Starting a Business in Retirement: Using a Lawyer
The legal hoops you'll need to jump through to launch
You’re eager to start a part-time business in retirement and have done your research. Now it’s time to learn about the legal requirements and tax implications; the human or electronic legal help you may need and what that could cost.
First off: Deciding on the way you’ll want to establish a business entity.
“If you’re starting out, it’s important to set up a separate legal entity, based on the aspirations of the business and where you see it going,” says Jon Eckhardt, a professor at the Weinert Center for Entrepreneurship, University of Wisconsin, and EIX editor-in-chief. (Full disclosure: EIX, the Entrepreneur and Innovation Exchange, is part of the Richard M. Schulze Family Foundation, which is a funder of Next Avenue.)
LLC vs. LLP vs. S Corp. vs C Corp.
There are four options.
You could set up your enterprise as a limited liability company, or LLC. With an LLC, you can protect your personal assets from creditors of the business. Plus, all the business income and expenses get reported on your LLC’s income tax return, so you’ll avoid paying corporate taxes in addition to personal income taxes.
Eckhardt favors forming your business as an LLC, “because taxes are co-mingled in a way that will be better for you,” with greater flexibility.
Another option, if you’ll have one or more partners, is a limited liability partnership, or LLP. It’s a general partnership that gives partners some limited personal liability.
Two other options are an S Corp or a C Corp. An S Corp doesn’t pay tax at the corporate level. Instead, owners pay themselves salaries and receive dividends from any additional profits; the dividends are taxed at a lower rate than corporate income. In a C Corp, profits are taxed twice — first at the corporate level and then as dividends to shareholders. A C Corp can have an unlimited number of stockholders and raise investment capital; it’s covered with limited liability.
Eckhardt favors forming your business as an LLC, “because taxes are co-mingled in a way that will be better for you,” with greater flexibility, he notes.
David Deeds, Schulze professor of entrepreneurship at the University of St. Thomas in Minneapolis and EIX executive editor, added, “If you are going to start a business with partners, then you need a partnership agreement. You need to have the conversation among the partners and get it on paper to clarify what percentage of the business everyone owns. If someone decides to leave the partnership, be clear about how that person can ease out.”
Hiring an Attorney
Next: determining which aspects of forming your business require hiring an attorney and which you’ll handle yourself, either alone or by paying for online legal services like LegalZoom or Rocket Lawyer to file certain documents. You’ll need to create a business name and file articles of incorporation; states usually charge $100 to $250 for administrative fees to file articles of incorporation.
Lawyers work on either a flat fee for one service or a bundle of services or they charge an hourly rate.
At Simon Law Group, based in Chicago, a flat rate for its legal services can range from $500 to $700 for filing forms or drafting an operating agreement, plus filing fees ranging from $175 to $1,000. A small-business law firm might charge from $150 an hour for a junior lawyer in a less populated region to $1,000 an hour for a senior partner in a large firm in a major city.
You can incorporate a business on LegalZoom, for instance, for about $150 to $350 plus filing fees. But know this: LegalZoom’s terms of service disclaimer states says, “I understand and agree that LegalZoom is not a law firm or an attorney, may not perform services performed by an attorney, and its forms or templates are not a substitute for the advice or services of an attorney. Rather, I am representing myself in this legal matter.”
Phillip Phan, a professor at Johns Hopkins Carey Business School and an EIX editor, recommends speaking to a legal expert specializing in small businesses to “learn what your state’s tax reporting requirements are before starting a business.” He adds: “Get a lawyer for a few hundred bucks who can file all the paperwork and register your business.”
Using Online Legal Forms
But some entrepreneurs with legal backgrounds have been happy using online services for some of their legal needs.
One is Lynn Zuckerman Gray, founder and CEO of Campus Scout, a New York City-based company providing strategic recruitment of college and grad school graduates for companies. The former global chief administrative officer for Lehman Brothers/Barclays real estate group, she’s a self-described “executive refugee from the Lehman Brothers crash of 2008.”
Says Gray: “I have the advantage of being an attorney, so when it came to setting up the company in 2009, I was comfortable using a LegalZoom or CorpNet, which is a woman-owned firm. I am familiar with the process and found it cost effective to have that type of service do the initial paperwork.”
But, she adds, “with regard to trademarks or any potential litigation, I believe that a small-business attorney is better suited to take care of those issues than an online service.”
Gray notes that “at Campus Scout, I have only used my attorney for trademark work and my recollection is that it was about $1,500 to $2,000 as a flat fee.”
How Your Type of Business Plays a Role
Gray advises people planning to start part-time businesses in retirement to understand that your legal needs will depend on the type of enterprise you’ll run. A small-business attorney with landlord/tenant expertise, for example, can assist a company leasing space for an office or retail site.
As a certified facilitator for the Kaufman Foundation and State University of New York (SUNY) Levin Global Center’s FastTrac New Venture and FastTrac Growth Venture Entrepreneurship training programs, Gray says new entrepreneurs must be especially aware of municipal and federal regulations connected to their industry.
“For example, some businesses will need licenses or permits that might require a lawyer. Others will have employment contract needs,” says Gray. “Certain businesses, like food trucks, restaurants and the construction industry have more regulations than others.”
Most municipalities have small business solutions centers that can answer industry-regulation questions.
Gray’s final tip: Be prepared for unexpected legal costs when starting a business. They’re virtually inevitable.