Key Takeaways:

  • Legal fees for starting a business vary widely depending on the type and size of the business, with costs associated with essential legal documents, business licenses, and intellectual property protections.
  • The choice of business structure significantly impacts legal costs, with corporations and LLCs generally incurring higher legal fees than sole proprietorships and partnerships.
  • Securing funding often requires substantial legal work to ensure all documentation is in order and that the business complies with regulatory requirements.
  • While some startups may minimize initial legal expenses, investing in legal advice can prevent costly legal issues in the future.

The fees for starting a business vary, which is why it's important to seek help from an expert to determine how much money you'll need. Common examples of startup expenses include:

  • Rent.
  • Mileage.
  • Supplies.
  • Wages.
  • Business registration.
  • Professional fees.
  • Marketing materials.

Breaking Down the Types of Costs

When trying to plan out your finances, you'll need to consider the different kinds of costs you'll be paying. For example, you might think about whether the costs are:

  • One time or ongoing. When starting your business, there are a lot of one-time costs you'll need to pay, such as buying equipment or supplies. During this time, your money going out might be more than the money you're actually making, so you'll need to account for that and try to make it up the next month. Ongoing costs, on the other hand, account for things like utilities or rent. Because you pay these every month, you should craft a budget that accounts for these.
  • Essential or optional. Sometimes, there are expenses you simply can't get around, such as repairing a broken server or hiring a new employee to help with the workload. In other cases, expenses might be optional, such as relocating to an upgraded building or investing in new office furniture.
  • Fixed or variable. Your fixed costs stay the same on a month-to-month basis, meaning you can play for them accordingly. Variable costs, however, might change depending on how much you sell or use a certain service. Include a stretchable budget here to cover the potential expense range.

Essential Legal Documents for New Businesses

When starting a business, the legal documents you need will vary depending on the structure and industry of your business. However, some key documents are essential for almost every startup. These include:

  • Articles of Incorporation/Organization: This is the document that legally establishes your business with your state. It outlines the basic information about your business, such as its name, address, and the names of its owners.
  • Operating Agreement or Bylaws: For LLCs, an operating agreement is crucial, while corporations need bylaws. These documents detail how your business will be run, including the roles and responsibilities of the owners and the procedures for making important decisions.
  • Business Licenses and Permits: Depending on your industry, you may need various local, state, and federal licenses and permits to operate legally.
  • Contracts: Startups should have standard contracts for employment, sales, vendor agreements, and client agreements to ensure all parties understand their rights and obligations.
  • Non-Disclosure Agreements (NDAs): To protect your business's sensitive information, NDAs are critical when discussing business matters with potential partners, employees, or investors.
  • Intellectual Property Documents: Protecting your business's intellectual property through trademarks, copyrights, and patents is vital to safeguarding your brand and products from infringement.

Legal fees associated with preparing these documents can vary, but investing in these basics upfront can prevent costly legal battles later on.

How to Determine an Initial Budget

To improve your chances of keeping costs low and controlling spending, it helps to plan out your startup costs before you jump into action. Better yet, this can help you choose an appropriate financing option, know the amount of income you'll need to break even, and manage your cash flow.

  1. Create a list of the costs you're expecting to face.
  2. Separate these costs into various categories, such as capital expenditures or expenses.
  3. Rank each cost in priority from high to low.
  4. Once all items are listed, give each one a dollar value.
  5. Add these dollar values together to see the total cost of your startup. If the total cost is more than your budget, see what items you can cut out.
  6. Adjust the budget as things change to keep organized.
  7. Before finalizing the budget, double-check figures to make sure you haven't underestimated the total cost.

Overall, the U.S. Small Business Administration estimates that most microbusinesses cost $3,000 to start, while home-based franchises can run anywhere between $2,000 to $5,000. Keep this in mind when planning your initial budget.

Legal Considerations for Different Business Structures

The legal fees for starting a business can differ significantly depending on the structure of your business. Here's how costs can vary across different business types:

  • Sole Proprietorship: This is the simplest and least expensive business structure. However, the trade-off is that there is no legal separation between you and your business, which means personal assets are at risk if the business incurs debt or is sued. Legal fees are minimal but may include licensing fees and the cost of filing a "Doing Business As" (DBA) name.
  • Limited Liability Company (LLC): LLCs offer liability protection while being easier to manage than a corporation. Legal fees for LLCs often include filing fees for articles of organization, costs associated with drafting an operating agreement, and possibly fees for ongoing compliance requirements.
  • Corporation: Incorporating a business can be more costly due to the complexity of the legal requirements. Legal fees typically include drafting and filing articles of incorporation, creating bylaws, issuing stock, and ongoing compliance with corporate formalities such as annual meetings and reports.
  • Partnership: For partnerships, particularly limited liability partnerships (LLPs), legal costs may include drafting a partnership agreement that outlines the roles and responsibilities of each partner, profit-sharing arrangements, and procedures for resolving disputes or dissolving the partnership.

Understanding the specific legal needs of your business structure is crucial in accurately budgeting for your startup’s legal fees.

Hidden Costs of a Startup

While you might think you have everything planned out for your fledgling business's finances, make sure you consider the following hidden costs that often sneak up on business owners:

  • Expensive loans. Most business owners need a loan to finance their startups, so banks and lenders often take advantage of the situation. They might offer poor terms, especially if you have a bad credit score or lack business experience. With bad terms, you might end up spending thousands more than you had originally planned in interest payments. If you happen to miss any loan payments because of this, it will further drag down your credit score, preventing you from future borrowing.
  • Perks and benefits for employees. Naturally, you will have already accounted for your employees' salaries, but what about additional perks? Statistics show that the overall cost of keeping your employees on board can be 1.25 to 1.4 times their basic pay. These extra costs come in the form of healthcare benefits, workers' compensation, taxes, and vacation time. This means that if you're paying an employee a $50,000 salary, that could actually equate to $70,000 in the long run.
  • Shrinkage. There are a number of ways you could lose product, including shoplifting, data entry errors, employee theft, or vendor fraud. This type of loss costs businesses an estimated $45 billion each year in the United States alone. If shrinkage is an issue for you, take steps to prevent it, such as hiring a loss management supervisor or being more thorough with your paperwork.

The Role of Legal Advice in Securing Funding

When seeking funding for your startup, whether through loans, investors, or grants, having your legal documentation in order is critical. Investors and lenders often require detailed due diligence before committing funds. Here are some areas where legal fees might play a role:
 

  • Due Diligence Documentation: Investors will want to review your business's legal standing, including your corporate structure, contracts, intellectual property, and compliance with regulations. Ensuring these documents are in order requires legal assistance.
  • Term Sheets and Investment Agreements: When negotiating with investors, a term sheet outlines the basic terms of the investment, and a more detailed investment agreement will follow. Both documents typically require legal drafting and review to protect your interests.
  • Regulatory Compliance: Depending on your industry, ensuring that your business complies with all relevant regulations can be complex and may require legal advice to avoid fines or other penalties that could deter investors.

By investing in legal services at this stage, you can present a stronger case to potential investors, which may increase your chances of securing the necessary funding.

If you need help with the fees for starting a business, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.