Overview of Legal Expenses
In the initial stages of starting and operating a business, legal costs typically include fees for reviewing compliance issues, negotiating contract terms and developing corporate organizational documents. These costs, though expensive, are necessary to ensure your business is meeting all statutory and regulatory requirements, protect against future litigation , and ensure you are getting the most from your agreements with employees and vendors. It is important to understand that although the task of starting a new business may potentially save you money in the long term as compared to running an existing enterprise, there will be costs tied to the organization, preparation and structuring requirements of a start-up business. Legal fees related to this help you comply with various state and federal regulations, and offer you protection and peace of mind going forward.
Business Startup Fees
The structure of your new business will ultimately determine your legal fees. The following are some general guidelines:
For LLCs, the ultimate cost is determined by how complicated you want the LLC to be and the time it takes to get it chartered. A simple LLC with two members costs at least $1,500 to prepare and file. An LLC with a complicated operating agreement along with the chartering of the entity is going to run at least $3,500. An LLC that issues capital stock, warrants, stock options and vesting can run well over $10,000.
Corporations generally cost more than an LLC because they require two documents compared to one for an LLC. Common stock is less expensive. Issuing preferred stock is more complicated and expensive. For legal fees, expect anywhere from $2,000 on the low end for a basic common stock corporation to $8,000 on the high end for a more complex preferred stock offering.
If you plan to work in a professional and regulated area such as medicine or law, you may have to pay to "incorporate the association." Fees for incorporation can range from $500 to $2,000.
If you decide to form a partnership, it may cost between $1,500 and $2,000 to get your partnership properly set up with a partnership agreement.
Licensing and Permit Costs
The cost of legal fees for licensing and permits can range from a few hundred dollars for a simple license to thousands of dollars for more complex businesses that require in-depth knowledge of state and federal regulations. Certain industries, such as food and beverage, hospitality, and transportation, often have specific requirements that may necessitate hiring an attorney experienced in local laws.
For example, starting a restaurant may require multiple licenses at the local, city, and state-level such as a food service license, an alcohol license, and a state sales tax permit. Obtaining each would require research into the requirements for each; another instance where hiring an attorney with the requisite knowledge of the regulatory landscape would be beneficial.
Trademark and IP Expenses
If you have developed an innovative product or service, you must consider getting a registered trademark, copyright or patent. Like business formation, you can save some legal fees by doing this yourself. However, it may not be worth it to take the risk of losing significant value to your company by having a poorly protected brand or invention.
Registered Trademarks are not absolutely necessary for all businesses. However, registered trademarks add great value to your business. Registered trademarks are valid indefinitely as long as the trademark is in use and the registration is kept in force. Registered trademarks are easy to assign to a new owner, which is important for the potential sale of the business. For any regional, national or international business, getting a registered trademark protection is well worth the time and money. If you want a registered trademark, it makes sense to apply for a trademark registration with the United States Patent and Trademark Office and also with your state Secretary of State Office. You only need to apply for trademark protection in the countries where you are doing business. In general, the legal fees to register a trademark in the U.S. and also in other countries runs from a few thousand dollars to tens of thousands of dollars, depending on the number of countries you want protection in and also the complexity of the trademark, for example does it include any foreign words or a design feature, etc.
If you have created an exciting new invention, you may be able to obtain a patent. Obtaining a patent is complex and expensive. It usually costs tens of thousands of dollars to get a patent application prepared and filed (sometimes costs exceed $100,000) and then many thousands of more dollars to prosecute the patent before the patent office. The legal fees depend on the type of patent and scope of the patent. Generally, patents should be obtained for truly unique inventions with potentially high commercial value, such as a radically new product or process.
If you have created software, artistic works, etc. may want to obtain copyright protection.
Consultant and Lawyer Fees
Attorneys and consultants can play an integral role in the process of starting up a business. An attorney will often handle the process of the ones that become part of a startup. Those that are incorporated have to consider the corporate governance rules and the regulatory environment in which a business operates, all of which incorporate legal considerations. In addition, in order to begin operations, one needs to develop a legal framework for conducting transactions with various service providers and vendors, typically done through commercial contracts.
Although companies in the early stage do not have substantial cash reserves, they may be able to obtain the help of an attorney through a fee installment plan or alternative fee schedule. Attorneys that primarily represent startups also often offer monthly subscriptions for a defined block of consulting time, and many large firms have startup practice groups that operate at deeply discounted rates.
Some costs are more predictable than others . Even if a startup obtains legal services at a reduced rate, those costs can fluctuate dramatically based on the transaction process. In general, it can be a cost saver to a startup to engage an attorney early rather than later in the process. Because of the potential liability associated with legal contracts, contracts should be created as early as possible, prior to any business transactions. This can help avoid undue risk to the company.
If, for example, a business has a plan for leasing office space, the lease form itself could be prejudicial to the startup. An attorney can often identify red flags in such agreements, reforming them to help protect equity for founders and advisors. By the same token, attorneys will often advise businesses not to enter into contracts that are likely to be changed, such as ones that involve a $1 per month telecom service.
On the whole, the costs generally associated with using legal consultants and outside attorneys is worth the investment, as these services can help avoid legal pitfalls.
Agreements and Contract Creation Fees
A significant part of protecting your business is creating contracts and legal agreements to manage your relationships with clients, vendors, independent contractors, and other service providers. While you can certainly find "free" templates online and many business owners opt for this type of drafting rather than hire a professional, you should consider the potential risk to your business and whether it is worth the cost to engage a professional.
Protection from Risk: As an example, you might be contemplating leasing space for your offices or hiring employees. Without an appropriately drafted lease, your landlord might take its time turning over the space to you or forcing you to lease more space than you want. Without employment contracts that include terms such as your company’s "at will" status or a process for hiring and firing, you could find yourself in a legal battle with a managing member or employee who claims ownership of all of your customers and clients.
Costs of using a professional: Below is a sample chart from the Cabbage Small Business Blog that estimates the costs of having a business attorney draft these contracts and agreements for you:
Estimate of Costs to Hire a Lawyer to Draft Business Contracts and Agreements (Quoted rates are either hourly estimates from Barclay Palmer at Wong Fleming or from the Rocket Lawyer site)
Service Estimated Cost per Rory Friedman at RocketLawyer.com
Partnership Agreement* $199
LLC Operating Agreement* $149.99
Confidentiality Agreement* $49
Employment Contract* $99
Software Licensing Agreement* $69
Independent Contractor Agreement $39 to $299
*Tips to reduce your costs*:
- Always have a written template for agreements or contracts in place before you engage with a new client or customer.
- Avoid using a generic template that is freely available online. They are often incomplete or not tailored to your specific needs.
- Invest the time to create your own template based on your business and the feedback you receive from your legal counsel.
- Make sure that your lawyer is taking the time to understand your business’s core principles when preparing these agreements. For example, some clients want their contractors or employees to sign a non-compete or non-solicitation clause. There are many states where these provisions are considered "unconscionable" and will not be enforced. If your business or clients are in those states, you will have wasted time and money in this area.
Estimating Your Legal Fees
When starting a business, you will inevitably incur some legal fees. Those may be upfront fees to incorporate your company or form an LLC, or they may come later when you seek advice on other matters. How do you manage this cost during the early stages of your business?
Here are some suggestions:
We charge a set fee for a lot of services we perform for small businesses, like forming an entity or reviewing a lease. When possible, it’s a good idea to budget for those costs using a fixed number; that way you’re not faced with an unexpected bill that you have to pay to an attorney or law firm.
It’s a good idea to request an estimate of anticipated fees before you hire an attorney. A knowledgeable attorney should be able to give you a ballpark of the total fees for a particular service. If the work isn’t specifically defined , and is of an ongoing nature (like our corporate representation services), the attorney should be able to provide you with some ideas as to what it will cost for the first six months or year you retain them. That way you can budget for it.
Some work that needs to be performed may not be directly related to forming your company but may be related to your industry or profession and may be a requirement for you to open your business. Examples might include zoning applications or liquor licenses. In those cases, an experienced professional should be able to estimate the total time it will take to obtain the necessary approvals and then you can simply multiply that estimate by the professional’s hourly rate to arrive at the anticipated cost.