get to know the client prior to beginning any work so that the documents and agreements are prepared with the client’s goals and objectives in mind. Instead of being limited to a one-size-fits-all option, the client will have an approach custom designed for him or her.
Additionally, a lawyer can provide explanatory insight into documents and agreements that self-service legal providers cannot. Therefore, the client should be confident that their venture has a strong legal foundation.
Because a lawyer is in a position to give legal advice, a lawyer can identify the legal and regulatory issues that might affect a client’s business. For example, if the founder is launching a food-products business, a lawyer will be able to direct the client through regulatory compliance matters. Similarly, a lawyer can provide a risk analysis for clients who launch products in highly regulated areas, such as medical devices.
Self-help legal services have been available for more than 40 years. In some situations, it might be completely appropriate to use them. However, engaging legal counsel from the outset can actually save money in the short-term by freeing up time to focus on other things and over the long-term by having agreements done correctly.