Small Businesses, especially those that don't qualify for sexy grants, loans or venture capital money, fight a constant battle in their infancy to keep their heads above water in the short term, even if they have a long-term business plan that is profitable. These businesses are the mom-and-pop stores, the bars, the restaurants, the artisans, the contractors and subcontractors, and the low-cost Internet companies that you see surrounding the Pittsburgh area. They struggle first to pay employees, rent, and overhead, and, if the cash flow runs dry after these costs are paid, they too often cannot afford necessary legal services.
Your small business can avoid this problem by working with attorneys to find mutually beneficial, creative means of compensation that you can structure so that you can afford the legal services that you need. Attorneys do not need to work on an hourly basis -- and if you don't think you can afford monthly invoices (or the retainer that an attorney requires for hourly work), then I suggest that you work with a willing attorney to explore the following options.
Consider Compensating Your Attorney with Equity in the Company:
Although it may be a difficult sell, it can't hurt to see if your attorney is willing to work for equity in your business (assuming, of course, that you are willing to give up a slice of your equity). This may be a difficult sell for two reasons. First, in regard to an attorney's reluctance to accept equity, an attorney may think that your business plan is too risky for her to consider equity in lieu of hourly compensation. With a well-presented business plan, you may be able to convince her otherwise.
An attorney may also be reluctant to accept equity for a more subtle reason: Any attorney ought to recognize that she will immediately assume a potential conflict of interest by accepting equity as compensation (i.e. the lawyer's ability to give prudent legal advice may be compromised by her personal stake in the company as a shareholder and her desire to be compensated as such). This conflict is curable -- indeed it would be up to you the shareholders to cure the conflict by waiving it -- but some attorneys may still be uncomfortable at the prospect of the conflict, no matter how vigorously you contend that you are willing to waive it.
You also ought to consider whether you are comfortable with such a conflict and, moreover, whether you are comfortable with giving a slice of equity away to anyone. However, if you are looking for immediate (and competent) legal advice at the company's outset, but you have no means to afford it, this may be the best way of attaining it.
Flat Fees:
Flat fees may not actually save your company much money over paying an attorney on an hourly basis (attorneys will likely set a flat fee for the scope of their work based on their experience in handling a matter on an hourly basis), but it will allow you to plan your budget much more easily. A lot of attorneys purposefully obfuscate the number of hours they estimate they will put into a legal matter, as they don't want to mislead you or be held to any number should a time-consuming problem arise. Requesting a flat fee will hold them to the fee that they quote you and will allow your business to budget for the legal work that will be done. Also, paying upfront as opposed to paying on an hourly basis won't affect your time value of money, as most attorneys will require a retainer that they hold in trust for hourly work anyways (so the money you paid at the outset of a matter for flat fee representation wouldn't be collecting interest for you during the course of your representation had you elected to pay an hourly rate invoiced monthly). Flat Fees are ideal for relatively simple matters like entity creation, simple contract drafting, and simple litigation (litigation matters where the money at stake is under the compulsory arbitration limit in Allegheny County of $25,000).
Find an Attorney Who Will Take a Collection Matter on a Contingency Basis:
Contingency fees are not exclusive to personal injury cases. If your business needs to litigate an unpaid contract and you are having liquidity problems, ask if your attorney will take your collection case on a contingency fee basis. You may be able to negotiate a graded fee that will allow you to pay her less if she is able to reach a quick settlement or more if she must file a law suit. Contingency fees generally allow your company to avoid attorneys fees and the costs of litigation until you successfully recover the debt or the amount in dispute.
There may be even more ways to structure your lawyer's compensation so that you can avoid an hourly rate that your company can't afford (including some hybrids of the above mentioned fee agreements). Each company has a unique situation. Explain yours to your attorney and work together to find an affordable solution to legal problems.
Peter Kurzweg, Esq.
Wednesday, November 26, 2008
Monday, November 17, 2008
Carefully Drafted Contracts Avoid Lawsuits (and usually win them when they don't)
Along with representing my clients in the Pittsburgh area, my legal services occasionally include the opportunity to serve as an arbitrator on various arbitration panels in the Pittsburgh area. For those of you who are not familiar with arbitration, the general premise is that three impartial lawyers sit on a panel, playing both judge and jury, and decide a legal dispute.
While many lawyers dread serving on a panel, I've always enjoyed the opportunity to "play judge" as an arbitrator because it provides me with the chance to observe litigation from a unique angle for many attorneys: that of the fact finder.
The majority of cases that I've arbitrated to date are contract disputes between two small businesses or between a service business and a consumer. And I'm always terrified to see how many small businesses are doing business with horrifically drafted contracts or (suprisingly often) no written contract at all. These cases are almost always the ones that make it to trial or arbitration as opposed to settling, because neither party really knows where they stand legally pursuant to the contract, and neither party wants to concede its position. In cases like these, many times the arbitrators are left to decide the case on a "he-said-she-said" credibility determination or, worse yet, on a "what does 'is' mean" analysis, where the contract is so terribly ambiguous that we can do nothing more than guess as to the intended meaning of terms. These cases are essentially coin flips for the litigants, where, unable to form an opinion on a more rational basis, the arbitrators' moods or personal opinions will come into play.
And while someone will win the coin flip, there are no winners in this type of litigation. Both parties will have incurred legal bills that they would have rather avoided. Both parties will have dealt with the uncertainty in their accounts books for the duration of the litigation. And the companies' employees' time will have been wasted at depositions, trials, or arbitration hearings.
Contract litigation does not NEED to be an inevitable cost of doing business. Instead, it can be avoided by carefully drafted contracts that reflect the parties negotations and a mutual understanding of the terms settled upon during these negotiations.
The next time your business, no matter how small, needs to enter into a contract, HIRE A LAWYER TO DRAFT THE CONTRACT! Consider these points:
* Lawyers know what questions to ask and what outcomes should be considered. They understand what protections the law provides each party and know how to draft the contract to provide or waive these protections.
* It will cost you less in the long term to hire a lawyer to draft your contract! A lawyer will generally bill disproportionately fewer hours in drafting a contract than he will in litigating a dispute arising from it. And, when the parties KNOW concretely what happens pursuant to a contract when certain conditions occur, then they are exponentially less likely to sue one another when a certain condition occurs. They can read the contract and, when it was well drafted, they each know where they stand in relation to one another.
* Lawyers have drafted contracts in the past and they probably can draft this one quickly based on that experience. Not only does this mean that they won't bill you nearly as many hours as you may expect (i.e. it's cheaper than you'd expect), it also means that they will take far less time than you will in attempting to draft your contract. Focus your time and attention on what you do best, managing a business. Allow your lawyer to do your legal work.
* Allow lawyers to take the blame in negotiations! Many small or family businesses are too concerned that they will look "untrustworthy" or "aggressive" if they ask for a written contract. This is CRAZY! Contracts PROTECT relationships; they don't destroy them. Everyone should be on the same page in any business deal. And, if you feel uncomfortable asking for a specific provision, allow your lawyer to negotiate for it. Your customer or vendor can blame your request on your evil lawyer, and won't think any less of you for it.
As always, if you or your Pittsburgh business has a legal question regarding contracts, don't hesitate to contact me for a free consultation. (412) 246-2023
Peter H. Kurzweg, Esq.
While many lawyers dread serving on a panel, I've always enjoyed the opportunity to "play judge" as an arbitrator because it provides me with the chance to observe litigation from a unique angle for many attorneys: that of the fact finder.
The majority of cases that I've arbitrated to date are contract disputes between two small businesses or between a service business and a consumer. And I'm always terrified to see how many small businesses are doing business with horrifically drafted contracts or (suprisingly often) no written contract at all. These cases are almost always the ones that make it to trial or arbitration as opposed to settling, because neither party really knows where they stand legally pursuant to the contract, and neither party wants to concede its position. In cases like these, many times the arbitrators are left to decide the case on a "he-said-she-said" credibility determination or, worse yet, on a "what does 'is' mean" analysis, where the contract is so terribly ambiguous that we can do nothing more than guess as to the intended meaning of terms. These cases are essentially coin flips for the litigants, where, unable to form an opinion on a more rational basis, the arbitrators' moods or personal opinions will come into play.
And while someone will win the coin flip, there are no winners in this type of litigation. Both parties will have incurred legal bills that they would have rather avoided. Both parties will have dealt with the uncertainty in their accounts books for the duration of the litigation. And the companies' employees' time will have been wasted at depositions, trials, or arbitration hearings.
Contract litigation does not NEED to be an inevitable cost of doing business. Instead, it can be avoided by carefully drafted contracts that reflect the parties negotations and a mutual understanding of the terms settled upon during these negotiations.
The next time your business, no matter how small, needs to enter into a contract, HIRE A LAWYER TO DRAFT THE CONTRACT! Consider these points:
* Lawyers know what questions to ask and what outcomes should be considered. They understand what protections the law provides each party and know how to draft the contract to provide or waive these protections.
* It will cost you less in the long term to hire a lawyer to draft your contract! A lawyer will generally bill disproportionately fewer hours in drafting a contract than he will in litigating a dispute arising from it. And, when the parties KNOW concretely what happens pursuant to a contract when certain conditions occur, then they are exponentially less likely to sue one another when a certain condition occurs. They can read the contract and, when it was well drafted, they each know where they stand in relation to one another.
* Lawyers have drafted contracts in the past and they probably can draft this one quickly based on that experience. Not only does this mean that they won't bill you nearly as many hours as you may expect (i.e. it's cheaper than you'd expect), it also means that they will take far less time than you will in attempting to draft your contract. Focus your time and attention on what you do best, managing a business. Allow your lawyer to do your legal work.
* Allow lawyers to take the blame in negotiations! Many small or family businesses are too concerned that they will look "untrustworthy" or "aggressive" if they ask for a written contract. This is CRAZY! Contracts PROTECT relationships; they don't destroy them. Everyone should be on the same page in any business deal. And, if you feel uncomfortable asking for a specific provision, allow your lawyer to negotiate for it. Your customer or vendor can blame your request on your evil lawyer, and won't think any less of you for it.
As always, if you or your Pittsburgh business has a legal question regarding contracts, don't hesitate to contact me for a free consultation. (412) 246-2023
Peter H. Kurzweg, Esq.
Thursday, October 30, 2008
Protecting Your Personal Assets from the Liabilities of the Corporation: Incorporating Isn't Always the Perfect Shield
I have noticed a common misconception among many Pittsburgh small business owners with regard to the legal protection that they receive by incorporating. These business owners, many of whom are the sole-shareholders in their corporation, mistakenly believe that the simple act of incorporating and filing the necessary documents with the state will offer them complete protection from liability for the acts of the corporate entity. This is a false sense of security based on a common misconception about Pennsylvania corporate law that I address in this post.
It is true that perhaps the most fundamental advantage in creating a corporation for your small business (as opposed to forming a partnership which is often better for tax purposes) is the protection from personal liability that the corporate identity provides to shareholders. The state allows the corporation to be its own legal entity with its own legal liabilities, thus protecting those persons who own the corporation from personal liability. But Pennsylvania, like many other jurisdictions, allows plaintiffs suing a corporation the opportunity to "pierce the corporate veil," thereby holding the shareholders themselves liable if certain circumstances exist with respect to their relationship to the corporate entity. In other words, a plaintiff can potentially go after your personal assets (your house, your bank accounts, etc.) for the negligent acts of the corporation.
The circumstances in which Pennsylvania allows plaintiffs to pierce the veil are multiple, but the most common three factors that I have seen courts use against the shareholders of a corporation are the following: commingling of personal and business funds, undercapitalization or underinsuring of a small business, and failure to follow corporate formalities. Courts, when faced with a plaintiff who names the shareholders of a small business individually for the liabilities of a corporate act, will look to see if any or all of those factors exist in the shareholders relationship to the corporation, and, if they do, will often allow the plaintiff to proceed in the litigation against the individual shareholders.
How do you protect yourself? Don't allow your relationship with your small business to meet any of those three factors.
1) Never, EVER mix your business funds with your personal funds. Courts will look at this factor first, and if it exists, may be prone to believe that the corporate existence is nothing more than a sham to protect an individual from liability. Keep your accounts concrete and separate -- do not deposit checks owed to your business into your own bank account.
2) If your business has physical property that could somehow cause an injury or involves labor that could cause injury, then be sure that you are well-capitalized and well-insured to be able to compensate an injured individual (if you are a contractor or construction firm, you will obviously need more insurance than a internet start-up). Keep up-to-date liability insurance on your real property. Make sure you carry general liability insurance. Be sure that your business is capitalized well enough that it can keep up with its contracts and debt payments.
3) Observe corporate formalities (even when it seems silly to do so). A good business, even one with a sole shareholder, keeps corporate meetings, elects board members (even if there is only one) and keeps minutes. Closely held businesses and sole-shareholder corporations may find this a waste of time -- but dotting the i's and crossing the t's keeps shareholders safe and makes for responsible businesses that can keep up with their debts and meet legal liabilities.
As always, if you are a small business in the Pittsburgh area in need of legal advice, call my office for a free consultation. (412) 246-2023.
Peter H. Kurzweg, Esq.
It is true that perhaps the most fundamental advantage in creating a corporation for your small business (as opposed to forming a partnership which is often better for tax purposes) is the protection from personal liability that the corporate identity provides to shareholders. The state allows the corporation to be its own legal entity with its own legal liabilities, thus protecting those persons who own the corporation from personal liability. But Pennsylvania, like many other jurisdictions, allows plaintiffs suing a corporation the opportunity to "pierce the corporate veil," thereby holding the shareholders themselves liable if certain circumstances exist with respect to their relationship to the corporate entity. In other words, a plaintiff can potentially go after your personal assets (your house, your bank accounts, etc.) for the negligent acts of the corporation.
The circumstances in which Pennsylvania allows plaintiffs to pierce the veil are multiple, but the most common three factors that I have seen courts use against the shareholders of a corporation are the following: commingling of personal and business funds, undercapitalization or underinsuring of a small business, and failure to follow corporate formalities. Courts, when faced with a plaintiff who names the shareholders of a small business individually for the liabilities of a corporate act, will look to see if any or all of those factors exist in the shareholders relationship to the corporation, and, if they do, will often allow the plaintiff to proceed in the litigation against the individual shareholders.
How do you protect yourself? Don't allow your relationship with your small business to meet any of those three factors.
1) Never, EVER mix your business funds with your personal funds. Courts will look at this factor first, and if it exists, may be prone to believe that the corporate existence is nothing more than a sham to protect an individual from liability. Keep your accounts concrete and separate -- do not deposit checks owed to your business into your own bank account.
2) If your business has physical property that could somehow cause an injury or involves labor that could cause injury, then be sure that you are well-capitalized and well-insured to be able to compensate an injured individual (if you are a contractor or construction firm, you will obviously need more insurance than a internet start-up). Keep up-to-date liability insurance on your real property. Make sure you carry general liability insurance. Be sure that your business is capitalized well enough that it can keep up with its contracts and debt payments.
3) Observe corporate formalities (even when it seems silly to do so). A good business, even one with a sole shareholder, keeps corporate meetings, elects board members (even if there is only one) and keeps minutes. Closely held businesses and sole-shareholder corporations may find this a waste of time -- but dotting the i's and crossing the t's keeps shareholders safe and makes for responsible businesses that can keep up with their debts and meet legal liabilities.
As always, if you are a small business in the Pittsburgh area in need of legal advice, call my office for a free consultation. (412) 246-2023.
Peter H. Kurzweg, Esq.
Tuesday, October 28, 2008
Why Your Business (No Matter How Small) Needs a Lawyer for its Formation
When you're first starting a new business, it's tempting to attempt to cut costs wherever possible, especially when you're starting a new business with less than ideal capitalization. Unfortunately, as I have seen all too often in my experience representing my clients, one of the first places small businesses try to cut start-up costs is in avoiding legal fees in the creation of their business. These businesses instead rely on one of the countless versions of the "do-it-yourself" legal books sold to starry-eyed entrepreneurs trying to cut-costs in the short term, and already reaping long term windfall profits in their own minds. Many of these businesses do indeed attain some level of success, only to walk into my office for the first time with a costly legal crisis that could have been avoided had they hired me in the outset of their business.
So what does a good lawyer do when he's starting your company that you wouldn't do yourself?
Simply put, a good lawyer does four things: a good lawyer 1) listens to your business plan, 2) asks you questions that you have not thought to ask yourself, 3)creates consensus and understanding among all of the principals involved in the creation of the company, and 4) translates all of these concepts into sound legal documents that encompass and protect the parties' expectations and relationships and provide for both the possibility of the company's growth or the company's termination.
I'll further explain these points one at a time.
1. A good lawyer listens: When you and your business partners first visit my office for a free consultation, the first item of business will be for you to explain to me what it is that you want your business to do, how you wish to do it, and what you expect from each other in meeting your business goals. This gives me an overall sense of what type of business you wish to create and what type of personalities are going to be involved. After passively listening and taking notes, I then become active in the process.
2. A good lawyers knows what questions to ask: The most central role of the lawyer in helping form a new business is to make sure that the articles and bylaws (and other documents depending on the choice of corporate entity) of the business reflect the intentions and expectations of the principals. And to create such documents, the lawyer not only must thoroughly understand these intentions and expectations himself, but he must also make sure that the principals fully understand their own intentions and expectations. In other words, many times a good lawyer must ask the questions that the principals have not thought of, or are afraid to discuss. From my experience, there are two things that are true for almost every small business when first getting off the ground: the principals rarely discuss the possibility of the business's failure and the principals rarely discuss problems that they have with each other, or their role. If the business plan isn't working, we must discuss how the principals wish to close the business's doors, if there is an escape plan for the individual shareholders if other shareholders wish to carry-on, the priority in which principals will be paid or reimbursed from the sale of any assets, and a laundry list of other rather depressing scenarios that new business partners don't wish to discuss with each other because they are, frankly, rather socially uncomfortable. Which brings me to the third point.
3) A good lawyer gets all of the principals on the same page: In small, closely owned businesses, shareholders often double as directors and officers. There are inherent conflicts that can arise from this situation, which are best remedied by careful legal planning at the outset of the formation that will be reflected in the By-Laws or Operating Agreement of the company. Principals also need to know what their expectations of each other are. If a shareholder is putting sweat equity into the corporation, do the passive investors who are only investing capital expect him to have greater or lesser equity than themselves? How will the shareholders and directors control the company? How is voting to be conducted? Will minority shareholders have a voice in electing directors? Again, there are a laundry list of questions, the answers to which highly affect the principals and the shareholders relationships to each other, that if not addressed until a problem arises can become very costly to the corporation.
4) A good lawyer is an interpreter: Finally, at the end of our meeting, if the client chooses to retain me, I ultimately act as an interpreter who takes all of the input that I received from the client, and generates legal documents that reflect this input, ultimately reflecting the intentions and the expectations of the parties with regard to what they want to happen if the corporation is successful and what they wish to happen if the corporation is not successful. It is these documents, which have been custom built for your business (and not generated by a computer program or form book), that will provide your business with legal stability down the road.
All of this help may look expensive, but it can be affordable through the use of flat fees or discounted-rate billing. For a free consultation for your small business, please visit my website or call (412) 246-2023 to speak with me and set up an appointment.
Peter H. Kurzweg, Esquire
So what does a good lawyer do when he's starting your company that you wouldn't do yourself?
Simply put, a good lawyer does four things: a good lawyer 1) listens to your business plan, 2) asks you questions that you have not thought to ask yourself, 3)creates consensus and understanding among all of the principals involved in the creation of the company, and 4) translates all of these concepts into sound legal documents that encompass and protect the parties' expectations and relationships and provide for both the possibility of the company's growth or the company's termination.
I'll further explain these points one at a time.
1. A good lawyer listens: When you and your business partners first visit my office for a free consultation, the first item of business will be for you to explain to me what it is that you want your business to do, how you wish to do it, and what you expect from each other in meeting your business goals. This gives me an overall sense of what type of business you wish to create and what type of personalities are going to be involved. After passively listening and taking notes, I then become active in the process.
2. A good lawyers knows what questions to ask: The most central role of the lawyer in helping form a new business is to make sure that the articles and bylaws (and other documents depending on the choice of corporate entity) of the business reflect the intentions and expectations of the principals. And to create such documents, the lawyer not only must thoroughly understand these intentions and expectations himself, but he must also make sure that the principals fully understand their own intentions and expectations. In other words, many times a good lawyer must ask the questions that the principals have not thought of, or are afraid to discuss. From my experience, there are two things that are true for almost every small business when first getting off the ground: the principals rarely discuss the possibility of the business's failure and the principals rarely discuss problems that they have with each other, or their role. If the business plan isn't working, we must discuss how the principals wish to close the business's doors, if there is an escape plan for the individual shareholders if other shareholders wish to carry-on, the priority in which principals will be paid or reimbursed from the sale of any assets, and a laundry list of other rather depressing scenarios that new business partners don't wish to discuss with each other because they are, frankly, rather socially uncomfortable. Which brings me to the third point.
3) A good lawyer gets all of the principals on the same page: In small, closely owned businesses, shareholders often double as directors and officers. There are inherent conflicts that can arise from this situation, which are best remedied by careful legal planning at the outset of the formation that will be reflected in the By-Laws or Operating Agreement of the company. Principals also need to know what their expectations of each other are. If a shareholder is putting sweat equity into the corporation, do the passive investors who are only investing capital expect him to have greater or lesser equity than themselves? How will the shareholders and directors control the company? How is voting to be conducted? Will minority shareholders have a voice in electing directors? Again, there are a laundry list of questions, the answers to which highly affect the principals and the shareholders relationships to each other, that if not addressed until a problem arises can become very costly to the corporation.
4) A good lawyer is an interpreter: Finally, at the end of our meeting, if the client chooses to retain me, I ultimately act as an interpreter who takes all of the input that I received from the client, and generates legal documents that reflect this input, ultimately reflecting the intentions and the expectations of the parties with regard to what they want to happen if the corporation is successful and what they wish to happen if the corporation is not successful. It is these documents, which have been custom built for your business (and not generated by a computer program or form book), that will provide your business with legal stability down the road.
All of this help may look expensive, but it can be affordable through the use of flat fees or discounted-rate billing. For a free consultation for your small business, please visit my website or call (412) 246-2023 to speak with me and set up an appointment.
Peter H. Kurzweg, Esquire
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