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Don't Zoom Through Legal Decisions

Don’t Zoom Through Legal Decisions for Your Business

June 26, 2015 Douglas Davis

Starting a business is a complex process where business relationships, partnerships, legal and tax issues must be taken into account.

When two or more people enter into a business relationship, they each bring their own unique talents, resources, ideas, and needs to bear. Having these different aspects in a business is critical to its success, but if each person and resource is not property covered by smart legal contracts and agreements, they can ultimately end in dispute.

I often see this played out when reviewing corporate bylaws, shareholder agreements and operating agreements that have been provided to me from clients who cut corners by using an internet “lawyer” or online legal resources such as LegalZoom as an alternative to experience and sound advice. To date, this choice has never once ended up well in the partner disputes and litigation with which we have dealt.

So why do otherwise smart and savvy business owners choose to “zoom” through legal documents and agreements? Up front, the cost may be lower, but when they find themselves in a legal dispute and realize the contract they found online did not cover all their bases, the end cost can be significant, not to mention the costly amount of time it takes to settle these issues.

Often online resources and internet attorneys provide documents that contradict themselves or have fundamental flaws that can intensify a conflict and create issues, rather than solve them. However, if you choose to use LegalZoom or another online legal service, ask yourself these questions before committing to a document or form:

  • Does the form provide a solution when a member (partner) stops contributing his or her services, or refuses to contribute additional capital to the business, or refuses to co-guaranty a line of credit or lease?
  • Does the form provide for distributions for taxes when partnership or S corporation tax status is elected, and the members receive phantom K-1 income?
  • Does the form address the duties and job responsibilities and contributions of each member, or protect against the freeze out of a minority partner?
  • Does the form provide for the distribution of membership interests to family members at your death?
  • Does the form include a tiebreaker formula when there is an even number of members and no clear majority?
  • Does the form offer any solution for retirement, termination of a member employee, or for triggers like disability and death?
  • Does the form include mediation and arbitration mechanisms?

If you are considering starting a business, bringing in a partner or entering into any other legally binding business relationship, consider spending the money upfront to obtain 5-10 hours of expertise from an attorney who has the experience and background in business and corporate law. They will ask the right questions, assist you with solutions and prepare a comprehensive plan that meets your objectives and covers you in the case of a dispute. The choice is yours; choose wisely.