CHAPTER I
What Is Business Law?
Do I Need a Lawyer?
LAWYERS SOMETIMES GET A BAD RAP. We’ve all heard our share of lawyer jokes. But as an entrepreneur, you’d be silly to buy into the common stereotypes that have accumulated over centuries. Smart entrepreneurs view attorneys as a valuable resource and one of their most significant allies in starting, growing, protecting and ensuring the successful lives of their businesses.
So what are lawyers good for?
Lawyers are good for a number of things, some of which are less obvious than others. Most people think of attorneys when they are contemplating starting a new business, when creating and reviewing contracts, and of course when they need protecting in the event of a legal issue.
However, there are many more duties a business owner can ask an attorney to handle. The possibilities are almost endless, but include these:
• Monitoring and fulfilling ongoing filing requirements, depending on what type of business you have
• Ensuring compliance with any regulations that apply to your company
• Keeping you current on product liability developments and coverage
• Serving as your Registered Agent, which means they act as a designated recipient of all Service of Process (SOP) communications in the event of a legal action or lawsuit
• Preparing fundraising documents, such as private placement memoranda
• Ensuring your Intellectual Property protection, which can be extremely important if you or your business have a unique idea or product not currently available in the marketplace
• Conducting litigations, making real estate and equipment arrangements, etc.
• Making collections on invoices, drawing up template agreements your non-legal associates can use with proper training and guidelines
• Scanning trade news and alerting you to any emerging issues you need to anticipate
• Helping you set up document and data archiving and protection resources
• Connecting you with useful business contacts in the attorney’s practice or even social circles
If you are still dubious, just ask self-employed and small business owners what kinds of support they get from their attorneys. You’ll hear some amazing stories.
But I can’t afford an attorney. I need that money for more important things!
Yes, legal costs can mount up, but it’s often true that those sums are a fraction of what you could pay or lose without the benefit of competent legal advice. You are probably gifted and well grounded in your core business. Don’t assume that that naturally qualifies you to be a legal expert, even in your own industry sector’s affairs.
And if your start-up is the first one you’ve launched, you may learn a lot from your seasoned attorney’s broad view of other small businesses and their successes and failures. You may have many governmental responsibilities to fulfill as well: Depending on what type of business you are currently operating or starting, you may owe information to various units of government and others. You cannot afford to make mistakes through ignorance or inexperience in these areas.
But what are the risks of skipping steps usually handled by attorneys?
There are a number of common business mistakes made by foolish entrepreneurs. One common error is selecting the wrong type of business entity or filing status for a new business. This mistake can end in much more labor-intensive document preparation and filings, unnecessary expenses, complicated and timeconsuming reporting requirements and potentially unpleasant tax implications.
Another common mistake hurts business owners who improperly formulate employment, confidentiality and non-disclosure agreements. These documents, more than any others, can prevent associates, among others, from “biting the hand that feeds them.” That hand is yours.
• Imagine hiring and training someone who then decides she will go out on her own in your neighborhood and start a competing business.
• Or what if you hire a salesperson whom you pay to build a large book of business and contacts, but who then tries to blackmail you into paying him more or threatens to take that business and relationships across town, to the competitor?
• What about when you try to raise capital to start or grow a business, and you are making your rounds visiting different financial resources, sharing your vision and strategies. Do you want to make sure that these individuals can’t make your idea theirs?
Couldn’t happen to you?
You might feel like your tiny start-up business is too small to attract legal problems. Not so! A gentleman I know very well decided he wanted to become a partner in a local landscape company. He met with the owner and decided not only to become a partner but to invest a large sum of capital. So the two men drafted a very basic hand-written contract. It wasn’t witnessed by anyone. There was only one signed original, and it was kept at the company.
The money was used to buy more equipment and to pay some outstanding payroll obligations. The company continued to operate for nearly a year while the two partners went door-to-door, earning new customers and renewing residual business. After watching the business grow compared to the previous year, my friend began to question why he wasn’t earning more from the business’s activity. As you can imagine, things got extremely nasty. The original owner finally said something like “Screw you. I don’t owe you anything. Don’t come around here again.”
Then when my friend began asking to see their agreement and financial records about his investment, the original owner said, “I destroyed the contract and I’m not paying you anything. If you don’t like it, sue me!” Unfortunately, this eye-opening experience taught my friend some of the hardest lessons of his business life. He spent a year working for next to nothing and lost his entire investment. There had been real documentation supporting his claim to owning part of the business—but it was gone. The only recourse he had was to launch a costly legal battle that he probably would have lost. In the end, he wrote off his loss and moved on, but not without a bruised ego and a significantly depleted bank account. Oops.
So what am I saying?
Just remember that starting a small business on a shoe-string budget is not a unique circumstance. I speak for most entrepreneurs. We’ve all been there. The start-up game involves a lot of difficult decisions, usually choosing among many things, all of which you need. But it’s about trying to properly identify what items are the most important related to the stage of the business development process you are currently in.
It is critically important to build a rock-solid foundation for your business. That includes setting up the most appropriate type of entity and business structure, organizing the company to bring on employees and investors, protecting whatever secret sauce you plan on taking to market, and a formidable list of other things. You do need solid legal representation to survive and succeed.
M.O.
The Many Faces of Business Law
ALMOST ANYTHING AND EVERYTHING you can think of in the legal field will probably fall under the umbrella of business law in one way or another. It’s one reason many lawyers are drawn to the practice.
For example you might be thinking, “Aha! What about divorce or family law?” Well, that area is often very relevant in small- and medium-sized businesses, in terms of their legal representation. Imagine a family business start-up where the husband and wife both have ownership. If the marital bliss ends, and the couple divorces, what happens to the business? A cluster of legal issues will need addressing. And that’s just one example.
There are many attorneys who specifically identify themselves as business attorneys. So what do they do? Most likely, they work in a few of the various categories I’ll discuss below. To find out, just ask them or research their background. Do not get confused by titles or advertised practice areas like corporate or business. It is more important to know basically what advice you want. With that defined, you can decide if a particular attorney is qualified. If you are not sure, just ask the attorney and check references. If you want to dig deeper, you’ll find numerous industry and jurisdictional-specific books with information and names of attorneys, with checklists or other references on the specifics of what you want to do.
Some of these categories are more common than others and are more closely associated with a traditional business lawyer, while others are quite specialized. Before we get started, please let my lawyerly mind point out that many, many books focus on small sections of each of these specialties. This list is not comprehensive and is only intended to give you an overall view of the range of topics you will find expertise in.
Agency Law This area addresses relationships, asking who can act on whose behalf. What authority do they have? What responsibilities do they have? Who is ultimately liable for an individual’s actions, that individual or the business? What can the individual do on behalf of the business? Who can be an authorized agent?
Alternative Dispute Resolution This area focuses on arbitration, mediation, and negotiation. It asks how we are going to resolve disputes. With customers? (Is the customer always right?) With employees? With suppliers? Disputes will inevitably occur; you must plan for them.
Commercial Code This is called the Uniform Commercial Code in the U.S. Typical issues: How do the commercial codes work in your jurisdiction? What protections are built in for your business that you may use? What is the relation of these codes to your business model?
Commercial Crimes The focus here might be on something your company does (or doesn’t do) or something that someone or another company does to you or your company. What things are considered commercial crimes in your jurisdiction? Are they the same in every location in which your business operates? Are there any differences if you cross state lines or ship products internationally? Sometimes what is legal and/or customary in one jurisdiction could be criminal in another. For example, bribes, in many countries, are part of standard business and in others, are a significant crime. On another front, your company could need protection from the criminal acts of employees.
Consumer Protection This specialty asks questions like what rules are related to your interactions with the consumers of your product or service. What liability do you have for your products? What if they break? What if they are used improperly? What are the rules you must follow for contacting your customer to collect a past due bill? Are there specific times of day when you may call? (In the U.S., the answer is yes.) Are there required disclosures you have to give? (In the U.S., the answer again is yes.) Do you need to have your products tested before they are imported?
Contract Law Contracts, contracts, contracts! They form the core of most businesses’ legal needs. They put understandings in writing. You must know what they actually mean. An attorney will help you to protect yourself and ensure you reach your desired results. The goal is to ensure compliance and adherence to the agreement reached. Contracts are very specific, varying by industry and jurisdiction. This is one of the most important areas in which to have an attorney. Every attorney I know updates his or her notes every time a new case is decided or a new issue arises, to ensure that all clients are protected in that situation in the future.
Corporate Law This very broad category includes the formation, modification, documentation, structure, distribution, compliance and control of organizations, just to name a few topics. It’s often used as another name for business law.
Employment Law Think human resources here. This area is also broad. Some typical questions include things like these: Should and can you have the employee sign a non-compete agreement? Can you ask the prospective employee about his personal life in a job interview? How often are you required to give an employee a break? When do you have to pay extra for overtime work? If your employee is hurt at work, how does that affect the business? Can an employee sue the business or you for anything? If it has anything to do with employees, then it is probably in this category and there is probably a rule or a case on the subject. Good advice and a little forethought will go a long way to preventing problems here.
Financial Regulation This covers disclosure, taxes, tracking, and reporting, as well as your interactions with local, state and national government agencies. For some industries, your needs can be quite minimal, rarely going beyond standard accounting and tax practices. In other industries, it can be a major portion of your business model.
Intellectual Property This is the world of copyrights, trademarks, patents, business processes, logos, and secret formulas or inventions. The focus is the protection and exploitation of all of these intangible items.
Insolvency This issue could affect your business, but it also can apply to your customers, suppliers and others. Most people believe this is the end of the road (especially those who played too much of the board game of Monopoly as kids). But I encourage you to view solid advice in this area as a powerful, long-term tool you can use. The list of major companies that have faced some form of insolvency, then restructured and went on to become more successful in the long run, is significant and long. Just look at the automobile or airline industries around the world.
Industry-Specific Laws and Regulations In addition to local rules, your industry may have its own very specific rules or regulatory agencies which you need to comply with. Your attorney can help review your particular sector’s governance, identify compliance issues, and help you know what to do about them.
International This area of law includes trade regulations, quotas, tariffs and more, not to mention potentially everything else discussed in this whole book, regarding each individual country you trade in. You must consider risks, opportunities and protections provided to your business in foreign countries. In some cases, your local attorney may recommend a counterpart in another country who can facilitate things on that local front much more expertly and economically.
Local Law and Regulation What are the local rules? In the U.S., there can be significant variance from city to city, and county to county, not to mention in multi- or interstate commerce. One of my clients has a tree maintenance firm. His office is located in the unincorporated part of the county (i.e., it’s not in a city, so it’s subject to county regulations only). The closest city is less than 10 minutes’ drive away, yet it requires tree trimmers to carry significantly higher levels of insurance to operate there. Luckily we could discover that for him and protect his business properly. Another client came to see me after he ended up in a bad spot due to an accident that occurred in a certain city. His business was not carrying the required amount of insurance to conduct business there. So this client was potentially facing not only the fallout from the accident, but also personal liability, the revocation of his professional license, and possible civil and criminal fines—all because he did not review the local rules. An attorney can help you determine if there are any local rules that affect your business.
Mergers, Acquisitions, Franchising, Sales and Venture Capital This specialty addresses everything associated with joining a business, acquiring an existing business, franchising or selling your business, and/or financing the startup or growth of your business. These are very specialized areas and vary by industry and size of transaction. You require the aid of an experienced and knowledgeable attorney due to the high risk involved.
Real Estate This includes leases, purchases, sales, and other property transactions. It’s one of the most common areas that leads business owners to work with an attorney. Unfortunately, I have met a significant number of clients who initially came in for help because of a commercial lease dispute; upon review it often emerges that the lease is extremely biased against their interests. When asked about it, these business owners say they did not read or review the lease prior to signing, because the landlord told them it was a “standard” lease. Don’t make that classic mistake: At least read before you sign, and get help if you question any of the terms.
Taxation This is a very jurisdictionally and industry-specific branch of law. Solid, up-to-date advice can make a significant difference in your business’s bottom line and overall success. And don’t underestimate the need to heed all warnings and keep excellent records. Far too often, I have seen otherwise successful businesses undone by faulty record keeping and tax audits.
Torts These are intentional wrongs. They can be the acts of individuals acting on behalf of the business or individually, or actions against the business itself. Examples are negligence, product liability, unfair and deceptive trade practices, fraud, misrepresentation, and the like. The aim of legal advice in this area is to provide protection for you and your business and also give you the ability to pursue those who wrong you.
So that’s the lay of the land in business law. Here’s a practical tip: Make sure that the business attorney you settle on has the specific qualifications and experience needed to provide you with the services you require. For example, I have done a fair amount of business, real estate and financial law throughout my career, but I do not consider myself to be qualified to deal with patent issues or complex commercial litigation that might cross several state or international borders. I would refer any potential client with needs in these areas to an attorney or firm qualified to handle those issues. The client might work with me for matters I’m experienced in and consult a specialist for particular issues outside them.
All in all, if you can develop a list of the kinds of legal advice you are most likely to need, you’ll find an individual attorney or a legal firm that can cover most of them and which can link you up with any specialized expertise you need that they cannot supply themselves. Armed with such advisors, you can avoid lots of problems and concentrate on building your business.
M.R.M.
Business Models for Your Legal Representation
A CORPORATE LAWYER usually does a mix of some of the things you just read about in the section above. While every business has its own unique ways of managing legal counsel, the financial side of this relationship usually falls into predictable business models. If you are in the early days of a one-person start-up, your needs might be rather simple, but it will be good for you to get a feel for the complete picture anyway. The initial distinction you must consider is whether the lawyer is in-house counsel or outside counsel.
In-house or outside?
In-house counsel is often referred to as corporate counsel, and a company with this arrangement is usually fairly sizeable or has significant revenues. These attorneys generally work full time, as direct employees of the business they serve. They will not have an outside practice or be a member of any outside law firms. The in-house counsel can be a single attorney, or a group of attorneys and perhaps support staff. Their primary job is to advise the executive level management team regarding the legal implications of major strategic decisions. Based on the business structure, they may also serve as the business’s legal department, handling other daily business tasks like collections, contracts or negotiations.
Attorneys who work as corporate counsel are often known as jacks of many trades because they spend most of their time researching, evaluating and advising, not litigating in court. The corporate counsel will bring in outside counsel with specialized experience to assist in complex or unique legal matters. Most states in the U.S. make exceptions in their bar rules related to corporate counsel, specifically that they may not have to take the bar examination for every state that their business operates in. It is very common for corporate counsel attorneys to move into business leadership positions rather than back into traditional legal practice; hence a fair proportion of CEOs are also attorneys.
Outside counsel are attorneys or law firms in private practice who practice in corporate or business law, or specialize in a related niche. They generally work full time for themselves or a law firm. Your business will be one of a number of clients that the outside counsel may have. One advantage of working with outside counsel is that you are free to work with as many attorneys as you choose. For example, a business might employ one attorney for collection matters, another attorney for real estate transactions and a firm for intellectual property matters. Outside counsel spend the majority of their time working on specific issues. Their representation will be limited to those issues, and they will have little to no involvement in business operations or decision making.
As we’ve seen, attorneys who work in private practice often specialize in a limited number of practice areas. They focus on continuing education in those specific areas and build a reputation for excellence in them. They often decline cases that are not directly related to their areas of expertise. Outside counsel must be specifically licensed, qualified and admitted to each court they appear in; thus their representation may not easily cross jurisdictional boundaries. Some attorneys do move from private practice to the role of corporate counsel, but it is more common for them to remain in private practice and build either their firm or personal book of business.
Cost considerations
Every business is unique. As an entrepreneur it will be an important business decision for you, when you decide what type of counsel to employ (or work with), and at what point to consider hiring in-house counsel.
This move is not usually part of a small business model. However, there is a growing trend in medium-size businesses to hire an in-house attorney, as the costs of hiring less experienced attorneys has decreased significantly in the past ten years. Many medium-sized businesses are identifying ways to utilize an attorney on staff to significantly increase profitability. For example, a medium-size car dealership hired its own in-house attorney. They realized a significant increase in profits by having the attorney handle all collection matters as well as reviewing and executing the sales contracts with clients, among other duties.
Hiring counsel and retainer models
If you are hiring in-house counsel, then the process will look just like hiring any employee of the business. If you are hiring outside counsel, you will have three basic hiring options:
• For a specific time period—called a true retainer
• For ongoing representation
Each attorney will have her own representation options, billing and contracts. (Yes, you will absolutely be required to sign a contract. It’s a habit you must get into for all transactions.) You must discuss this with your attorney.
First, let’s look at the true retainer model, where you retain an attorney for a specific time period. You pay the attorney an agreed fee, and in exchange the attorney will ensure that he is available to handle any legal matters for your business that arise. Also, he will not take any cases against your business for that specific time period. Other than the initial “true retainer” fee, there may not be any additional charges for the entire period. Some view it as almost legal insurance.
Second, you can consider retaining an attorney for a specific issue or individual case, hiring the attorney to represent you in a single matter through the completion of that matter, regardless how long it takes. This is the most common type of legal representation and is what most people think of when they hire an attorney. Typical issues might be buying some land or equipment, preparing a patent application, or hiring (or firing) a high-profile employee.
Finally, there is retaining for ongoing representation. This generally requires a significant retainer fee. But you can contact and use the services of the attorney as needed on multiple legal issues. The simplicity of this arrangement makes it a very common method for getting legal representation. It’s also flexible: In one month you may require services such as having a contract reviewed, drafting demand letters, and researching the applicable laws for a new project. The next month you may not require any services at all. Obviously both you and the attorney will want to review the work flow vs. compensation balance from time to time and adjust as your needs require.
Billing methods
Private practice attorneys generally charge for their services using one of three billing methods: flat fee service, hourly billing, or a contingency fee agreement.
Flat fee services are most common in simple matters where the expectations on both sides are very clear and there is little chance of deviation from the service to be provided. Examples would include the review of simple documents, drafting of simple documents, or appearing at unopposed legal proceedings.
Hourly billing is the most common type of billing for private practice attorneys. Most states in the U.S. require the attorney provide in writing the hourly rates for anyone who could bill on your matter. This could include the attorney, partners, associates, paralegals, legal assistants or other staff. You can then verify whether these rates are in accordance with the market rates.
Finally, contingency billing is where the attorney only gets paid if you recover what you feel is due you. This method is used only in specific practice areas like personal injury or medical malpractice.
Hourly billing issues
While hourly billing terrifies most clients initially, it is very important to understand that it is by far the best way to buy legal services, especially in business law or when there are unknowns in the matter.
Here’s why. You, the client, expect a certain level of service and full diligence given to your affairs. If you have agreed to pay a fixed amount and you feel it is unreasonably high for the service you receive, it is unlikely you will continue to retain the attorney at that rate for very long. If the fixed amount you pay is either fair or too low, then the attorney has a financial incentive to complete work on your matters by doing the least work possible. (More money and less work means higher profitability for the attorney. Higher profitability is good. Remember, your attorney is a for-profit business too).
In contrast, with hourly billing, you are only billed for work actually done. You can request more or less attention to be given to your various matters. And your attorney knows that she will be accurately compensated for all work she actually does for you.
Yes, yours is a small start-up and you watch costs like a hawk. And everyone knows someone who has a horror story related to hourly billing. But that can be mitigated in multiple ways:
• Periodic account statements. Every law office and state bar has policies, rules and rates related to statements. You have the right to receive, review, and if need be, question them on a regular basis, just like you do with all other business expenses.
• Selecting the right attorney for your needs. As with any other area of your business, you should research, evaluate and then select a quality attorney. This may include getting referrals and reviews and tapping your own intuition. Most attorneys are building their own practices, which are of course businesses, so their reputations and long-term relationships are important considerations for their financial success as well.
• Clear communication. Billing should be transparent. If an issue arises, it should be dealt with immediately. You and your attorney are a team, working towards the success of your business. Your attorney can be one of your greatest resources, and you must ensure that neither billing nor communication problems impair that cohesive relationship.
Attorneys often have minimum retainer balances. If your account balance falls below the minimum, you may be required to make a payment to get the balance back up to the minimum requirement. They may also have a minimum monthly billing or administrative cost, especially with long-term clients. Law firms are one of the most heavily regulated professions, especially the financial accounting of client funds. Thus, most law firms will have fixed costs associated with an active client and account. These firms will offset these costs with monthly minimum billings, i.e., a mandatory monthly case review by an attorney, or a monthly administrative maintenance fee. Each law firm will also have its own policy for costs such as copies, postage or filing fees, which may be a separate cost retainer or monthly cost invoicing. Make sure you are clear on the total billing and methods used so that you can accurately budget for legal expenses.
A corporate lawyer represents the interests of your business to the rest of the world. You have many options for obtaining the legal representation you need, as well as options for paying for your attorney’s services. Since your corporate lawyer can be one of your greatest business assets, invest all the time and effort you need to pick the one who will best fit your needs.
M.R.M.
How Do I Find the Right Attorney for My Needs?
IF YOU WANT TO FIND a good outside corporate attorney for your new or prospective business, you can start by asking friends, family and trusted colleagues for candidates with stand-up reputations in your community or industry. Everybody has one or more contacts who can point you toward legal resources they know about or have worked with themselves.
Then you’ll need to make sure the candidates you’ve discovered have the particular expertise and topical focus that match your business’s needs. You can do some of this online, or by making use of referral services you might find in small business advisory agencies, the local bar association, business management consultants, chambers of commerce, trade associations, and the like.
It’s also important to think about your budget and your timetable. Some attorneys will be able to start working with you immediately, while others have projects and client needs slotted ahead of you.
There are other important considerations:
• Quality vs. cost
• Accessibility of the attorney
• Experience of the attorney and firm
• Long-term nature of the relationship
• Ability to take new clients
• Needs of your business
• Social or personal nature of the relationship
Let’s suppose that you come up with several candidates. Now what? What things should you look out for? Here are some preliminary questions, assuming you are meeting with a senior attorney in a firm. You can adjust them appropriately if you are considering a single, independent attorney:
• Who will be doing the majority of the work?
• If there is research to be done, will that be handled by a paralegal?
• If yes, what is the rate for your paralegals?
• If not, what is the hourly rate for an associate attorney?
• What is the hourly rate for your time?
• Do you offer flat rates? If not, how many hours will this project take?
• If you are discussing a particular project, ask how much various activities within the project will cost.
Your initial, exploratory consultation may be free of charge, though some higher profile firms do charge for one. However, many of them will credit that amount if you commit to using them as a resource moving forward.
Often the most respected member of a firm (a senior partner or a name-on-the-door type) will introduce you to the firm and its services. This attorney is often not the person who will be handling your needs once you sign a service agreement. More than once, early in my career, I contracted with legal resources for different projects and later found out that a paralegal did most of the preliminary research and document prep. Sometimes the document prep would be original and other times it would start as a template that the firm had in archive. And there have been instances where I thought the quick-witted attorney with the expensive designer suit and her name on the building was going to be handling my contract negotiations. But in fact, a junior or associate attorney who passed the bar exam the Friday before was going to be drafting a letter on my behalf and sending it over to the other party’s firm for review. This made me feel (and perhaps look) like an idiot.
Delegation occurs in a law firm the way it does in every business. If you want a specific partner or attorney, then you need to communicate that and be prepared pay for the services requested. Experienced senior attorneys in this area of practice often charge triple or more what an associate with less than five year’s experience would charge.
Also, as part of the way attorneys are regulated, managing partners of law firms are fully liable for the actions and practice of all associates, so it is extremely rare that an unqualified attorney would be allowed to handle a case unsupervised.
These cautions are not meant to slam paralegals or junior associates. Paralegals are specialists whose work allows law firms to leverage their senior members’ time, and they can save you lots of money as well as speed up the work on your matters. Likewise, younger attorneys can bring energy, creativity, technical savvy and other qualities to their work that can offset what they may lack in experience. The point here is that you must clearly understand who’s doing what and what it will cost, and you should feel comfortable asking for the most appropriate people to perform certain tasks.
As with so many things in business, this is where “Buyer Beware” is good advice. Be cautious when you find firms that are willing to engage in projects at a fraction of the cost of others. Confirm that appropriate personnel are handling the items you want them to handle and have it spelled out in your service contract. A blanket contract appointing XYZ Law Firm to handle your needs is not sufficient.
Don’t be afraid to probe candidates
It’s completely normal for a business to interview a number of legal resources to find the firm or individual that most closely matches its needs based on size, scale, expertise and business style. Attorneys and law firms come in all different shapes and sizes. There is an appropriate resource out there for every business’s needs. So evaluate costs, location, proposed strategies, and how much they are focused on billings vs. going beyond expectations to show their commitment to the relationship. Really get a feel for who they are and what they are about.
Frankly, if you are a small business owner, you probably don’t need a high-profile firm representing your interests. Often you can find the same quality of work in smaller firms that specialize in working with individuals and businesses of your size. Whatever you do, don’t just call the firm with the most public advertising or the full-page ad in the phone book or online. Their marketing budget is not necessarily a reflection of their skillset. These resources could be great, but I’ve noticed that they seem to charge higher hourly rates. It might just have something to do with paying for all that marketing and promotion.
M.O.
What Does a Corporate Lawyer Do?
NOW THAT YOU KNOW your options for getting legal representation, the types of specialization you can tap within corporate law, the business models available for paying for your attorney’s services, and how to locate and pick a good match for your business needs, we can ask and answer a fundamental question: What does a corporate lawyer actually do?
Answer: represent your business entity to the outside world. It seems like a very simple answer. But there is some extremely important lawyerly fine print related to that answer, so please read on very carefully.
At some point in your start-up phase, you will most likely turn your proposed business into some type of business entity (see more on this on pages 43-44). The majority of these possible business organizations are actually independent entities, each with its own tax ID number, bank account, liability, legal requirements, etc. Essentially, a business entity is just that: an independent non-human entity, a straw person, a pseudo-individual, even a humanoid. Call it by whatever name that helps you picture that the entity now has a separate life with rights and obligations distinct and separate from those of its owners, shareholders, partners, members, etc.
Your corporate lawyer represents the interests of the business entity, not necessarily the individuals associated with the business. (That’s the absolutely important fine print.) The business could potentially have interests that are different from or even opposed to the interests of individuals associated with the business, such as the founder, a partner, a shareholder or member.
These situations, where interests diverge, are far more common than you might expect. The business’s interests are determined based on the type of organization and decision-making process it has, as declared in the formation and administration documents of the business. The most common examples of divergence are hostile takeovers (when a new faction gains a controlling percentage of voting shares and replaces the corporate leadership or liquidates the company), the execution of corporate estate planning (when a partner in a business dies and her ownership transfers to other partners and not to her estate), or the realignment of voting blocks in a closely held company.
Here’s a real-life example of the last situation. I was involved in a case in which three brothers founded a very successful business. Abe was the one that made it all happen and ran the daily operations as CEO. Bert worked there on a daily basis and essentially did the research and menial tasks. Charlie was part of the company in name only. The brothers structured the company by distributing the ownership shares as follows:
Abe got 40 percent, while Bert and Charlie each got 30 percent.
Well, at one point, Abe and Bert had a falling out. Abe, acting as CEO, hired a law firm to sue Bert on behalf of the business, for some alleged wrong. However, Charlie sided with Bert. They got together and, using their 60 percent majority, appointed a new CEO. On behalf of the business entity, the new CEO then directed the law firm to drop the suit against Bert, and then asked the firm to proceed with a suit against Abe! The law firm had to follow the instructions of its client, the business.
The lesson here is that you may have founded your company, or you may be a major figure in it. But you are not the business, no matter how much you identify with it, and your company’s legal representative is not your personal watchdog—she’s the company’s face to the world.
M.R.M.