4 min read
Launching your LLC is exciting, but ignoring legal matters can turn that excitement into stress—fast. Many business owners put off addressing crucial legal issues, thinking they’ll handle them “later.” But waiting too long can expose your LLC to unnecessary risks, from financial penalties to disputes that could threaten your business’s future. In this guide, we’ll break down why handling legal issues early is critical and how you can protect your LLC before it’s too late.
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Waiting too long to write down your agreements means -- you start your company, agree generally on terms with your co-founder, employee, contractor, advisor, etc. -- but never write it down. It’s “too long” when a problem pops up and you don’t have an agreement to resolve the conflict.
Think of it this way -- if you have a co-founder, what happens when one of you thought a voting decision was majority but the other thought it was unanimous? Or if a contractor thought he was just designing a couple pages of your website and not the back-end or other pages you assumed were included?
Most entrepreneurs assume people will do what they say in the beginning until they’ve been burned. Then you learn that it’s not necessarily someone trying to be malicious. Instead, it’s most often a case of miscommunication where one person thought they only needed to work 20 hours a week for the company but the other person thought everyone was working full-time.
If you “wait too long” and the problem presents itself without a written contract, it’s too late and the costs to fix the problem are exponentially higher.
It could hurt it in any of these ways:
In a non-legal sense, it really hurts the business because people don’t know their expectations. This is usually one of the biggest drawbacks. It’s like, what if you didn’t know how much equity each person had? Or on a major decision, one person thought it was majority-approval required but another thought it required super-majority? For many states, if you don’t have an operating agreement for your LLC, then many decisions require unanimous support.
What happens if you gave a contractor or advisor a 0.01 percent ownership interest for giving you some tips or helping you with a logo? Things go awry, and when you try to add a new member or sell part of your interest, that percent who owns one-one-thousandth of your company can veto all decisions. And you can’t change that unless you got them to agree to something in writing. Of course, if they’re already vetoing decisions, they’re going to want something to give up that power.
In a legal sense, it’s usually a death knell for early stage companies because it leads to a situation that’s so costly that it’s impossible to afford unless your company is further along. You can litigate it, but then you’re stuck with a toxic company. You can avoid litigation, but then everyone thinks someone is trying to screw them over.
In a less-fatal scenario, it costs you a lot of money. It’s unmet expectations with a contractor. It’s your company not owning IP that a co-founder or contractor created.
My favorite example that’s analogous to what happens in businesses is trying to get a spouse to sign a prenup who’s already trying to divorce you. It won’t happen because it’s too late. He or she doesn’t want to help you - they’re getting out and (usually) want to get whatever he or she thinks is owed. So you do the prenup when you’re still in love and you save yourself from these problems later.
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Making sure you know what agreements you need ahead of time and getting them in writing when everyone’s got good vibes toward each other. Check out or blogs on specific agreements to know more about the importance of having specific agreements like NDA, Employee Agreements, Agreements over copyrightable content, Independent contractors, Operating Agreement, Bylaws, and Shareholders Agreement.
Meet Jake. Jake met Laura in high school at a party when they were both 17. They quickly fell in love and would spend late nights on the phone talking about how excited they were to grow old together. They told their parents it was only a matter of when, not if they’d get married. Jake even comically got Laura a promise ring reconfigured from his grandmother’s ring.
Things were great until they both went to the same college. Jake signed a lease for an apartment they both lived in but Laura became a party animal and left Jake for the football team’s punter. Jake tried to get his ring back and to get Laura to take over the lease, but it was too late.
Why am I telling you this? Because this is the exact same thing that happens in every business relationship. You commit. Things are perfect. And then they change. Money gets involved. People aren’t what you think. Your partner changes. The contractor or manufacturer acts differently. This is why you need to get everything you agree on written down in stone (or paper) when everyone’s still feeling good about the relationship.
The biggest question now is, "Do you need a lawyer to start an LLC?” For most businesses and in most cases, you don't need a lawyer to start your business. Instead, many business owners rely on Legal GPS Pro to help with legal issues.
Legal GPS Pro is your All-In-One Legal Toolkit for Businesses. Developed by top startup attorneys, Pro gives you access to 100+ expertly crafted templates including operating agreements, NDAs, and service agreements, and an interactive platform. All designed to protect your company and set it up for lasting success.
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Protect your business with our complete legal subscription service, designed by top startup attorneys.
Legal GPS templates are drafted by top startup attorneys and fully customizable.
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Chris Daming, J.D., LL.M. : Oct. 25, 2024
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