Incorporating a Small Business

Posted: June 26th, 2009 | Author: | Filed under: Small Business Topics | 1 Comment »

Why should a new business incorporate, and what sort of legal entities are available?  This is a question I hear all the time in my business law practice. 

In most cases, using a legal entity to carry on a business makes good sense.  It helps protect the personal assets of the individual business owners from creditors of the business, and helps provide a mechanism to raise capital to fund the business. 

The two legal entities that most people choose from here in Washington are the corporation and the limited liability company (or LLC).  The choice always boils down to many factors, not the least of which is tax.  Small business owners generally want to minimize taxes, which points to using either a corporation that qualifies for “S-corporation” status, or an LLC; both of these entities essentially tax the business operations just once, in the hands of the individual business owners.  Individuals can own corporations and LLC’s, and operate their businesses through them as single owners.  The LLC is generally considered to be the best entity to use to own real property.

Forming legal entities in Washington is generally pretty straightforward, although where you have a corporation, you have some choices that you should think about during the set-up phase which can have important consequences, such as how you vote for directors, lowering the voting threshold for big decisions, and so on (the standard, downloadable forms typically ignore these). 

Once the entity is formed, additional steps must be taken to confirm that the business owner is also the shareholder or member of the chosen entity and that any existing business assets (or real property) are properly transferred to the entity – this is something that business owners who do their own incorporating often overlook.  The new entity must also be registered for federal, state and local tax purposes. 

Probably the most important document that is often overlooked or not well though through is the buy-sell agreement, as it is commonly known.  This document should always be used where you have more than one business owner.  It describes how the entity will be managed, who will provide funding for it, and what happens if an owner wants to sell out (or dies, gets divorced, files bankruptcy and so on). 

There are many incorporation forms available to consumers.  This can be a cost-effective way to set up a new entity, but I would always recommend having a trusted professional review “standard” forms to make sure they work in a specific case.

Raising Capital

Posted: June 19th, 2009 | Author: | Filed under: Small Business Topics | 4 Comments »

Many clients that come to see me have great ideas, but they need money to get started.  Typically, they are young and entrepreneurial, don’t have personal financial resources and banks won’t touch them.  Can they go out and ask people to give them money to develop their ideas?

Yes they can, provided they follow the federal and state securities laws and regulations.  These can be quite complicated, and this is obviously not the right place to analyze them in detail.  In simple terms though, the securities laws and regulations are designed to protect an unsuspecting public from the reach of unscrupulous promoters who go out and try to raise capital through public solicitations.  The law forbids this, and requires any public offering to be “registered” with federal and state regulators, which is extremely expensive and beyond the reach of fledgling businesses. 

However, the law does allow investments to be made in a private context without formal registration (private offerings) where the parties know one another and the investors have a thorough knowledge of the business in which they propose to invest.  The trick is to make sure that private offerings stay private, and that the investors are given all the information they need to make an informed investment decision. 

There are a number of different formats that may be used when it comes to putting together the investment structure.  For example, preferred shares are popular with sophisticated investors, whilst investments made by close friends or family members often involve loans, common shares or some combination.  Simple is always better!

Anyone looking to raise money privately should consult with someone who works in this practice area to make sure they remain on the right side of the law.  If they don’t, investors may have the right to get their money back if the business doesn’t do as well as they may have liked, with fairly dire consequences for the entrepreneur and the business.

What Do I Do?

Posted: June 3rd, 2009 | Author: | Filed under: What Do I Do? | No Comments »

You would be amazed at the number of people who ask me what my practice area is, and immediately after I tell them, they ask me a legal question (about say divorce) that has absolutely nothing to do with my area of expertise (business).  I thought I’d write a short piece that might help explain what I do.

I practice business and corporate law (which also means I don’t do divorces or litigation).  I consult with business owners and help them set up new businesses, buy new ones, sell existing ones, and guide them through their various business activities. 

I help clients, particularly start-ups, raise money to fund their business operations, through borrowing or raising private capital through issuing shares to investors.  I evaluate leases and business plans, and provide a sounding-board to business clients about strategic decisions they may be considering.  I frequently troubleshoot crises.

Clients often need advice on whether they should incorporate, and if so, what sort of legal entity they should use.  That usually drives a discussion on whether they should have a buy-sell agreement where there are multiple owners (they should), and the different circumstances that come into play where a business owner wants to leave the business, becomes divorced, passes away and so on.  That in turn very often morphs into a discussion of how business owners can retire, through transitioning businesses to family members, sale, retirement or some combination of these.

Since I have practiced overseas as well as in the US, I have a background in cross-border transactions where clients want to establish business in the US, or a US business wishes to establish an overseas presence.  Being close to Canada, this is particularly useful.

Working as a business lawyer typically involves looking at a client’s business as a whole, and making sure legal solutions fit within the client’s overall business goals.  The term “counselor” is probably an appropriate title in many areas of business and corporate practice.

I hope this helps explain what I do in a little more detail.

Billable Hour Hangs On

Posted: May 21st, 2009 | Author: | Filed under: Billing | 1 Comment »

In my quest to eliminate the billable hour (which has been fairly vigorous I can tell you), I have been polling quite a few of my business clients to see if they have any interest in being billed in some other way, such as value-based billing using fixed fees, retainers and so on.  Well the results really were pretty interesting.  In just about every case, the clients were surprised that I thought they might be disgruntled with the present system (they weren’t, which is good I suppose).  They said they trusted me, and were concerned that if I quoted a fixed fee, it might compromise the integrity of my work (the quicker I work, the more I make, which is the exact opposite of the hourly dilemma; the slower I work the more I make).  

The lesson for me is that I shouldn’t be imposing my value judgments on others quite so easily.  By all means suggest alternatives, but don’t force clients to accept them.  Educate clients on alternatives wherever possible, but accept that as human beings, we are all unique, have unique approaches and unique ideas.  It seems like the billable hour isn’t quite dead for me yet?

Reflections on Foreign Practice

Posted: May 21st, 2009 | Author: | Filed under: Law Practice in Different Countries | No Comments »

I started out my legal career practicing in South Africa. Many clients whom I’ve had the privilege to serve have asked me whether practice in South Africa differs from US practice. The answer is a resounding “YES”; in just about every conceivable facet!

Here are some of my observations, for those who might be interested.

South African practice – when I was involved in it from the mid-eighties to mid-nineties – could best be described as “old-school” and genteel for the most part, traits generally associated with Mother England. Lawyers were highly respected, and clients used them because they believed they got good counsel (and I think they generally did). The emphasis was always on document preparation; lawyers were discouraged from having input into the business deliberations underlying deals; this was a “Business Decision” and something we always avoided. Clients paid us, usually on time. The law itself was simpler, and tended toward categorizing transactions. If you couldn’t find a category, you couldn’t do the deal, simple as that.

Then there was the marketing and practice development piece. In South Africa, if a client or potential client asked if you had experience doing X, and you did, you would reply coyly to the effect that “I’ve done a little of X, yes” which meant you were the leading expert. The only other possible response was “No”.

Switch to Washington circa 1998. To my shock and awe, clients (a) wanted me to make multiple “Business Decisions” (that’s why they were consulting me right?), (b) weren’t particularly interested in smoking cessation electronic cigarette what my document looked like or what it said (“it takes care of the deal, right? Where do I sign?”), (c) came up with all manner of creative solutions that I simply couldn’t categorize, but didn’t need to since there was adequate consideration (d) and when I gave the standard reply about whether I had done X before, I was surprised when they said they look for someone with more experience.

Probably the most sobering and difficult piece for me personally has been the fact that it is extremely difficult to differentiate one’s services as a business lawyer in the US based on document quality. In South Africa, documentation and craftsmanship were everything, and differentiated a good firm from a bad one. That was really all you had to do well to market yourself.

Not so in the US and in my early years in Washington, I remember being constantly incensed when competitors with better marketing skills would outbid me on a project with sub-standard documents. But to their credit, they got the job done and the client was generally happy. I learned from that. I still pay the same meticulous attention to detail, but I pay far more attention to customer satisfaction.

Is any system better to work in? My take on it is that you can be more creative in how you practice in the US, which makes it fun, but the competition and the public’s (to me incomprehensible) lack of respect for the profession make it a lot tougher to be successful.

Do Lawyers Have Any Value Anymore?

Posted: May 14th, 2009 | Author: | Filed under: Reflections on Law Practice | No Comments »

There are a number of erudite commentators who are predicting the demise of the legal profession in light of the commoditization and outsourcing trends. It’s all part of eliminating inefficiencies in the supply chain. So do lawyers provide anything of value, or has their shelf-life just expired? Well, I think lawyers still have a part to play, but of course I’m biased; it’s what I do.

But here are a few examples of why I think we may still have value:

A client consulted me because he paid an online entity formation service to set up an LLC. Like most business folks, he assumed that when he got a nice certificate mailed to him, the job was done. He operated as an LLC for about 18 months, until someone pointed out that all he had was a certificate. So 18 months later, he paid me to complete the legal process of transferring assets to the LLC, becoming a member, licensing the business and so forth. None of this is difficult, stuff, but it is important to the client and has consequences if not done correctly. The result? The client ended up paying double what he should have, which he could have saved on the front-end.

Or again, there was the client who bought some assets only to find that they were subject to multiple tax liens and that he was being held responsible for them as a successor owner (and we’re talking significant money here). An ounce of prevention….
And then there was the one about the client who purchased real estate with a large down-payment. Unfortunately, the property was subject to multiple liens and he couldn’t get his money back.

Or the client who borrowed money from investors to fund a real estate LLC, only to discover that he was violating securities rules by not giving the investors adequate information.

The list goes on.

And in none of these cases are the clients being dumb. This is the stuff of everyday life, not big corporations, and most often, your average consumer or small business simply isn’t aware of what’s out there, and because each case is unique, it’s tough to Google a solution even if you did know which question to ask.

House Calls Anyone?

Posted: May 13th, 2009 | Author: | Filed under: Reflections on Law Practice | No Comments »

In the process of getting feedback from clients on their wants and needs, I found there was one idea that seemed to have tremendous appeal; house-calls. Remember the days when you called your doctor and they popped right over? Well this would be similar; I would visit clients at their business premises and for a fixed fee, I would perform a diagnostic check on the overall legal health of their business. Everyone I’ve polled so far loves the idea. It allows clients the opportunity to ask me all the questions they never get around to asking; it allows me to learn more about clients and their businesses and to interact more with clients on semi-formal basis (which is the part of lawyering that I love most), and given the fixed fee, removes the time element from the equation.

Dear Client

Posted: May 8th, 2009 | Author: | Filed under: Billing | No Comments »

“Dear Business Law Client

After much soul-searching and after receiving feedback from a number of clients, I have decided to try to eliminate hourly billing from my business law practice wherever possible as from June 1, 2009.

I don’t think that hourly billing serves the needs of clients particularly well and often discourages them from contacting their professional advisors when they need them most, that is, early on before mistakes are made.

Clients become irritated when they are charged in fractions of an hour per phone call or email (whether they originated the call or email or their lawyer did); this hardly encourages them to contact their professional advisor on a proactive basis. Clients feel rushed when they know they are “on the clock”, which discourages meaningful consultation. When clients ask their advisor how much a service will cost them, the answer is typically vague, something along the lines of “it depends” or “there are so many variables that it’s hard to say”. This lays all the risk of cost overruns at the feet of the client (the longer it takes, the more it costs) and makes it really tough for clients to budget for services.

I think clients would be better served by a system where clients are charged for professional services based on the value of the service provided, which typically has little to do with time. Time is certainly a factor to be considered, but even our professional associations permit lawyers to take a host of other variables into account in setting fees. Yet we as a profession consistently fail to do this because it takes us out of our comfort zone.

I would like to offer a fresh perspective using an alternative billing system based on the following basic principles:

 Charges for services should be linked to their value to clients.

 The fee structure should be designed to motivate clients to seek professional legal services at the earliest opportunity before mistakes are made. It is better to identify problems early on and plan for them than try to clean up the mess later on.

 Professionals should share in the risk of cost overruns together with their clients.

 Professionals should be rewarded for devising innovative solutions which may result in high financial yields to a client but when quantified in terms of pure time, yield little return to the professional.

 The fee structure should encourage and reward efficiency.

 Fees should be returned to clients if they are not satisfied with the services they receive.

Based on these principles, I am going to charge clients based on the type of service they ask me to provide and wherever possible, what the client believes the service is worth. In each case, I will discuss the service and fee before I do any work so there are no misunderstandings. I will also offer clients a refund if they are unhappy with any part of the service.”

Hourly Billing Withdrawal

Posted: May 4th, 2009 | Author: | Filed under: Billing | 4 Comments »

They warned me it would be tough, but this takes me back to painful memories of nicotine withdrawal!

As part of my commitment to finding better ways to deliver real value to clients, I have set myself the goal of eliminating hourly billing from my practice by June 1 and replacing it with a value-based system based on client wants and needs. The new model (which is by no means unique, just seldom used by business lawyers) would wherever possible make use of periodic retainers covering all consultations, and project-based fees for specific jobs, to be negotiated up-front with clients.

I have prepared multiple iterations of a letter summarizing the model, but each time I’m about to declare it effective, I come across a new business or transactional matter or process that takes me out of my comfort zone and causes me to grasp reflexively at hours, minutes and seconds and brings home just how addicted to hourly-billing I have become over twenty odd years of rigorous time-keeping. But I’ve also come to understand that there probably is no perfect billing model, and that I’m simply going to have to go through the withdrawal process and accept a higher degree of risk, which is, after all, what my clients have been doing for during my twenty odd years of rigorous time-keeping!

I am determined, and I intend to kick the habit.

Whither Business Lawyers?

Posted: April 27th, 2009 | Author: | Filed under: Reflections on Law Practice | No Comments »

For a long time I’ve felt that the way I have been practicing business law has become outdated, but I’ve always been too busy to do anything about it or too obtuse to understand the rapidly-evolving dynamics underlying my discomfort. This economic downturn has finally forced me to reevaluate the business law services I provide, and to question how relevant they still are. Twenty-something years ago, I was trained to prepare lengthy agreements to cover every eventuality, and billed by the hour. Now my clients are often half my age, have a far keener understanding of the social paradigms that drive modern businesses and have little inclination to engage a forty-something attorney to charge them an arm and a leg for advice they can research for free on Google or a document they can buy online for next to nothing. My challenge is to figure out a way to stay relevant and offer value. I have some ideas about how I believe the future might look, but at the moment, I’m trying to stay focused on listening to what clients and consumers are saying they want. And I must say, I’m pretty excited about the results so far.