Consulting with an attorney before opening a new business may seem to be a pricey indulgence for a startup, but business attorneys spend a great deal of time straightening out early mistakes.

Apparently innocuous issues such as signing building leases, drawing up sales contracts and forming partnerships can be done without the help of a lawyer, but often create problems.

Most startups are pressed for money and often incorporate themselves without the aid of legal counsel, says Donna Flammang, who practices business law with Taft, Stettinius & Hollister LLP's Cleveland office.

"They don't bother consulting with an attorney because they think, ‘I'm small and nobody's going to bother me now because what are they going to get if they sue me?' " Flammang says. "But you have got to realize that [the potential legal liabilities created by not consulting with an attorney] are hanging out there, and if you go on to become successful, people can come back and collect later on."

Frank Chaiken, partner with Thompson Hine LLP in Cincinnati, says fledging businesses might be lured by low-cost incorporation filings and Internet advertisements, but those can prove costly mistakes in the long run.

"They may go to Web site that says, ‘We will incorporate your business for $29.99,' and all they will do is file some basic articles of incorporation for a corporation or articles of organization for an LLC," Chaiken says. "There are a great number of other things that you have to do in order to properly set up that type of a business organization. If they don't go to an attorney, people may not know all of those next steps that have to be taken and they might wind up with something that you would refer to as a defective entity."

Kathleen H. Ransier, an attorney in the corporate and finance group at Vorys, Sater, Seymour & Pease LLP in Columbus, admits it can be a tough sell convincing a cash-strapped business that attorneys provide a service worthy of the sometimes hefty fees.

"But my pitch when I talk to people initially would be that the attorney is sort of a repository of all the knowledge and experiences of lots of different clients and businesses," Ransier says.

For instance, the skill set of an attorney includes interpreting the meaning of documents.

"The plain or so-called common sense meaning of words and phrases may not be the meaning that would be attributed to those words or phrases by the legal system or a lawyer," she says.

"Individuals that own and operate the business might easily sign a document, therefore, without understanding the true meaning of their obligation; the requirements that that agreement imposes on them; the circumstances in which that agreement is breached; or the consequences of the breach," Ransier says. "That happens so frequently."

The main importance of setting up a corporate entity or a limited liability company is for limited liability protection, meaning that the liability of the business is limited to the amount of the investment that the owner puts in, in the form of share capital or LLC capital. That capital is then held separate from their own personal assets.

The Fine Print

There are key documents signed by the owner of nearly every business that require an attorney's consultation, Flammang says. The business ownership can pay the attorney an hourly rate when dealing with those documents to ensure they are done in a quality manner, she says.

A number of contracts companies enter into early in their business lives are significant, says John Saada, a corporate attorney with Jones Day in Cleveland who works with small- and medium-sized businesses.

"Even things like a lease of a building, those are the types of things it's important to have a lawyer look at because they have a long-term impact," Saada says. "If it's not done right to begin with you're going to be stuck with it for a while."

The use of pre-prepared paperwork to form corporations and partnerships is another area where new companies get into legal difficulties, Saada says. Such agreements are legally binding but often don't offer business owners the protection from personal liability they are seeking, he says.

"It's really easy to form a company; anyone can do it," Saada says. "There are services that will do it for $50, but there's more to protecting yourself from liability than just forming a company. You need to follow corporate formalities and, if you don't, creditors can look through a corporation and say, ‘You did form a company, but you treated the company like it was your own personal business.' "

There's a theory called "piercing the corporate veil," in which a court can find personal liability, Saada says, which occurs even if an owner has properly formed the company but has not followed corporate formalities.

In cases where a court pierces the corporate veil, owners of a limited liability company can be found legally liable for that company's debts because, despite having filed the proper paperwork with the state, they treated the business like it was their personal property and not the shareholders'.


Another often-committed business sin is an entrepreneur's assembling a business plan on his or her own, says David Hunter, an attorney with Brouse McDowell's business practice group in Akron.

While this may seem trivial, businesses in a cash pinch can sometimes make foolish errors through a lack of planning that could leave owners paying for a business' obligations, even if it were incorporated, Hunter says.

For example, businesses with cash-flow issues often postpone paying their Social Security and Federal Insurance Contributions Act taxes with the intention of repaying them in better times, Hunter says. However, should the business be unable to pay those taxes in the future, the ownership will still be held personally liable for their payment, he says, even if the business has been incorporated.

"So if you get into a big hole you can't say, ‘Hey, I wasn't conducting business as John Doe, I was conducting business as John Doe, Limited-Liability Company.' It doesn't make any difference," Hunter says. "Also, if you're encumbered with other obligations that suggest a bankruptcy filing might be appropriate, those types of obligations are non dischargeable, so they're with you forever."

Establishing Rules

Business owners also often fail to establish rules that dictate what happens in different scenarios, such as when an owner is incapacitated or caught stealing, Saada says.

"I think it's very important early on to have an agreement among the shareholders that talks about what happens in those situations and that restricts a shareholder from selling shares," Saada says. "That way a shareholder can't just sell his or her shares to someone that the others don't want to do business with. ... Those are the kinds of things that you need to put into that contract, otherwise there's no rules to govern what happens."

It's also important for a business, especially if there are two or more owners, to outline and agree to what the various rights and responsibilities are as to the allocation of profits and losses, roles and responsibilities within the business and, most importantly, what happens when an owner want to transfer shares or get out of the business.

In terms of its relationships with employees, businesses should protect their property and confidential information, Chaiken says.

"It should be clear that the intellectual property created in the course of the business belongs to the company and not to the employee," Chaiken says. "The company should also make provisions that employees will not misuse or disclose confidential information."

Flammang often sees businesses that sell products or services but have not worked out terms of sale with an attorney. In a situation where a buyer takes a seller to court claiming a warranty was not honored, the court will apply the buyer's warranty conditions if the seller does not have them in place.

No Stupid Questions

If a business owner has questions about whether he needs an attorney, he should at least ask. Entrepreneurs should sit down with a lawyer to see if legal representation is necessary, Hunter says, adding most lawyers will not charge for such meetings.

"If they're contacting us and it's way too early for them to think about discussing matters with a lawyer or for us to be getting together, we'll tell them," Hunter says. "More times than not, we have people that have waited too long or have taken some steps that are irretrievable and then it's harder to provide assistance.

"My favorite is when someone has already signed a contract or a lease and then wants us to come in and take a look at it," Hunter says. "They ought to come to us and say, ‘This is what's being presented to me and, before I execute, could you take some time to review it and give me your sentiments?' "

The little bit of expense up front can save you in the long run on contracts that can be costly messes to straighten out, not to mention bringing the sense of relief a legal OK can bring.

"Once you get in the habit, as a business, just the good feeling that you get from having your attorney look at it and say everything is OK with this," says Richard Wolff, partner with Spengler Nathanson PLL in Toledo. "That's usually worth the money."

Businesses should not overlook the need for an employee handbook to establish rules and precedents.

"Especially in these days when employees tend to be fighting back and going to court if they feel they are treated improperly," Wolff says. "It's a lot more defensible and you are in a much better position, as an employer and as an owner, if you have a policy in writing to defend against that type of challenge."

Chrissy Kadleck contributed to this story.