Written by: Tyler Blaser,Esq.
Part I: Protecting You & Your Business from Legal Liability
The Problem. As a young lawyer growing a business transactions legal practice, one of my toughest challenges is helping entrepreneurs in our community understand the cost-benefit value of consulting with a lawyer to plan and prevent legal problems, rather than contacting a lawyer for the first time in reaction to those problems when they happen. And, make no mistake, Murphy’s Law requires that these problems will happen – a fact every business owner will confirm.
While our law firm, Vanderpool, Frostick & Nishanian, P.C. (“VFN”), represents both national and international businesses, most of my personal clients are friends, family, and other close professional connections throughout the Northern Virginia area who have stricter budget constraints. One advantage stemming from these personal relationships is the opportunity to engage in intimate, frank discussions about how they operate their business, calculate and manage risk, and explore client perception of when they believe it is worth their capital to engage counsel. In having these conversations, entrepreneurs will tell me that they would consult with a lawyer more often, but the front-end cost ultimately leads them to incur risk without counsel.
Contrasting Approaches. While this approach may be common, and even understandable, any business lawyer can attest to the fact that this outlook is flawed from a cost-benefit analysis perspective, both in terms of avoiding future liability and securing payment of amounts receivable. This article explores the cost-benefit of obtaining legal advice as it relates to avoiding future liability while considering two hypothetical young entrepreneurs beginning small businesses:
Owner A wants to start a business and keep it afloat, but like many, faces financial constraints and is therefore cost-conscious. Owner A assumes that lawyers are a waste of money but runs into some issues with setting up its business entity. After some thought, Owner A sets up a free initial consultation with business counsel but declines representation to avoid paying the required hourly rate. Owner A decides to go it alone, begins business operation, obtains an SBA loan, executes a commercial lease, and agreements with customers and vendors, all without counsel.
Owner A’s business is thriving until it is served with a lawsuit filed by a disgruntled customer, seeking $100,000 in damages for work that the customer believes needs to be redone, plus another $200,000 in statutory damages and attorney fees, due to non-compliance with Virginia Consumer Protection Act (“VCPA”). Additionally, the customer filed a complaint with the Department of Professional and Occupational Regulation (“DPOR”), putting Owner A’s professional license at risk of revocation. Because Owner A did not follow corporate formalities in forming and operating its business, Owner A’s personal assets, including its home, vehicle, investments, and personal bank accounts are all at significant risk.
Owner A knows it cannot navigate the legal process to deal with complex legal issues of this magnitude and decides to engage counsel to defend this lawsuit. Luckily, Owner A is able to successfully defend the lawsuit, but in getting there, must pay its attorney ~$50,000 to prepare for trial, plus another ~$20,000 for related consultants and experts (both conservative estimates). Despite Owner A successfully defending the customer’s civil claims, DPOR suspends Owner A’s professional license due to violated regulations. Owner A is now ~$70,000 in the hole, without a professional license, or the income from its business, cannot pay its loan or rent payments when due, and eventually must file for Chapter 7 bankruptcy.
Owner B starts in the same position as Owner A, also facing financial constraints, and is also cost-conscious. Owner B knows it does not have the expertise or time to devote to consumer protection or professional licensure compliance (or other legal complexities), so Owner B sets up a free consultation with VFN business counsel. After consultation, Owner B engages counsel to prepare its business entity’s articles and organizing documents. The lawyer provides these services to Owner B, and in related discussions, recommends Owner B forward its customer agreement for review. The lawyer recommends Owner B amend its customer agreement to comply with VCPA and DPOR requirements. The lawyer makes appropriate changes and counsels Owner B on the importance of following corporate formality.
Owner B pays a total of $2,500.00 for these services, but in doing so, avoids significant legal (and financial) exposure. If a lawsuit were filed against Owner B, its attorney is positioned to negotiate or dismiss any claims quickly, avoiding cost for trial prep, and fees for consultants and expert witnesses. Incidentally, Owner B also sleeps well at night, knowing its attorney is losing sleep on its behalf.
The Lesson. While I have intentionally simplified these hypothetical scenarios for contrast, any successful business owner can confirm the lesson they offer invest a little amount now to engage legal counsel and manage risk, to avoid major liability and expense down the road. You will thank yourself. The issues discussed in this article focus on business formation, corporate liability, and regulatory compliance of customer agreements, however, consultation with a business attorney is similarly valuable in the context of
- purchasing a business;
- raising capital and extending or obtaining financing;
- buying, selling or leasing commercial property;
- negotiating and navigating agreements with vendors and customers;
- drafting corporate governance agreements related to decision making, distributions, and other ownership rights; and/or
- selling your business’ equity or assets, when that time may come.
Consult with an Experienced Small Business Lawyer. VFN is one of the most highly regarded law firms in Northern Virginia, with seasoned and well-connected attorneys who can help you in any of these areas. While we also have experienced litigators who can help you in the event of a dispute, we would always prefer to help you avoid legal problems before they happen.
Remaining in contact with an experienced business attorney is the most simple, sure-fire way to avoid legal liability, and the resulting financial stress that comes with it. By doing so, you can make sure your business is in a position to thrive and will continue to do so moving forward.
This blog post is not intended to provide legal advice or substitute for the advice of legal counsel with respect to specific facts and situations. See disclaimer