Legal Misfortune: Banned From Selling Securities

This article is part of a series of stories about the tragic consequences that can result from common legal mistakes that many entrepreneurs make. These are real-life examples that we have seen in our business law practice.
To circumvent the work of finding potential investors by networking within his personal network, one of our clients purchased a list of accredited investors and began cold-calling the list to see if they were interested in investing in his company. One of the persons he called complained to his state’s attorney general, an investigation ensued, and this person and his company is banned from ever selling securities in that state again.
The mistake could have been avoided with a 10 minute call to a securities lawyer (approximately $50) who could have instructed the entrepreneur how to legally approach the investors on the list that he purchased.
Learn about 7 Deadly Legal Mistakes that cost entrepreneurs thousands. Visit www.7deadlylegalmistakes.com to get a copy of our free mini course.

Legal Misfortune: $20,000 in Legal Fees to Fix “Technical Mistake”

This article is part of a series of stories about the tragic consequences that can result from common legal mistakes that many entrepreneurs make. These are real-life examples that we have seen in our business law practice.
One of our clients permitted their employees to help them find investors, which is legal under certain conditions. As an incentive to getting the job done, the company paid the employees extra compensation, but only if they closed sales of securities—a technical, albeit, illegal, mistake. The company was forced to disclose this information to state and federal regulators, ensuing in an extensive investigation.
Our client was in the middle of raising capital from angels and had to put the offering on hold until it could resolve the problem. Government regulators are notoriously slow when dealing with these types of violations, and the investigation took us six months to resolve.
Afterwards, angels who had previously been interested in the company were too nervous to invest.
The company ultimately filed for bankruptcy and has remained dormant ever since.
Had they worked with counsel to put a procedure together to avoid this mistake (approximately $2,000 in legal fees), bankruptcy may have been averted.
Learn about 7 Deadly Legal Mistakes that cost entrepreneurs thousands. Visit www.7deadlylegalmistakes.com to get a copy of our free mini course.

Legal Misfortune: “Playing Lawyer”: Lost $1,000,000 of VC Funding

Entrepreneurs are boot-strappers, often with shoestring budgets requiring them to use (or develop) new. I’ve been there. I’ve designed websites, set up computer networks, designed logos and graphics, built walls and installed tiles to move my businesses along.
In the long run, I built a lousy website, did not have adequate backup when the network crashed, my logos looked like clip art, my walls were not level and my tiles cracked.
Thankfully my legal skills are much better than my other “professions”.
We self sufficient entrepreneurs often try to “play lawyer” much like I tried to “play computer network professional”. That is, until the network crashed and my business was shut down for two days. So much for the money I thought I saved by doing it myself.
Playing lawyer is a high stakes game, especially for a growing business. Often times, a legal task (like drafting a contract) that would have cost less than $1,000 to complete, can turn into a 7-figure tragedy.
Business lawyers frequently advise clients to complete certain legal actions in their business. You should have written agreements with vendors. You should have IP assignment agreements with your employees and consultants. You should maintain proper books and records and follow corporate formalities. You should have contracts with your partners. Sometimes I think that business lawyers fail to connect the dots for clients about what could happen if they fail to do these things. I’ve certainly been guilty of this.
In this market when investment capital has all but dried up and M&A deals are largely on ice, growing companies can’t afford to have legal screw-ups jeopardize a potential opportunitiese. You may not get another chance.
For the next month or so, I am going to share with you some real-life examples of how “playing lawyer” cost entrepreneurs major opportunities.
Here’s one to get you started:
To “save money” on legal fees, one of our clients failed to consult with an attorney while raising the initial capital for his business. The client sold shares of his company’s common stock without first increasing the company’s authorized shares, essentially, selling stock that didn’t exist--which is fraud. The client was close to closing a critical financing with an VC investor for up to $1 million in funding. When the investor discovered the problem, he got cold feet and took the offer off the table. Additionally, the mistake cost the company $10,000 in legal fees to remedy the problem. Incidentally, the cost to amend the company’s certificate of incorporation, including legal fees would have been no more than $500.
Learn about 7 Deadly Legal Mistakes that cost entrepreneurs thousands. Visit www.7deadlylegalmistakes.com to get a copy of our free mini course.

"Incorporating" an Opportunity

Last week I mentioned that I own another company called Law Firm Incubator Suites (www.lawfirmsuites.com), a professional office suite business. Essentially, we lease a large commercial office space and rent individual offices to lawyers and other professionals. When I started the business, I had to make an assessment about the best corporate entity to use. The analysis I completed for my business is the same that I use my law practice with our clients.
Essentially for this business, I had three choices, work as a sole proprietorship, as a limited liability company or as a corporation.
In a sole proprietorship your personal assets are not protected from the creditors and liabilities of your business. Essentially, if the business gets sued and you lose, your personal assets like your car and personal savings are at risk.
In my real estate business, I have many vendors and I rent office space to several people. I have employees and there are guests who visit the office who could possibly get injured. All these items are potential sources of liability and I didn’t want to be on the hook personally for any business-related debts or lawsuits.
Even more importantly, one of my goals is to build the business and sell it. There’s also a good chance that I may need to raise capital to grow the business down the road. Both would be tough to do as a sole proprietorship.
Ultimately, working as a sole proprietorship was not an option.
An LLC’s management is governed by contract (as opposed to a corporation that is governed by statute). This makes the LLC very desirable when thre is more than one owner. Essentially, contracts can be much more flexible than statutes. Also, in an LLC, business income is taxed at your personal tax rate only. In a corporation, business income is taxed once in the corporation and a second time if you distribute any of the remaining profits to owners through a dividend.
Since I was going to be a one-man-army, I didn’t need the flexibility management that an LLC provides, and my business is qualified to make a S-Corp election (preferential tax treatment for certain small businesses). This allowed me to get the same one-time tax treatment as the LLC.
Also, the State of New York requires that all LLCs publish the formation of the LLC in a local and regional newspaper for six weeks, and make an additional filing with the state when you complete the publishing. For me, the added expense would have been about $1,800. Since my business was going be located in New York, I decided to save my money and form a corporation.
When I filed my Certificate of Incorporation with the Secretary of State via fax, I requested 24-hour expedited service. If you get your documents in before 2PM, your business will be organized by the next day. If you do not use expedited service, it can take 10 to 15 business days to process your filing. The extra cost for expedited service was $25--money well spent. FYI, you can also pay for same-day ($75) and two-hour expedited service ($150).
I filed, and got my response the next day. LFIS, Inc. was officially organized.