My legal and tax practice consists to a significant degree in helping people start new businesses, and I follow the literature in this field. A few days ago, I read a law journal article entitled “5 Reasons Why Startups Need a Lawyer from Day 1.” For reasons I’ll explain below, I agree with the article to an extent. But for several reasons, I strongly disagree with it.

As its title indicates, the article argues that there are five reasons why startups need lawyers from Day 1, but it adds two unnumbered reasons. The seven reasons are as follows:

 

 

Startups need lawyers from Day 1 to draft contracts with their customers that are tailored to meet their specific business and legal needs.

They need these lawyers to review contracts with their suppliers and other non-customers to make sure these contracts protect them.

They need them in order to protect their intellectual property, including trademarks, trade names, trade secrets, and copyrights; and to advise them to obtain patents if they need them.

They need them to provide them with strategic advice (which lawyers with broad business experience are sometimes able to offer);

They need them in order to choose the best type of legal entity for their businesses. (These entities will almost always be LLCs, but in rare cases should be, for example, sole proprietorships, business corporations or limited partnerships.)

If their businesses have two or more owners, they need these lawyers to define, in their LLC operating agreements or their corporate shareholder agreements, these owners’ legal rights and duties toward one another and toward their business.

They need lawyers from Day 1 in order to ensure that their websites are specifically tailored to their businesses and aren’t “standard but wrong.”

 

 

I generally agree with the article. However, I also have significant disagreements with it.

■The article assumes that multi-owner startup businesses have LLC written operating agreements or shareholder agreements. In my experience, all multi-owner businesses need these agreements but most of them don’t have them. Or they have inter-owner agreements from one-size-fits-all companies like LegalZoom or Rocket Zoom. For many startup businesses, Legal Zoom and Rocket Lawyer agreements are a bad idea.

■The article assumes that startup businesses have websites. Many startups should have good websites from Day 1, but many don’t need them, at least on Day 1.

■The article fails to state that startup lawyers should encourage their clients to establish SEP-IRAs or other federally tax-favored retirement plans from Day 1. And they should encourage them to obtain comprehensive estate plans by Day 1 or soon thereafter.

■The article overlooks three key tax tasks that are critical for all startup businesses but especially for those with two or more owners. Startups need lawyers with tax expertise to handle these tasks. The first task is to choose for startups the best federal tax regimen for their businesses. The choices are sole proprietorship taxation or taxation under IRC Subchapters C, K or S. The second task is to structure their businesses to maximize the annual 20% qualified business income deduction potentially available to them under IRC Section 199A. The third, for startups with two or more owners, is to structure their businesses under IRS Proposed Regulation § 1.1402(a)-2 to minimize the owners’ Self-Employment Tax liabilities.

■The article makes no reference to the need of startup founders to structure their businesses to minimize the risk of third-party claims and lawsuits against them. In particular, the article makes no reference to the judicial doctrine called veil-piercing. Startup owners need to understand that doctrine.

■Finally, the article fails to take into account the fact that many people starting new businesses don’t have much money. Startup lawyers should usually advise their clients as follows: If you don’t have much money and if you have to choose between paying lawyers and buying business liability insurance, buy the insurance!

John Cunningham is a lawyer licensed to practice law in New Hampshire and Massachusetts. He is of counsel to the law firm of McLane Middleton, P.A. Contact him at 856-7172 or lawjmc@comcast.net. His website is llc199a.com. For access to all of his Law in the Marketplace columns, visit concordmonitor.com.

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