When the stakes are high, hire a professional
If you want to start a business, you can hang out your shingle and just go for it. There are online forms you can use to form a divorce agreement. And you can put your money directly in mutual funds or other investments.
But are you covering yourself legally and getting the best value for your money? Do you really have the expertise to navigate these potentially life-changing issues on your own? Our experts believe you’re better off in the long run—and sometimes the short run—if you involve a professional.
If you’re a budding entrepreneur, for instance, there are important legal considerations.
First off, what legal entity best fits your business? “There are myriad choices,” notes Christopher Dodge, an attorney and shareholder at Murphy Desmond S.C.
His firm of about 50 lawyers offers a full range of legal services for consumers and for businesses of all sizes. “Our services are high-quality, we’re reasonably priced and we have great depth,” says Dodge. “My practice involves start-ups and small businesses, but the firm also handles tax issues, business formation, intellectual property litigation, land use, funding and dealing with banks and securities laws.”
Business entity types include sole proprietorships, which offer no legal protection and are tax-neutral. Limited liability partnerships, as separate legal entities, offer some liability protections. There are also multiple types of corporations—also separate legal
entities—that offer varying degrees of liability protections and have different tax impacts.
The best entity for your business depends on your goals. But Ed Lawton, an attorney at Axley Brynelson, LLP, believes businesses should create some sort of legal entity as a risk-minimization mechanism.
Axley Brynelson offers a full range of services as well. “We represent a lot of entrepreneurial businesses and large ones,” says Lawton. “We understand the business lifecycle and can often foresee issues before they come up, because we’ve seen them with 20 other clients. We stay active in business organizations, so we understand the issues, and we offer complimentary benefits like legal alerts on upcoming changes to laws, and a free annual half-day employment law seminar.”
It’s not enough to form a legal entity, he observes. “You should use it when entering into contracts rather than doing so as an
individual. It reduces your risk exposure and accumulates the benefits produced by your efforts into that distinct entity. It can also be helpful for financing purposes or when selling your interests in a business.”
That should be your first legal step, agrees Erik Ibele, an attorney at Neider & Boucher, S.C. “You don’t want an unorganized business that puts your personal assets at risk in the event of a claim from a customer or supplier.”
Since his firm is a small business, its attorneys know firsthand the pressures, issues and concerns other small businesses face. “We have long experience representing start-up businesses in a variety of areas, including biotech, materials science, telecommunications, and online businesses of all sorts,” he says. “We have a lot of financial experience, and several of our attorneys are also CPAs (certified public accounts).”
Ibele specializes in intellectual property protection: trademarks, copyrights, trade secrets and confidentiality agreements, although he’s not a patent attorney. “A lot of people used to think of intellectual property as a minor or side issue with respect to businesses,” he says. “Now so many businesses are web-based or based on technology of some sort, and intellectual property has really come to be at the center of things new businesses need to be concerned with.”
The products and services your company offers will determine what intellectual property protection you need. “You may need to meet with a patent attorney and file an application for your technology,” Ibele says. “Or simply put a copyright notice on something, whether it’s a website or a brochure. Or register a trademark because it’s a unique logo or design you want people to identify with your business. And if you have employees with knowledge of proprietary information or know-how that’s not really protectable by the other three means, you need to put in place agreements that require them to keep your secrets confidential.”
If your business will have shared ownership, defining that relationship is another big step, indicates Dodge. “Up front, you have to decide your ownership percentages, who will make decisions for the entity, what amounts owners will contribute financially, how sums will be drawn to the entity, and what would happen if there was a conflict or if somebody wanted out,” he says.
There may be permits and licenses to acquire, and the requirements vary by type of business and by municipality. You may have to develop human resources policies. You have to determine if you’ll lease or rent space. “Both are excellent options; it’s a question of money and ability to pay, and of projected growth,” says Dodge. “Purchasing space is committing to it, and it could hinder growth. A short-term lease can be an excellent option for a start-up—it enables growth, or if you fail, you’re not stuck.”
Businesses should beware of the “killer leases” some landlords spring on less sophisticated parties, or smaller businesses with less leverage. “They often contain pretty far-reaching indemnity provisions combined with unlimited personal guarantees, and so many restrictions that it can be pretty difficult for a tenant to comply,” Lawton warns. “It’s something I see a lot, but in this softer leasing environment, tenants may be able to get some of those provisions limited or knocked out if they ask.”
And while it’s generally a good idea to have employee handbooks, you have to be careful how they’re worded. “This is one thing I see people make mistakes with,” Lawton says. “They want at-will employees that they can fire for any reason or no reason, as long as it’s not discriminatory, but their handbooks may look like employment contracts. Then if you want to separate someone from the company, an employment attorney could argue there was a contract. You need an express statement in the handbook saying that while it sets out terms and conditions, staff members are still at-will employees.”
These are just some of the issues attorneys can assist you with, and it’s best to involve one early on. “Attorneys can document whatever you want, and can also help you plan—what kind of entity you want, whether you should hire employees or use consultants, or buy or lease a building,” says Lawton.
You should involve an entire support team during the business planning process. “That includes all the service providers that typically work with new businesses—your banker, your CPA, your marketer, your insurance person,” Ibele says. “And the earlier you involve them, the better.”
A great business starts with a great idea, notes Dodge. “Attorneys and others on your team will help with the rest. You need to,
as a business, hope for the best but consider the possibility of failure or problems,” he says. “Lawyers tend to plan by looking at the worst-case scenario and owners tend to look optimistically. You need both.”
Another time to involve an attorney—again, as early in the process as possible—is if you’re considering a divorce or are wrestling with child custody issues. “It’s a mistake to think you can do it without a lawyer,” says Ginger Murray, president of Lawton & Cates, S.C. “It may sound self-serving, but people who try to do it through forms won’t be mindful of tax implications, for example. And victims of abuse—or people being falsely accused of abuse—shouldn’t go through the legal system without counsel. Attorneys have learned ways to protect children, parents and assets.
Murray has practiced family law for 15 years. During that time, for roughly five years, she was family court commissioner in Oneida and Forest counties, presiding over divorces, paternities and other family actions. “At Lawton & Cates we’ve put together a team of lawyers that covers almost every area of law,” she says. “We have individuals who are very good at specializing in each area, and our goal is to be able to represent clients with diverse needs, small cases or large. We handle cases from dog bites to class actions.”
If you have a family issue, find a lawyer you’ll be comfortable with, she advises. “I offer free consultations. It gives a potential client the chance to meet with me and our legal team to see if it’s a good fit. It’s also an opportunity for me to identify whether the person has realistic expectations and priorities. It’s very important to me that parents have children as their top priority.”
Murray’s objective is to reduce trauma to all involved in family issues. “And make no mistake, with a divorce, there will be trauma,” she says. “But sometimes it’s still the best thing to do. Parents used to stay together for their kids, but experts say if you’re not modeling a healthy relationship, you’re not doing the children any favors.”
She helps clients work through child custody and placement issues. Custody defines who makes major decisions, while placement defines which parent has the kids when. “Luckily, most times parents agree to share responsibility,” she notes. “Wisconsin law assumes that’s in the child’s best interest.”
When children aren’t involved, the major issue in a divorce is usually finances. “Sometimes it’s pretty critical that I get involved as soon as possible,” says Murray. “If someone has a gambling or substance abuse problem and is draining the finances, we need a game plan right away to protect assets. In some cases, unfortunately, we have to work together to file bankruptcy, and it’s mostly best for both spouses to do that together.”
Because of the economy, she’s seeing couples who believe they should part ways stay together for financial reasons. “But family law attorneys understand the financial pressures and are equipped to help people work through them,” says Murray. “One thing I’m seeing today that I haven’t before: even after people get divorced they’re staying in the same house.
“They have trouble figuring out who should get the house, or how to get out from under the mortgage,” she continues. “We can come up with creative solutions, such as distributing the marital property in such a way that a bank would approve a loan, if that’s what’s needed. If they do have to live in the same house for a time, we can come up with rules for co-existing. If they’re selling the house, we determine how to break up the proceeds so it’s fair to both parties.”
When it comes to investing, a professional advisor can help you earn higher returns and pay less in taxes. The types of securities you buy and the time you hold them can have a significant effect on your taxes, so Marilyn Holt Smith, CEO and senior portfolio manager of Holt Smith Advisors, helps her clients invest tax-efficiently.
“We match what’s happening in individuals’ investment portfolios to their tax situations,” she says. “It can be very complex at times, and tax situations are very personal—yours will be different from your neighbor’s—so you can’t be generic about it, or shouldn’t.”
Many people have money in three “pots,” she notes. There are tax-deferred accounts like IRAs, where you pay taxes as you take withdrawals, tax-exempt accounts such as Roth IRAs, where you deposit after-tax funds, which then compound tax-free and you make tax-free withdrawals. Then there are taxable investment accounts—anything for which you get a 1099 form at tax time—you pay taxes on interest, dividends and capital gains.
“Where you put your securities matters,” says Holt Smith. “If you have the three types of accounts, which type do you buy stocks in? There’s usually an answer regarding taxes, and it’s only by going through it with someone who has that type of tax knowledge and awareness that you’ll determine how best to handle your situation.”
The types of securities matter too. “If you buy mutual funds, you can’t use them to minimize taxes, because the fund managers don’t know and can’t manage to individual investors’ tax situations,” Holt Smith explains. “It’s only by having your own portfolio with securities that can be managed to your situation—like separate stocks, bonds, and exchange traded funds. You can basically do anything with an ETF that you can with a mutual fund, but there’s much more personal control in terms of returns and taxes.”
She cites a 2010 study by research firm Lipper that analyzed the tax implications of mutual funds over the last 10 years. “They found taxes lowered the funds’ annual returns by up to 2 percent,” she says. “When tax rates are low and investment returns are high, like in 2010, it doesn’t sound like a lot. But when tax rates go up the cost can be significant, especially when your investment returns are low. If you look at 9 percent average annual returns, 2 percent can be quite a chunk.”
The amount of time you hold a security affects your capital gains or losses. “If you hold a security less than a year, the short-term capital gains are taxed as ordinary income,” Holt Smith says. “If you hold them longer, the gains are taxed at the capital-gains-tax rate of 15 percent.
“As money managers, we’re very conscious of the holding period for securities,” she continues. “If a security needs to be sold, but we’re within a week or two of having held it for a year, we’d wait. We do what’s in the best interests of individual clients.”
One advantage of investing with Holt Smith Advisors is that the firm can handle all of an individual’s investable assets. “We can manage all their accounts as one large portfolio and look at how the person is structured overall in terms of diversification and in achieving their financial goals,” Holt Smith says.
“We can look at the entire situation and invest not only for a good return, but a good after-tax return,” she adds. “It makes a huge difference in ensuring your tax bill doesn’t eat up your investment returns.”
— Judy Dahl