General Practice, Solo & Small Firm Division

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Practice Area Newsletter

American Bar Association - Defending Liberty, Pursuing Justice

Summer 2009

Vol. 5, No. 4

Young Lawyers

 

Planning Checklist for First-Time Entrepreneurs

As an attorney who provides outside general counsel services to entrepreneurs and small- to medium-sized companies, I have found my work to be extremely rewarding and intellectually stimulating. I grew up in a family business, so I understand many of my clients’ business and legal challenges because I have personally experienced many of them when I operated my family’s small business.

During this current recession, I have encountered more first-time entrepreneurs requesting my services than ever before. Most of these clients have never previously started their own businesses and are accidental entrepreneurs. Some of these entrepreneurs have decided to start their own ventures because they are unable to obtain another job in their industry, while others have expressed that they want more control over their professional lives. Either way, many of them do not understand all of the responsibilities that starting a new business entails. When meeting with first time entrepreneurs, I discuss some of the following topics:

Business Plan

During my initial meeting, I request a copy of the client’s business plan because it may offer some information that may not be discussed during our conversation. I advise my clients who do not have a formal business plan to create a concise, one-page memo that clearly identifies the reasons for starting the business, whether it be providing a much-needed service or selling a unique or popular widget and how their business will differentiate from their perceived competitors.

Choice of Entity

Each state has distinct rules regarding the various forms of doing business. There are several different types of entities, and each one has its advantages and disadvantages. Some choices include a sole proprietorship, a partnership, a C corporation, an S corporation, a limited liability company, a limited partnership, and a professional service corporation. It is important to listen to your client’s vision for the new venture so you can advise the proper entity type because changing legal entities at a later date may have tax and liability implications.

Business Name

After a business name has been chosen, it should be researched with both your state’s licensing department and the U.S. Patent and Trademark Office to see if the name is currently in use by another entity. Your client should also check to see if his desired domain name is available. I have several clients who have chosen their business name based on the availability of a domain name. Consistent branding is very important, so it is advisable to recommend your client obtain a Twitter account, a Facebook account, and any other web service account that pertains to his industry.

Employer Identification Number/Federal Tax Identification Number

The Internal Revenue Service does not require an Employer Identification Number (EIN) for every entity, so it is important to understand the IRS rules to know which entities are required to have one. An EIN number may be obtained online through the IRS website. The type of goods and services your client provides may effect his tax obligations, so I advise my clients to utilize the services of a certified public accountant who can assist them with their accounting and taxes.

Permits and Regulatory Licensing

Many businesses and service professionals need to have some type of permit or a professional license to legally operate. Some industries require federal permits, while others require state and/or local permits as well. Be aware of all pertinent regulatory requirements for your clients because compliance issues may have serious financial and legal consequences.

Location

Is the venture going to be a home-based business, an online business, a brick and mortar business, or a combination thereof? Local zoning laws may prohibit certain businesses in both residential zoned neighborhoods and in some commercial zoned areas, so it is imperative to know the relevant zoning laws. If your client has a brick and mortar location, you may want to review the lease to ensure that it is flexible enough to fit your client’s needs. If your client has a website, you may want to discuss copyright and trademark issues, blogging and defamation issues, website linking, terms of service, and website security issues. Each location has its own set of legal issues that should be proactively addressed.

Employees

Hiring employees creates another set of responsibilities that an entrepreneur must understand. There are numerous federal, state, and local laws that must be followed before, during, and after an employee’s affiliation with an entity. Some of these laws pertain to minimum wage, employee benefits, working conditions, and discrimination. The size of the business may determine if certain laws apply.

Insurance

Insurance needs may depend on the type of business and its location. For example, a home-based business may want to consider home-based business insurance because homeowners’ insurance policies usually do not cover business-related activities. A brick and mortar entity may want to consider commercial property insurance, general liability insurance, and/or an umbrella policy. A professional services provider may want to consider obtaining errors and omissions/malpractice insurance. Federal or state law may mandate some forms of insurance such as worker’s compensation insurance, unemployment insurance, and health insurance. I recommend my clients contact an insurance professional to learn more about which policies best suit their needs.

In the current economic climate, I have noticed that some businesses view reducing or eliminating their insurance coverage as an easy way to reduce their expenses. If my clients have already explored lowering their insurance premiums, I advise them against eliminating their insurance coverage entirely because one incident has the ability to destroy their financial position. Instead, I counsel my clients to look into reducing other office expenses or even their own salaries because these types of reductions usually have only a short-term impact, whereas an uninsured incident has the potential for long-term financial devastation.

Address the Important Issues

Starting your own business can be both exciting and overwhelming at the same time. Addressing the above issues during the initial meeting may help your clients determine if they have the “right stuff” to become an entrepreneur. Some clients may realize that entrepreneurship is not for them after discussing these issues. Others, however, might think that these new responsibilities sound easy compared to their prior or current situation. In my experience, a more informed client leads to a more successful attorney-client relationship

Bradley S. Shear provides outside general counsel and business consulting services to entrepreneurs and privately held entities. His practice is located in Bethesda, Maryland and he can be reached through his website at www.shearlegal.com or by email at bshear@shearlegal.com.

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