We’ve been offering some stories about people, small businesses, and organizations who made some business and legal decisions before they had retained their PCL (primary care lawyer) to be part of their team of trusted advisors. Here are two common ones that I have heard several times:
A young woman starting up a small business wants to formalize the business as a business entity – either an LLC, an S Corporation or a C corporation. A real estate lawyer she knows had suggested that she call me to get some help. One of the first questions she asks is what the legal fees and costs would be to do this work. I give her a flat rate dollar range, with the caveat that it will vary depending on how simple or how complicated the situation will be. She sees that number as a lot of money. I tell her that number includes any filing fees or costs; for example, the filing fee for an LLC in Massachusetts is $500.00.
The filing fee costs surprise her too. She asks if that is a one shot fee or an annual fee. When I advise her that this is an annual fee, she is surprised. (She has now already received some legal counsel about things she didn’t know about before her call.) I tell her that this is why we need to have an initial meeting and take a good look at her business and other factors and determine what the best legal entity would be for her.
“But for a lower number than that fee, I can do this and take care of setting up and registering online,” she tells me.
“You can do that,” I respond, “but I think you’ll find that the value of our work is not so much helping you fill out and file documents, but the key questions, answers, analysis and advice that we will be offering you along the way. There’s more to this than just picking a form of entity and filing papers with the secretary of state.” She says she’ll get back to me soon.
With another young client formalizing a business, I ask: “Do you have an operating agreement yet or any sort of by-laws or rules that you will govern yourselves by.” He is contemplating entering into a partnership with a close friend of his and another party. He and his friend will be 50% owners and the other partner will be a 50% owner.
“We don’t have any of those, but we are close friends, we have known each other for many years and worked together in the past before. I’m pretty confident that we can work it out if something comes up,” the would-be client tells me.
“This might sound odd or counterintuitive to you, but actually, having an operating agreement or some by-laws done early in your business relationship is a good way to protect your close friendship,” I suggest to him. “It anticipates problems before they arise when you are both calm and on the same page, and allows you to discuss and decide how you’d handle them before your relationship gets strained by the business.”
“For instance, what if you three have to make an important business decision and your non-close friend partner wants to go one way and you and your friend want to go another way? How do you break that tie? If you have no rule on how to break it, what are you going to do?” I ask.
“Well, Ok, but we have other things to deal with right now. We’ll get to that question later. We’re cool on stuff like that now,” the potential client says.
Less than a year goes by and the three of them already have strong differences of opinion on some major decisions impacting the imminent future direction of the business. They can’t agree and decide that it’s best if one side buys out the other. But they did not do any operating agreement or by-laws, so there are no governing rules. They are stuck and one party is ready to go to court as the situation escalates. Their discussions are all over the place, and within a short time, distrust seeps in and both sides feel the need to lawyer up. The one lawyer that had been advising them is now also in a bind because he is technically the lawyer for the entity having helped them set up the LLC. “If this escalates and gets litigated,” he tells them, “I probably won’t be able to represent any of you as partners.”
Right about the same time that negotiations are going on and the three owners are trying to work out some sort of buy-sell agreement by the seat of their pants, but no longer trust each other, I get a call back from the young woman who had been referred to me by her real estate attorney friend about two before. She decided to go with an S corporation form but now wants to bring in another owner and maybe an investor but she hadn’t done any operating agreement yet and has questions about what to do next. “Can we meet and discuss what to do next? I see now that I need some advice beyond the forms, and maybe will take you up on that suggestion of having a primary care lawyer,” she says.
Better a little late than too late. She may have to change her business entity type, but it’s early enough to prevent some more major damage or legal fees.
It reminds me of one of my law colleague’s tagline for his firm:
“The worst time to hire a lawyer is when you need one.”
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