LegalZoom CEO: These Are the Biggest Legal Mistakes a Startup Can Make

January 21, 2016, 5:06 PM UTC
Illustration by Getty Images

When an entrepreneur decides to start a company, he focuses on creating the product, attracting customers and building a team. Filing for trademark, copyright or patent protection should be priorities also high on that list. LegalZoom CEO John Suh calls these “the necessary evils.”

When you think of law and tax, they’re the necessary evils,” Suh said. “Entrepreneurs just want them to be taken care of as quickly and efficiently as possible, so they can get back to the real business of building the company.”

Enter LegalZoom. For a flat fee of about $300 a year, the online provider of legal documents and services aims to help first-time entrepreneurs start and run a company. LegalZoom has helped start over a million small businesses since its inception in 2001 – including WordPress, Umami Burger, CoolHaus and LivingSocial.

LegalZoom’s CEO Suh and General Counsel Chas Rampenthal sat down with Fortune to discuss some of the most common mistakes they see new entrepreneurs making along the way.

If I’m an entrepreneur, how can LegalZoom help me with my business?

Suh: We can help you start your business, and we can help you run your business. We are more specialized in the starting of a new business, but our services of running a business are growing dramatically. From 2000 to 2010, LegalZoom was a do-it-yourself online document place. We were the alternative to a lawyer. We achieved market dominance in highly specialized areas around court documents. In chapter two of our business around 2010 to 2014, we added lawyers to the mix. We created a legal plan that is now robust. We’ve done over 200,000 one-on-one consultations with entrepreneurs.

Rampenthal: We partner with less than 20 boutique law firms and over a thousand lawyers. The future of the legal profession doesn’t exclude lawyers – it has to include them. But the legal profession also has to include the customer, and the legal profession has excluded the customer. LegalZoom needs to constantly be doing more and more for entrepreneurs, so they feel more taken care of by the legal system. People are so afraid of the system that they bury their heads in the sand and hope it goes away. You shouldn’t be afraid to start a company, you should be empowered.

What are the most common issues and questions new entrepreneurs have when they come to you?

Suh: I think the essential need is that most entrepreneurs want to focus on building a product, getting customers and building their team. When you think of law and tax, they’re the necessary evils. One of the things we recognize is that we are means. We’re trying to create a transparent, high-quality and easy-to-use process. We’re trying to go deeper to take our focus from starting a business to help you run your business.

Rampenthal: In startups, it’s asking: “Should I be an entity, and what type of entity should I be? A corporation? An LLC? What is best for me?” That has tax consequences, governance consequences and different compliances. You need someone to make sure your business is operating within the bounds of the law and that you’re filing the required paperwork every year. This is not intuitive to people who have not spent three years in law school.

Next up is when they make this their full-time work. Now, they’re worried about contracts, customers and vendors. And next would be when they start hiring employees.

From a legal standpoint, I am seeing the sharing economy is growing, and the legal issues that have been solid and steadfast for old businesses do not fit. I believe there’s going to be a new classification something between an employee and an independent contractor. There are legal experts all over saying, “I have no idea what’s going to happen.” The law is way behind right now.

What about other markets like the cannabis industry that are not so black and white either?

Rampenthal: Up until recently, we’ve stayed out of a lot of that, mostly because at the federal level, there’s still a lot of illegality. It’s an undefined gray area.

So if an entrepreneur of a cannabis company came to LegalZoom seeking legal advice, what would you do?

Suh: The one business we don’t incorporate is medical marijuana.

Rampenthal: It just doesn’t lend itself to people who are out there just taking a gamble. We don’t incorporate enough medical marijuana businesses to make it such that we can get expertise in it and give people that level of advice.

Do you see your position changing depending on how the law evolves?

Suh: The evolution of business and the evolution of society radically outpace regulation and laws. They’re usually 30 to 50 years behind what is commonplace, but that’s what happens when you have a legal system based on precedent.

Rampenthal: It’s an industry that is highly reluctant to change. You can see the way engineering has changed. You can see how medicine has changed. But you don’t see anything like that in law. The only difference in the way law’s practiced today versus the way it was practiced in 1880 is fountain pen to ink pen to computer to tablet, but it’s the exact same broken business model that doesn’t work for the majority of Americans.

What are the legal mistakes you see many first-time entrepreneur making?

Rampenthal: The No. 1 mistake they make is they wait until they’re in trouble, and they scramble for a lawyer. It’s like waiting until a tooth falls until you go see a dentist. It’s just the wrong time. Establish a relationship with a trusted legal adviser. Whether it’s going to LegalZoom and paying $300 a year to have someone pick up the phone and call for advice or whether it’s finding a friend who graduated law school. You need a relationship with somebody who’s familiar with the legal system, so that when you have a problem, it’s not an emergency.

Suh: You can eliminate a lot of things with a bit of preventative care. If you have $150,000 of startup capital, spending 25% of it on a lawyer is ridiculous. As a serial entrepreneur, that makes me sick. You need to get it right out of the gate, but you need to select where you want to invest your dollars. We want to give you an affordable, comprehensive start and keep in contact with you through the early stages. It doesn’t cost a lot to do it right, but if you make a mistake, it can be devastating.