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Tips to help start-ups avoid legal headaches

Janelle Chorzempa, an attorney with Marvin, Chorzempa & Larson, offers some advice for start-ups. She specializes in contract negotiation and litigation, personal injury, estate planning and business law for architecture and design clients.

• Invest adequate capital into the firm to cover periods of low cash flow – equivalent of two to three months of estimated firm costs (including salaries).
• Properly license the firm with the appropriate design boards and states where the firm will do business.
• Choose a business entity that will provide the best protection and benefits.If possible, never choose to be a sole proprietor or partnership.
• Always procure professional liability insurance before a project starts.
• Research potential clients thoroughly.
• Interview attorneys and accountants who can assist with the formation of a business and who will be available when needed.
• Develop a unique contract and proposal forms and letters.

Engineer Scott Wallace worked at the same large consulting firm for 23 years. When a change in leadership meant the firm would close its smaller market offices, Wallace didn’t want to walk away from his established practice. He instead kept five employees and launched Wallace Group Inc. in April 2010.

“We’re doing the same thing we’ve always done, but with a different corporate structure,” Wallace said.

Layoffs and lack of work at larger companies have prompted seasoned architects and engineers to dive into the tumultuous waters of founding their own firms. The struggle to stay afloat involves securing a client base and fishing for future projects, but new business owners say start-up firms have the best chance to succeed when they obtain proper legal guidance and carefully navigate lawful options – while avoiding potential mistakes.

Wallace felt overwhelmed by the idea of handling legal issues associated with starting and running a small business, and decided to seek professional legal counsel. Dan Knox, an attorney with Schwabe, Williamson & Wyatt, said trying to begin a firm without such assistance is like trying to wire a house without electrical expertise.

“(Start-ups) need to form a relationship with someone who is interested in their practice,” said Knox, who has 33 years of experience representing architects and engineers. “I root for my architecture clients to get the next assignment.”

Most new firm owners spend their first years trying to stretch every penny. Doling out money for legal advice may seem like a waste of limited resources, but lawyers say obtaining assistance early on can pay off in the long run. Once a firm is up and running, it usually can get by with piecemeal assistance and may need to seek legal counsel only once a year, according to Janelle Chorzempa.

“Our goal is to educate the client to be able to handle a lot of the negotiations on their own,” said Chorzempa, managing attorney at Marvin, Chorzempa & Larson, a Portland firm that specializes in serving the design and construction industries.

Until firms reach that point, however, attorneys can help clients navigate what may feel like a seething ocean of legal issues: nitpicky registration requirements, decisions about ownership stakes, myriad insurance options, the right – and wrong – ways to write and review contracts.

Early in the process, start-up stakeholders need to choose a type of corporate entity. There are notable differences between a sole proprietorship, a professional corporation, a legal liability company and a partnership.

Terry Buchholz, for example, started her engineering firm, Integrated Water Solutions, as a sole proprietorship. Eighteen months later, it’s now a legal liability company because the status suited the small firm’s business plan better.

The legal liability company option is a common choice, Chorzempa said. Not only is an “LLC” easier to operate, but its owners are afforded corporate liability protection for their personal assets from business debts. An LLC also has the same tax advantages as a partnership or “S corporation.”

Chris Spurgin and Francis Dardis, who founded Stack Architecture and began practice in April 2010, said they ruled out the “partnership” model for their firm based on the exposure to unlimited liability for business debts.

The LLC and S corporation models are similar in that they聽are both pass-through taxation entities, but Spurgin said they decided on the S corporation model for Stack because of the benefits聽that would come as the firm grows.

While choosing an entity model is an important first step, both Knox and Chorzempa caution that legal missteps and lack of contract experience can lead to the demise of a fledgling firm. Wallace said legal counsel has helped him sidestep potential contract problems.

“There’s a big learning curve in making the transition from just doing technical work to actually understanding and structuring contracts and agreements to protect the interest of your firm in this litigious society,” Wallace said.

The smaller the project, the less complex the contract, but even standard contracts from a group or organization like the American Institute of Architects may need editing at times, Spurgin said. An attorney always reviews Stack Architecture’s larger contracts.

With so much opportunity for misunderstanding, Knox recommends that contracts include what a firm will do and also what it won’t.

“Every third dispute I handle, at least some major part of the reason that people start squabbling is that at the beginning of the relationship, the client and the design professional didn’t commit to writing what the design professional was hired to do,” Knox said.

While specifics may vary from project to project, any good contract includes a one- or two-page set of standard terms and conditions, terms of payment, an agreement on limitation of liability, agreement that there will be no consequential damages and a dispute resolution clause, Knox said.

Although making sure a new firm’s legal ducks are all in a row can be time-consuming, Buchholz said strong legal advice can, at the very least, create a solid foundation for a firm starting out in an unpredictable economic climate.

“If you make sure that you have all the right things in place, you can be successful,” Buchholz said. “Starting a business shouldn’t be as scary as people think.”