The top-11 legal things start-up businesses should know

For 17 years, in addition to representing people and businesses in court, we have served as general counsel to businesses in a variety of industries. We’ve counseled people starting businesses from their spare bedrooms as well as established businesses with millions of dollars in revenue. Based on our experience, we’ve compiled a top-11 list of legal things that people should know before they start a business.

1. Incorporate.

Incorporating protects your personal assets. If you don’t incorporate, your personal assets could be seized by your business’s creditors if things go wrong. Incorporating protects your house, your cars, and everything else you own from any calamities that may befall your business. Think of incorporating as the cheapest insurance you’ll ever buy.

2. If you have partners, plan for the breakup to minimize the chances of a breakup (and to make it go smoothly if it does happen).

Shareholder agreements (for corporations) and operating agreements (for LLCs) help business partners understand what is expected of them and provide methods for resolving disputes. These agreements can prevent small issues from becoming large disputes that can destroy friendships and businesses. And if a “business divorce” is the only solution, these agreements can provide a framework to untangle your financial affairs with as little friction as possible.

3. Know what goodwill is and why it is valuable.

Generally, “goodwill” is the value of a business over and above the value of its tangible assets and available cash. The positive feelings that people have for your business are part of your business’s goodwill, and they have value. In fact, once developed, your business’s goodwill will likely be its most valuable asset. You need to do everything you can to protect it.

4. Good contracts make good business.

Written contracts can do more than just prevent swearing contests. If they are well-written, they project a level of professionalism that helps you stand out from your competitors that may use forms copied from the Internet or that don’t use contracts at all. Well-written contracts can also be a tool that helps you close more sales and even charge more for your services.

5. It’s important to pay attention to the small details.

Don’t Sweat the Small Stuff was a popular book the 1990s. But in reality, your business’s success will hinge on whether you sweat the small stuff. It’s tempting to think that you don’t have to sweat the small stuff when you’re exhausted from sweating the big stuff. But those technicalities that seem so small really do matter. They wouldn’t be called technicalities if they didn’t.

6. Find a good lawyer.

Good lawyers will tell clients things that they don’t want to hear. And they will give clients advice that may conflict with their interest in getting paid if that advice is what is best for the client. Unfortunately, good lawyers are hard to find. Find one.

7. Good lawyers don’t use legalese.

Legalese is not a magic language. Truth be told, it can be as confusing to lawyers as it is to you. You should be able to understand anything that your lawyer writes, particularly contracts that you are being asked to sign. The law sometimes must deal with complicated issues and concepts. But they can be discussed in a way that nonlawyers can readily understand. The ability to do so is a sign of a confident, clearheaded, and capable lawyer.

8. Find a good accountant.

There is a lot of tax-related paperwork that businesses must do. To properly complete that paperwork, you must fastidiously track your income and expenses. Get a trained professional to help you set up systems to track the required information and to prepare the necessary filings. That will give you more time to do whatever it is that you do best for your business. And it will make sure the paperwork gets done right.

9. An accountant is not a lawyer.

Practicing law is more than representing people in court. Among other things, incorporating businesses and drafting contracts are also practicing law. Some accountants may tell you that they can incorporate your business or prepare a contract for you. If yours tells you that, fire him. If you’re going to let your accountant draft a contract for you, you might as well let him perform your colonoscopy too. He is equally qualified to do both. And if you let him do either, chances are that it won’t end well.

10. Ignorance of the law is no excuse.

Any business that engages in a regulated activity must learn the laws and regulations governing that activity or risk the consequences if it fails to do so. Ignorance of the law is no excuse. That’s not a cliché; it’s the law.

11. Sometimes the best way to make money is to pass on an opportunity to make money.

No one has ever gone broke because they said no, but many fortunes have been lost by people agreeing to deals or taking on projects that they later wished they hadn’t. Learn your comfort zone and then say no to things that fall outside it.

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