Starting a business without running up legal bills

My brother and I are starting a business and are strapped for cash. How do we avoid incurring a ton of legal expenses?

John B.
Austin, TX

Unless you have a lot of personal assets that you want to protect that can't be stashed in exempt buckets like IRA's, home equity etc., you probably don't need to incorporate and hire a lawyer before you rent office space, get a phone line, print business cards, and offer, say, consulting services. Just do it.

Unless you are going into a regulated industry such as food service, child care or the like, don't worry about getting a lawyer right away and just make sure there's really a business opportunity and that you can close deals. If not, you don't need to mess with the legal stuff anyway. Once you've sold something, you'll have revenue, energy and a reason to get the legal stuff right. Don't let the legal worries become a distraction.

When you do start working on it, don't try to jump through every legal hoop at once. If your full time job becomes filling out forms, your business will fail. Do only the bare minimum, worry only about the things that will really hurt you. Here's a tip: unless you have a lot of assets sitting in the bank or are making a lot of taxable income, very few things will really expose you to much risk in the first year.

Wait to hire employees as long as possible. Hiring employees makes the legal side much more complicated. Note: contractors can come in and do project work for you any time.

Once you're ready to get a lawyer, make sure you find the right one. Find a lawyer who will answer basic questions for free. You shouldn't have to pay $100 to get a simple question answered. You want a lawyer who doesn't start the clock unless he has to draft docs or do research, and who is willing to give you a low hourly rate (under $200/hour) and bill his time conservatively until you get on your feet.

If you have some free cycles, ask your lawyer to point you in the right direction and let you do things yourself to keep costs down. For example, you can probably figure out how to incorporate yourself and modifying a form of NDA isn't rocket science.

Changes to the bankruptcy laws

What are some of the changes to the bankruptcy law that are about to take place? When will these changes take effect?

Ray M.
San Marcos, TX

The changes to the bankruptcy code are effective October 17, 2005. The bill has many features, but here are a couple of the key changes:

Lawyers must sign a statement that they have done "an investigation" and don't know of any falsehood in your bankruptcy petition. Some feel this may require your lawyer to pay for an asset check to be performed on you by a private investigator. That would add to the cost of filing bankruptcy.

Also, if you make over the median income for your state (approx. $39,000/year in Texas), you can't file a Chapter 7 bankruptcy unless you meet a strict means test (i.e. you have just enough income to buy basic food and shelter). In applying the means test, the average income over the past six months is used, regardless of present actual income.

So in all likelihood, you will have to file a Chapter 13 bankruptcy. When you do, this same means test will be applied, and every dollar above what is required to provide a subsistence living for yourself will be taken and given to your creditors for the next five years.

For more info about these changes to the bankruptcy laws, see the Lawyers.com Bankruptcy Law Changes writeup.