Corporate Formation Questions: Pay Me Now or Pay Me More Later

It cost less to stay out of trouble then to get out of trouble.

I get calls from people who want to start companies that are developing and launching new products or are in the service business. It can be anything from a car wash to manufacturing. Most of my clients are small startups, some of them literally working out of a garage. Usually, these clients or potential clients are looking for help with set up. They want to know “do I need and L.L.C. or a corporation or can we just be partners.” It is much easier and cost effective to deal with the issue before it becomes a problem. Unfortunately, before they get to me, some have made some pretty serious mistakes. Coming to me after the event makes it difficult, if not impossible, for me to help them.

To avoid some of the more serious legal issues that I see on a fairly regular basis, here are some things you should consider. These issues do not necessarily come up in all cases but you should be aware of them so you can avoid them if at all possible

Many individuals and small companies think that cannot afford to use a lawyer and to use contracts. That is when the most expensive mistakes happen. You need to understand that “contracts” in general terms covers a lot of legal territory.

For instance, a contract between the partners, or a buy sell agreement between the shareholders or an operating agreement between the members of an L.L.C. are all contracts. These are essential documents to set the very basic terms of what you are going to do and how you are going to act among yourselves. Friends for life can be bitter enemies over a misunderstanding in business.

Contracts can save you a lot of time and trouble, if handled correctly.   A well drafted contract can save you when disputes and arguments come up. A poorly drafted contract can mean the demise of your company. A contract does not have to be as long War and Peace to be valid or considered well drafted. Sometimes, all you need is a short, simple agreement that spells out the obligations and responsibilities of the people signing the contract.

Something people often forget, e-mails and text messages can form the basis of a contract. I always caution clients be careful what you e-mail out or text out. You could be offering a contract and if accepted you could be bound.

At the end of the day, a lawyer before the event cost less than after the mistake.

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