Micro-ISV Tip #8: Legal Mysteries
I had occasion recently to delve into the mysteries legally defining a micro-ISV in the
Patrick Cunningham, Attorney at Law, runs his solo attorney practice from next to the old Pacific Stock Exchange in downtown
Q. What can an attorney do for someone starting a micro-ISV that they can’t due online today?
A. Well, I think the counseling aspect is critical. People don’t want to hear this, but you can give a macro view because of your experience whether the business they are proposing to do really make sense compared to his other clients, some of whom have made money, some of whom have lost money. He can maybe give you some initial input on that. Then of course one of the critical things that any attorney can do is the tax angle. You can’t make a business decision without considering the tax consequences. A lot of business owners don’t think about that when they are just starting.
Another thing related to the taxation is what type of business entity is going to make the most sense for you.
Q. Let’s take the issue of partnerships. On several occasions I’ve seen a couple guys get together to start a software company only to have it turn into a mess. One partner wants more, another wants out, etc. What can an attorney do to help?
A. They can create a partnership agreement that will really work. And the first step is to have a written agreement. A lot of people don’t. But if you have a written agreement, then you have to think about what you’re going to write in that agreement and hopefully you think it through very clearly.
But even if you have a very, very simple written agreement, at least you have the basics of an agreement between the two of you that’s signed and when you do fall apart – as 9 out of 10 will – you’ve got a place to work from that’s not a hundred miles from where the other guy is coming from.
Q. Do attorneys often negotiate partnership agreements between partners?
A. They can, but in a very small setting what often happens is two partners go to an attorney and say “We want to become partners, can you draw up the papers?” and the attorney can’t negotiate because which side is he going to be on? He can only ask them why don’t you two come up with an agreement and I’ll help you make that into a legal document.
Q. What else can an attorney do for an aspiring young business?
A. Number one, is make sure there’s a written agreement. Make sure it’s in the proper form. Make sure they have the proper business permits. They can introduce you to an accountant, which will probably be helpful to organize your accounting records, at least get a structure set up. Familiarize you with the laws a little bit about the laws of trademark and trade names so you don’t run afoul there. Talk with you about accounting and taxation. Talk to you about insurance for your business; maybe introduce you to an insurance broker or agent.
Q. Should small businesses find small law firms or go with big law firms?
A. Well, probably the very large law firms don’t want the very small business and the small businesses can’t afford a larger law firm, for the most part. I do think for the smaller entrepreneur having a solo practitioner or a small law firm – fewer than 10 attorneys in the law firm – would be better. You would have a more personal relationship with your legal counsel. And you can afford the rates a little better. It’s a little cheaper, maybe a lot cheaper.
Q. Should that business owner find a lawyer when they need them or before they need them?
A. Absolutely before you need them. If you have a lawyer who helps you with the business when you start it – and you should budget for legal when you start your business – when a problem arises you’ll have someone you can call who may be able to help you directly with the problem or refer you to someone who can.
So you’re going to have that kind of security blanket, that kind of member of the team.
Q. If someone you knew where going to start a micro-ISV, and they came to you and asked, how do I find a good lawyer, what would you tell them to do? Just pick a name in the phone book?
A. I think the first step is to contact a lawyer, maybe someone you have some kind of relationship with, a personal or family relationship, or some pre-existing relationship, and get a referral. Most lawyers do have a network of acquaintances in different areas of law.
Q. Okay, so let’s say you find John Smith, Esquire. What would the lawyer expect you to ask?
A. The lawyer would expect you to ask if he had a firm résumé; some of the smaller firms do have them, some do not. You could ask them about any specializations they have; the state bar specializations in different areas. You can ask them what additional degrees they may have beyond their law certificate. You can ask him what percentage of his work is dedicated towards business organizations. You might even ask them if he can name to you any of his shall we say model clients.
Q. Okay. Any other advice you’d give to someone starting a micro-ISV?
A. Well, one piece of advice I have heard is I think valid is before you hire your first employee is have an employee manual. Oh, and this is critical if you do nothing else, before you hire your first employee have workers’ compensation insurance set up before the person sits in his chair, or her chair, so that she’s insured for worker’s comp.
If you have an employee – or anyone working for you for that matter, who you may call an independent contractor – and that person trips over a chair in your office, and say sustains a brain injury, you’re facing catastrophic financial repercussions, if you’re not insured for comp. If you are insured for comp, it’s not a problem for you. Worker’s comp insurance is not as expensive as you think.
Q. I’m confused. I thought someone had to be an employee to be covered by worker’s comp.?
A. In California the law presumes that someone doing services for another is an employee. And then it’s the burden of the employer to prove that the person is not his employee, but an independent contractor. Generally speaking, it’s difficult to carry the burden when you’re up against the presumption of employment.
It’s going to be heard in the Workmen’s Compensation Board. With that presumption of employment and in fact the Comp Board is required to let us say favor the employee in a comp case. Its very likely that the person you thought was just your part-time independent contractor is in fact your employee.
Q. Gotcha!
A. Yeah. And suppose you have a part time independent contractor doing some work for your firm, and he’s working for you 20 hours a week on a regular basis, but he’s an independent contractor, that’s the way you arrange it. And you send them down to Radio Shack to pick up a computer cord. And on the way, he hits a pedestrian in the crosswalk. And then you find out he doesn’t have insurance. You’re going to be sued. And again, you’re probably going to lose, because of the presumption of employment.
Q. Well, these are the sort of things it might be good to know about before they happen.
A. Before it happens. Before it happens. You’re in business to make money, right?
Q. Right!
A. And you want to make money, but at the same time you don’t want to lose money, lose your financial future. So you have to approach it with some degree of caution.
Q. So this is why you want to have someone – I’m not going to say adult supervision – but somebody who knows what they are talking about.
A. Yes, absolutely.
Thank u, nice interview!
Posted by: Lorenzo | September 07, 2005 at 05:43 AM