Entrepreneurship, Legal Counsel, and Corporate Governance: The Key to Economic Recovery
Final Research and Writing Submission
Adrienne B. Haynes
University of Missouri-Kansas City School of Law
May 2013
Contents
- Introduction
- Entrepreneurs and Lawyers: Why we need each other
- What is Corporate Governance?
- Overview
- How do Principles of Corporate Governance Apply to Entrepreneurs?
- Successful Corporate Governance Strategies
- Criticism of Corporate Governance Principles when Applied to Entrepreneurship
- The Effect of Corporate
Governance on the Economy
- Elements of a “Successful Entrepreneurial Economy”
- A Look at the Numbers
- Conclusion
The more people who own little businesses of their own, the safer our country will be, for the people who have a stake in their country and their community are its best citizens. -John Hancock[1]
- Introduction
Businesses start with an idea; an idea of how to satisfy a need and generate a profit. These ideas originate from entrepreneurs. The word “entrepreneur” originates from a French word, entreprendre, which means “to do something” or “to undertake.”[2] The Merriam-Webster dictionary defines an entrepreneur as “one who organizes, manages, and assumes the risks of a business or enterprise.”[3] This overarching definition includes all new business starts and self employed persons, regardless of business activity.[4] A more narrow definition excludes “replicative entrepreneurs- those producing or selling a good or service already available through other sources”[5] and limits the scope of consideration to those “[entities] , new or existing, that provide… a new product or service or that [develops and uses] new methods to produce or deliver existing goods and services at lower cost.”[6]
Because the qualifying degree of entrepreneurship is dependent on which definition is subscribed to, quantifying the effect of entrepreneurship on the economy can be challenging.[7] The Small Business Administration (“SBA”) subscribes to the broad definition of entrepreneurship which includes all businesses, regardless of whether or not the business activity is new or existing. It defines a small business as “an independent business having fewer than 500 employees”[8]. In 2010, this number reached 27.9 million. There were only 18,500 firms with 500 employees or more.[9] It is clear that entrepreneurial activity is crucial to the economy, but entrepreneurship alone cannot prevent an economic recession.
The National Bureau of Economic Research (“NBER”) evaluates the state of the economy by analyzing trends in employment, personal income, sales volume in manufacturing and retail sectors and industrial production.[10] An economic recession is a period marked by “significant decline[s] in
[aggregate]
economic activity”[11] and is evident when “businesses cease to expand, the [gross domestic product] diminishes for more than two consecutive quarters, the rate of unemployment rises and housing prices decline.”[12] While the number of entrepreneurial venture births tends to rise during these times of economic downturns, it is not enough to turn the tide.
Theories on exactly how to catapult an economy out of a recession and onto a trajectory of sustainable economic expansion and recovery varies by school of thought. However, there is one common thread: economic recovery requires people to spend money. While at first glance, this logic may seem counterintuitive, an understanding that our economy is consumer driven may bring clarity. Spending money at a business indicates increased demand, which eventually requires business owners to hire more staff members. This has a positive effect on unemployment rates. In addition, increased demand encourages innovation and competition.
While statistics about business births during trying times may be encouraging, the majority of entrepreneurs have a keen awareness that if they want to survive the downturn they must take affirmative steps to prepare. Planning for long term business success involves strategic partnerships that foster targeted discussion and management emphasis on the application of corporate governance principles to small business. This essay will explore how partnerships between entrepreneurial business ventures and legal professionals can lead to sustainable business growth and development and thus, kick start economic recovery.
- Entrepreneurs and Lawyers: Why we need each other
While many paint a picture of lawyers and entrepreneurs being on opposite ends of the personality and priority spectrums, this has not always been the case. The two governing documents of the United States of America, the Declaration of Independence and the Constitution, were birthed by the collaboration of legal minds and business visionaries. Of the fifty-six delegates that signed the Declaration of Independence, twenty five were lawyers, seventeen were merchants, and fourteen were plantation owners, and many men served in more than one capacity.[13] Of the fifty-five attendees of the Constitutional Convention of 1787, “thirty-five were lawyers or had benefited from legal training”[14] and thirteen were businessmen. [15] The desired result of their joint work was, in essence, the purest form of social entrepreneurship- the promotion of entrepreneurship or development coupled with the advancement of fundamental principles of human rights to advance widespread and lasting societal change.[16] In order for their desires to become a reality, they understood that their partnership was necessary in order to develop a multidisciplinary system of governance.
It is not enough to blame the lack of collaboration on a presumption of differing priorities between the stereotypical unorganized, flighty entrepreneur and the introverted, money-hungry attorney. In order to eradicate this deep rooted societal perception, entrepreneurs must be empowered to be intelligent consumers of legal services and lawyers must be trained to read the market and to be holistic providers of legal services. Necessity requires a thoughtful analysis regarding how society can return to the collaborative mentality of our Founding Fathers and use corporate governance as a vehicle to educate and revive our economy with the marriage of effective lawyering and entrepreneurship.
If entrepreneurs and lawyers joined forces again to develop a multidisciplinary system of corporate governance, the resulting economic growth would have a higher likelihood of being sustainable and could be enough to increase rates of business survival and lower rates of national unemployment and debt levels. The current entrepreneurial movement is based heavily on the ideology that everyone can be their own boss. This shift has lead led to a waning of the creative and collaborative dynamic between the business and legal worlds. This newfound independence and self-sustainability has been exploited for taglines of endless articles and blogs on “Why Entrepreneurs Hate Lawyers” and “Why Lawyers and Entrepreneurs Can Never Get Along”. Charley Moore, the founder of RocketLawyer, found that most entrepreneurs still consider retaining legal counsel as an option that is burdensome, complex and expensive.[17] Unfortunately, according to the RocketLawyer 2013 Small Business Index, 47 percent of small business owners having less than 250 employees had never even consulted legal counsel. The reasons why business owners avoid seeking legal counsel may vary, but the reasons often include financial inability, a lack of understanding about what legal services they may actually need or the idea that they will seek counsel only if needed, or simply not knowing who to go to. While the reasons may be valid at one time or another, being intentional about cultivating a long lasting partnership between a small business firms and attorneys prevents the exacerbation of issues that, if left unaddressed, may lead to a business death.
Despite the harsh reality of the amount of business ventures that operate without legal counsel, the necessity of the relationship remains evident. Although legal considerations are embedded in the majority of business decision areas, the RocketLawyer report stated that over half of all business owners with less than 250 employees faced a legal problem in 2012.[18] Putting off legal discussions can lead to a multitude of problems, including improper formation, violation of preexisting intellectual property, or unintended tax consequences. The same report detailed that the top concerns reported by entrepreneurs dealt specifically with areas that require a lawyer’s guidance- “compliance with government regulations”, “choosing the right business structure and “incorporating properly.”[19] Working with an attorney can provide much needed guidance for a wide variety of topics including formation and entity classifications, intellectual property protections, tax status, capital management, management authority and compensation, labor and employment, and exit planning. The alternatives to legal consultation, such as do-it-yourself legal websites, other professionals who illegally perform legal tasks, and an influx of limited service pro-bono clinics, are ineffective at adequately addressing significant concerns and needs and may leave a business with only a portion of the process complete. More often than not, failure to invest in initial legal care leads to expensive legal bills or business failure when problems are discovered.
For entrepreneurs, the search for an attorney who both understands their needs and can provide needed services at an affordable price will require some time. The time spent on this part of the process is crucial- “[s]ome of the most expensive legal work is correcting work that was not done correctly the first time.”[20] As the legal field begins to change, entrepreneurs have a wide variety of choices, and can now choose from independent solo practitioners or a lawyer who may be located in a different geographic area. [21] It also helps for entrepreneurs to have a general list of legal issues they perceive to be relevant in their business strategy.
While entrepreneurs need lawyers, the inverse is also true. Lawyers need entrepreneurs. The economic recession had a crippling effect on the legal profession, resulting in layoffs, hiring freezes, and de-equitizing of partner shares.[22] In order for the profession to survive, there must be an influx of creative legal solutions that cater to the market. A quick comparison of the numbers of small businesses reported by the SBA versus the amount of businesses that do not seek legal care shows that there is a growing market that can tapped in to more intentionally. An honest look at the potential of almost half of small business firms being unrepresented by legal counsel “reflects an urgent need for better and cheaper legal services that can keep pace with the demands of a rapidly globalizing world.” [23] If the legal profession fails to take note, “the problem of unmet legal needs, [when] not solved by lawyers, “will be solved by technology.””[24]
In order for lawyers to appropriately address the needs to entrepreneurial ventures, they have to not only educate themselves on their areas of need but also provide the services in a cost effective way. Considering the effect of globalization on the legal profession, “few[er] clients have the ability or willingness to pay for this service under the traditional law firm model. It is either too slow, too expensive or too unpredictable.”[25] This begs the question of whether or not the legal market is realistically capable of catering to an influx entrepreneurs. A true shift towards meeting the needs of entrepreneurs means that legal professionals need to come up with ways to lower legal rates, bundle services, and educate business owners on various legal issues.
In order to properly analyze whether legal professionals will be able to connect with this underserved market, the spotlight must turn to governance practices in both the legal profession and the entrepreneurial movement. Per practice, attorneys have to be held responsible for the provision of quality services in a timely manner. By opening a firm’s doors to several new clients at once, a consciousness must be developed to take care of each client. While having 30 consistent clients may be better than two clients bringing in the same amount as 30, there is only so much time in a day. Lawyers may need to employ creative strategies on their own such as provisions of workshops to handle general questions, or outsourcing small document review cases. Fort the practice as a while, the policies and practices relating to self-regulation of the profession vary by country and the U.S. legal system is generally slow to incorporate any new changes. Internationally, other countries have loosened the restrictions that limit the collaborative efforts of lawyers and other professionals. The U.K. Legal Services Act of 2007 and the Australia Legal Profession Act both allow firms to solicit external investments and outside owners.[26] This shift was the outcome of discussions centered around how to create a “regulatory framework [that] would best promote competition, innovation, and the public and consumer interest in an efficient, effective and independent legal sector.[27] Employing strategic methods such as those used overseas would allow U.S. legal professionals the flexibility to consider other ways to generate profits, which could allow for fee flexibility.
- What
is Corporate Governance?
- Overview
Businesses, consumers and investors alike have been affected by the multitude of stories surrounding corporate misconduct and financial scandal that emerged from the lack of corporate accountability systems. Learning from these mistakes and promoting ethical business cultures through corporate governance can help a business develop a loyal customer base, increase the ability to gain funding, attract superior leadership, and contribute to long term business success.
Although the first entity type to come to mind when considering corporate governance principles is a corporation, there are many areas of corporate governance that apply to entrepreneurs and small businesses. Because corporate governance deals with the reputation and impact of businesses on the communities in which they are located, corporate governance touches decisions relating to formation, financing, and exit planning. While these decisions in these areas involve a necessity of legal analysis, the assistance of counsel is not often consulted. The development and incorporation of a well rounded system of corporate governance can be the vehicle that repairs the disconnect between the entrepreneur and the lawyer. The implementation of corporate governance may look different in different entity types or industries, but acknowledgement and the increasing practice of it has gained widespread attention.
To begin, a baseline understanding what corporate governance is must be established for an effective analysis of how legal counsel and corporate governance can promote entrepreneurial growth. In general, corporate governance is centered on monitoring and control systems used to prevent harmful business activities, regardless of whether the origin for the harm is internal or external. Specifically, corporate governance “refers to the set of systems, principles and processes by which a company is governed”[28] with an emphasis on “responsible business practices, […] community engagement, and sustained financial performance.”[29] It is based on doctrines of fairness, transparency, accountability and responsibility.[30] Corporate governance can be implemented in a variety of ways, from intentional organizational culture to mandatory legislation. The following paragraphs will highlight how corporate governance applies to entrepreneurial ventures and includes best practices and easy-to-implement solutions that can be used encourage strategic execution.
- How do principles of corporate governance apply to entrepreneurs?
A review of the Top Ten Legal Mistakes Made by Entrepreneurs as told by Connie Bagley shows that all 10 problems could have been avoided by partnership with a lawyer who was mindful of corporate governance protocols and directly correlates with the concerns reported in the Rocket Lawyer Small Business Index regarding compliance and formation issues.[31] Bagley’s top ten list adds inadequate provision of formation and financing information, premature disclosure and intellectual property mistakes, and most importantly, procrastination of legal counsel.[32]
In order to effectively implement corporate governance policies, it is necessary to review the business issues dealt with by entrepreneurs and create a framework that minimizes the frequency faced issues while encouraging transparency, accountability, and a mindfulness of the community stakeholders. Any small business that desires to apply principles of corporate governance into their business strategies needs a lawyer, in addition to other professional service providers, to help the navigate through the “increasing complex […] patchwork of rules, policies, and guidelines related to corporate governance.”[33] Consulting with legal counsel adds long term value to a business because “sound corporate governance can reduce market volatility, encourage investment, and promote sustainable productivity and growth”.[34] The incorporation of a governance policy will ensure that businesses not only survive economic downturns, but continue to thrive in the recovery.
- Successful Corporate Governance Strategies
The following paragraphs will discuss nine corporate governance strategies that, with the help of legal counsel, can be incorporated to recession proof an entrepreneurial venture. They are: planning for the unexpected, business formation, management and operational decisions, financial transparency, employee relations, government regulations, growth, becoming a valued member of the community, and exit planning. Before an initial consultation, it is important for entrepreneurs to have a general idea of what issues they’d like to address or get insight on. As business and legal issues are tightly intertwined, a general awareness about what advice is needed can keep legal costs down and ensure that the partnership remains one of mutual benefit. Keep in mind that one attorney may not be able to provide all these services, and that specializations may vary.
Planning for the Unexpected
Most importantly, an effective business lawyer’s mission should be to get an understanding of their client and their industry to make sure the business is protected against things that traditionally go wrong, as well as some of the less common occurrences. A lawyer’s job is to identify the “what if’s” and plan for them. Corporate governance is how that plan is instituted. When a business, whether created from necessity or opportunity, is starting out, no owner will have the judgment to consider and protect themselves from every obstacle without assistance. Meeting with an attorney for an initial consultation will help an entrepreneur get a look into the legal issues that they need to consider.
During the first few meetings with an attorney, an entrepreneur may feel overwhelmed. The attorney will likely be asking several questions, some of which an entrepreneur may not have considered or want to face. However, these conversations about how to handle general topics such as insurance to hard topics such as embezzlement, key person death and intellectual property protection prove to be invaluable in the long term. Consideration and planning for how to handle crucial business decisions and emergencies from an objective, non-urgent perspective can keep a business afloat in the hardest of times.
One of the most common ways that a lawyer can protect a small business is by document preparation or review. While many online legal service organizations provide forms, to be fully protected, it is important to have an in person consultation with an attorney to make sure that the forms will give a business adequate protection. Having a professional review of leases, offer letters, confidentiality agreements, option agreements, and customer contracts can save substantial amounts of money in future legal fees, if the forms are challenged.[35]
Business Formation
There are many types of business entities available to an entrepreneur and assessing the advantages and disadvantages of each is difficult, even with experience. During the formation stage, a business lawyer can help provide an overview of which entity type may work best depending on the purpose of the business, the permitted activities, and the industry. The differences between the structures vary based on the state of the principal place of business and include variables ranging from management authority and liability, tax classifications and consequences, to applicable state, local, and federal regulations. An attorney also can educate entrepreneurs on new or alternative forms of entities available in certain states for enterprises with focus on social entrepreneurship. For instance, entities such as benefit corporations, flexible purpose or social purpose corporations, low-profit limited liability companies (“L3C”), and tax-exempt nonprofit corporations are a few non-traditional entity types that are gaining traction in the entrepreneurial movement.[36]
Formation of a business also requires compliance with permits and licenses that vary between industries and locations. What constitutes compliance can vary between local, state, and federal levels. For example, running a business out of one’s home would require insight into whether or not that is permitted or regulated by a homeowner’s association agreement as well as local zoning regulations. If a business activity involves anything that is supervised or regulated by a federal agency, such as agriculture, alcohol, radio or television broadcasting, or transportation and logistics, federal licenses and permits may be required.[37] Lastly, compliance may also be required in certain industries by specialized associations and independent agencies.
Beginning a business requires a look into relationships with third parties as well. If the venture is a start up, the founding entrepreneurs must either ensure or disclose the existence of any covenants not to compete with former employers. A diligent name and intellectual property search can keep businesses from engaging in infringement of another’s intellectual property. If a business has been in operation for any period of time, they may also need to consider the implications of any pre-existing debts of the business and how they could affect future business activity.
Management and Operational Decisions
Allocating management roles and responsibly areas requires in depths discussions about time, capital commitments and various other topics. Targeted questions will likely include discussions about financial obligations, contributions, distributions, conflicts of interest, and transfers of interests. This information can be used to make a term sheet, which serves as an outline for both business owners and potential investors. Involving a lawyer in management operations decisions is important because it may be difficult for multi-owner enterprises to plan for what will happen in the event of a major disagreement or owner death, disability, or divorce. By talking through these topics, the goals of corporate governance are furthered because they promote forward thinking and a plan for business continuance even in the case of interruptions or management turnover.
A lawyer may also provide guidance for entrepreneurial ventures who want to have an unconventional method of management, such as an external board. A lawyer can educate owners on how to conduct meeting, take minutes, and how to document those practices in the organization’s formation documents. Incorporating the idea of an external board provides many advantages, such as a larger network, different perspectives to assist in decision making and external know-how. [38] A lawyer can also facilitate discussions between owners and potential external board members. Having an attorney who is familiar with a business will be evidence of professionalism and commitment to the strategy.
Financial transparency
Raising capital is vital to the transition from idea to reality for most entrepreneurs. In most cases, the financial analysis of a new business is steeped in projections that may or may not prove to be accurate. The application of corporate governance in the financial context is important on the front end because “investors have indicated a willingness to pay a premium of 10 to 15 percent [more] for companies with excellent corporate governance practices.” [39] In addition, taking the initial time to do research on financial projections will undoubtedly boost investor confidence and lead to increased returns. Entrepreneurs and business owners who “systematically make poor forecasts quickly find themselves unable to secure any further resources for investment and eventually exit the market.”[40] Although business attorneys will appropriately suggest consultation with a certified public accountant, they can assist with the financial transparency portion of formation by creating non-disclosure agreements. They can also provide valuable expertise on what information is necessary to prepare for venture capitalists, what to include in investor agreements, and also advise on the practice of trading ownership shares for capital.
A capital raising strategy that has gained popularity in the entrepreneurial movement is crowdfunding. Crowd funding, also known as crowd sourcing, is a popular method for entrepreneurs to raise capital by soliciting a large number of small investors, typically through websites that are specifically designed to monitor the fundraising efforts. [41] The contributions received can be categorized into five models[42] of either gifts or investments. Contributions that are considered gifts are given to the fundraising entrepreneur without the subsequent expectation of an interest in the venture or any of its future earnings. [43] The types of crowd funding contributions that fall under the gift classification are those made under the donation model, the reward model, and the pre-purchase model.[44] Contributions that are classified as investments are equity capital and function as loans, complete with repayment terms.
The reality of the crowd funding exception enacted by Congress under the JOBS Act does have the potential to serve as an effective tool to aid in the entrepreneurial plight to raise capital. However, as an attorney can advise, crowdfunding does not make reaching financial goals happen automatically or without obligation. Equity capital via crowdfunding has many of the same restrictions as traditional equity investments. It does require consideration, or a legally enforceable return promise, from the soliciting venture’s management, which can come with repayment terms or the potential for third party ownership options. In addition, using the money for purposes not initially disclosed can lead to “claims of fraud, misappropriation, conversion and embezzlement, which lead to the risk of financial exposure in the form of adverse judgments and the cost of litigation.”[45] Consultation with an attorney about how to best seek and utilize capital speaks to the element of transparency associated with corporate governance.
Employee Relations
Coordinating a staff can be a source of headache for business owners. Lawyers can help protect the interests of the business by setting parameters and drafting employee and subcontractor agreements and highlighting and coordinating compliance with laws relating to benefit plans, workers compensation, unemployment insurance, and payroll compliance. For start-ups, having enforceable restrictive covenants is also crucial because all business owners have legitimate interests in preserving and protecting their businesses. This includes protection over valuable items such as overall business strategies, trade secrets, and customer lists. The four main types of restrictive covenants include non-compete agreements, non-disclosure and confidentiality agreements, non-solicitation agreements, and assignments-of-innovation agreements. During the course of employment, maintaining complete employee files that contain any reviews or write-ups is also an important protection against potential employee lawsuits.[46]
Managing a staff well during times of economic success and also downturn goes hand in hand with corporate governance because it is evidence of a mindfulness towards stakeholders. During a downturn, the costs associated with maintaining a staff are among the first cut. However, creating a plan, both in desired process and financial arrangements, to maintain key personnel is invaluable. For most entrepreneurial ventures, staff members are committed to the success of a business and have a sense of ownership and loyalty. Keeping invested staff members and also being able to recruit talent from other organizations shows business strength and acumen.
Government Regulations
The responsible business practice of partnering with an attorney up front to identify the appropriate responses to government regulations is in alignment with the purpose of corporate governance. Whether or not the economy is in a recession, there are several governmental agencies that small business owners need to be mindful of, including the Internal Revenue Service, the Department of Labor, and the Equal Employment Opportunity Commission. Unless intentional, many requirements for these agencies can go unnoticed, which can undoubtedly lead to negative financial ramifications. Jordan Guernsey, the entrepreneur behind Molding Box, an outsourcing company, places a high emphasis on using an attorney to navigate through government regulations. “At one point, I was being sued by the Department of Workforce Services for [$100,000]. I had no idea I even needed to work with them when I first started up! Luck would have it that I had a great lawyer and ended up settling for a heck of a lot less.”[47] Making government compliance a part of a corporate governance strategy will allow a business to operate at maximum potential by experiencing sustained economic performance and increased management and investor confidence.
Growth
Growth of a business can occur in several ways and may be planned or unplanned. Planned expansion can occur through entering international markets, participating in either a merger, acquisition, or takeover, or choosing to make the transition from a private company to a public one.[48] Unexpected growth occurs when a business has unforeseen growth, and while a boost in profits sounds desirable, the expansion can “force the organization into a situation requiring rapid adaptation to the growth.”[49]Having a plan to deal with both possible instances of growth is important, and working with a lawyer can empower a business owner to take an objective approach to the benefits and risks associated with each growth path and measure them against long term business goals.
If a business chooses to go public, preparing for an initial public offering (“IPO”) requires organization, time, and an understanding of trading markets, including the New York Stock Exchange, the American Stock Exchange, the Regional Exchanges and the OTC markets. An attorney with an understanding of federal and state securities law issues and each market’s listing rules can help a company remain in compliance with the Securities and Exchange Commission through the complicated process. Once an IPO is complete and a company becomes listed on an exchange, there are continued obligations under the Securities and Exchange Act of 1934, such as management discussion and analysis requirements and various disclosure obligations. In addition, an attorney can assist a small business owner with understanding their obligations under other laws such as Sarbanes-Oxley and the JOBS Act.
Becoming a Valued Member of the Community
A major component to corporate governance involves conducting all business operations and strategy implementations with a mindfulness of how the actions will impact stakeholders. Stakeholders can include members of the community in which the business both operates in and services, the employees, the customers, the environment, and any other group or interest that management feels they are accountability to. Actively expressing stakeholder appreciation may manifest in a variety of ways, including providing grants to local schools or charitable organizations or committing to a strategy of recycling and other green business practices. An attorney can assist small businesses by transforming the shareholder view into the concrete strategies that guarantee these commitments and keep management accountable.
To survive an economic downturn, a business’ stakeholders must have not only a remembrance of them, but a loyalty.[50] By remaining in alignment with a business’s initial purpose, taking care of employees, and staying active in local communities, small business firms can leverage their goodwill to stay afloat.
Exit Planning
Most entrepreneurs don’t start with a plan for ending a business. Regardless of whether or not they plan to sell, most foresee the business continuing. Working with an attorney can help flesh out concepts relating to events that would lead to a winding up of the business, as well as how to diligently prepare for a sale. Corporate state statutes may have mandatory processes that can trigger a winding up, but some statutes can be opted-out of. This is an important concept to understand during the organization of a business. A lawyer can also advise a selling entrepreneur on subjects such as stock sales versus asset sales and how to handle “existing contract rights and obligations (loans, real estate and equipment leases, rights of refusal, shareholders agreements, employment agreements, supply contracts, production contracts, distribution agreements, franchises, intellectual property rights, etc.) [and] employee benefit plans.”[51]
- Criticism of Corporate Governance Principles when Applied to Entrepreneurship
Because most entrepreneurs are “motivated by freedom,”[52] some argue that the use of corporate governance in entrepreneurship will minimize creativity and is thus directly opposed to the very essence of entrepreneurship. Incorporating these standards does come with a cost. It is requires business owners to commit time to finding the right lawyer and working through short and long term legal needs. It also carries a financial burden. However, legal consultation should not be limited to crisis or ad hoc situations. In fact, the opposite is true. Utilizing a lawyer early on in a business process provides guidance and structure. “Entrepreneurial firms need to harness the positive discipline that comes with corporate governance but
[the implementation of the aforementioned strategies]
can co-exist with innovation, research, and development…”[53] The consistent use of legal counsel and the incorporation of corporate governance principles gives business owners the freedom to be creative while resting assured that they are protecting the many interests of their business, are in compliance with local, state, and federal regulations, and sets a foundation for long-term success.
- The Effect of Corporate Governance on the Economy
Effective corporate governance has proven to be essential for economic growth and “[s]uccessful entrepreneurs expand the size of the economic pie for everyone.”[54] If entrepreneurs and lawyers joined forces to incorporate the principles and diligence of corporate governance, the resulting entrepreneurship and innovation will have a long lasting positive effect on the economy. The economic impact would be rooted in systems designed to withstand economic fluctuations by planning for the unexpected in advance. Throughout fluctuations, the ability to maintain a commitment to stakeholder relationships and compliance with any local, state or government regulations will allow business owners to continue to focus on delivering business value. Without a synergistic culture of governance, inefficient economic decision making is inevitable,[55] as our nation first experienced under the Articles of Confederation and again witnessed in the corporate scandals of Worldcom and Enron.
- Elements of a “successful entrepreneurial economy”
The fostering of entrepreneurial ventures has played a large role in the development of many countries, including the United States. While this is true, the effect of responsible entrepreneurship on the economy is largely understudied. Typical economic analysis centers only on the elements surrounding the transaction like cost, demand, and the “optimal pricing and input combination” without any regard to the entity from which it derives. However, as correctly analyzed by the authors of Good Capitalism, Bad Capitalism, for economies to experience sustainable growth, there “must [be] some essential parts or components that work in harmony if they are to promote entrepreneurship, innovation (and its dissemination) and growth most effectively.”[56] They outline the necessary elements of a “successful entrepreneurial economy” as including: ease of start up and exit, a “reasonably well-functioning financial system”, “flexible labor markets”, an effective system of the enforcement of “property and contract rights”, “incentives to innovate and grow” such as “effective antitrade laws” and an “openness to trade”. [57] Essentially this is corporate governance, and the quality of this reality this is positively correlated to the degree of lawyer involvement in a small business.
While the authors correctly analyze what it takes to create this economy, they incorrectly discount the ability for replicative entrepreneurship to contribute to economic growth. Replicative entrepreneurs are those that are engaged in “producing or selling a good or service already available through other sources.”[58] A review of the factors of that contribute to economic growth coupled with the understanding that replicative entrepreneurship provides a “route out of poverty, a means by which people with little capital, education, or experience [to] earn a living,”[59] replicative entrepreneurship must have a positive effect on economic growth and sustainability.
Forty-seven percent of small business owners have never consulted legal counsel.[60] If even half were to do so, the reality of a “successful entrepreneurial economy” would be within reach. Consulting with an attorney at the onset of business development encourages business owners to properly plan for a business’s launch and also compels them to engage in exit planning. By protecting their intellectual property and other business interests, entrepreneurs are given the freedom to innovate and grow their operation without fear of uncertainty or infringement without recourse. Additionally, involving a lawyer in document preparation and review contributes to making the goal of having an effective system to enforce property and contracts rights more attainable. Taken together, the partnership of entrepreneurs and business lawyers, as well as the insight of other market professionals like certified public accountants allows for flexible labor markets and well functioning financial systems.
- A Look at the Numbers
Small businesses support our economy in a variety of ways. Small business firms, independent businesses with less than 500 employees, [61] make up “99.7 percent of U.S employer firms, [and provide] 64 percent of net new private-sector jobs, 49.2 percent of private-sector employment, 42.9 percent of private-sector payroll, 46 percent of private-sector output, 43 percent of high-tech employment, 98 percent of firms exporting goods, and 33 percent of exporting value.”[62] Consequently, increased entrepreneurial activity during recessionary periods is imperative. Among many of the economic benefits derived from small businesses, the effects on job development and employment are noteworthy. “Small firms accounted for 64 percent of the net new jobs created between 1993 and 2011 (or 11.8 million of the 18.5 million net new jobs). Since the latest recession, from mid-2009 to 2011, small firms, led by the larger ones in the category (20-499 employees), accounted for 67 percent of the net new jobs.”[63] If small businesses were able to responsibly incorporate the practice of “hire, not fire” even during periods of declining economic activity, the symptoms of a recession may be short lived and alleviated faster. Steady employment rates and practices by these entities would significantly reduce the amount of unemployment and would have inverse effect on the traditional indicators of a recession- when “businesses cease to expand, [and] the [gross domestic product] diminishes for more than two consecutive quarters… [64]
The survival rates for small businesses are stark, but they don’t have to be. According to the SBA Office of Advocacy, almost 50 percent of businesses birthed survive longer than five years and a third of those survive 10 years or more.[65] In light of recent economic conditions, it comes as no surprise that the amount of business death was higher than the percentage of business births but the statistics reported in 2011 show an increase.[66] Nonemployer firms have turnover rates three times as high as employer firms, mostly because it is easier for nonemployers to start and stop, as they tend to be smaller than employer firms.”[67] In addition to the failure rates, the businesses that do survive the recession have experienced a decline in their employment levels. [68] In comparing the number of business births and deaths against the factors that contribute to a “successful entrepreneurial economy”, it is evident as outlined in this paper, that influence of legal counsel is a crucial factor in helping institute corporate governance practices and thus ensuring long term business value and sustainability. And it is this sustainability that contributes to the overall health of our economy.
- Conclusion
Entrepreneurs and lawyers must be
intentional about leveraging the benefits they stand to gain by successful
collaboration. For the dedicated entrepreneur, partnership with legal counsel
undeniably provides access to big-picture thinking and business protection.
Used wisely, the relationship can lead to sustainable profits, successful
investor relationships, and a system focused on long term compliance. For a
creative and enterprising lawyer, educating and positioning oneself to be a
valuable asset to small businesses can serve as not only an opportunity for
craft mastery, but as a protection against the fluctuating employment rates in
the legal industry. By working together, economies will be comprised of more
capable and prepared business owners. Their success in turn promotes healthy
employment rates and continues the furtherance of the entrepreneurial movement.
[1] Carl J. Schramm, The Entrepreneurial Imperative 5 (2006).
[2] Russell S. Sobel, The Concise Encyclopedia of Economics: Entrepreneurship, Library of Economics and Liberty (2008) http://www.econlib.org/library/Enc/Entrepreneurship.html.
[3] Entrepreneur, Merriam-Webster Dictionary Online http://www.merriam-webster.com/dictionary/entrepreneur#.
[4] See, William J. Baumol, Robert E. Litan, and Carl J. Schramm, Good Capitalism Bad Capitalism and the economics of Growth and Prosperity 2 (2007).
[5] Id.at 3.
[6] Id.
[7] Russell S. Sobel, The Concise Encyclopedia of Economics: Entrepreneurship, Library of Economics and Liberty (2008) http://www.econlib.org/library/Enc/Entrepreneurship.html.
[8] Small Business Administration, Frequently Asked Questions (2012) http://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf.
[9] Small Business Administration, Frequently Asked Questions (2012) http://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf.
[10] See, Recession: What Does it Mean to Investors?, Investopedia (Mar., 19, 2010) http://www.investopedia.com/articles/02/100402.asp.
[11] The NBER’s Business Cycle Dating Committee, The National Bureau Of Economic Research (Sept. 20, 2010) http://www.nber.org/cycles/recessions.html.
[12] What Causes A Recession?, Investopedia (Feb. 26, 2009) http://www.investopedia.com/ask/answers/08/cause-of-recession.asp.
[13] U.S. National Archives & Records Administration, Signers of the Declaration of Independence, The U.S. National Archives & Records Administration (May 15, 2013) http://www.archives.gov/exhibits/charters/print_friendly.html?page=declaration_signers_factsheet_content.html&title=NARA%20|%20The%20Declaration%20of%20Independence%3A%20Signers%20Factsheet.
[14] America’s Founding Fathers: Delegates to the Constitutional Convention, The Charters of Freedom (http://www.archives.gov/exhibits/charters/constitution_founding_fathers_overview.html.
[15] Id.
[16] What is Social Entrepreneurship?, PBS: The New Heroes, http://www.pbs.org/opb/thenewheroes/whatis/ (last visited Dec. 10, 2012).
[17] Rocket Lawyer Releases the 2013 Small Business Index, Market Wired (Jan. 30, 2013, 9:00 AM) http://www.marketwire.com/press-release/rocket-lawyer-releases-the-2013-small-business-index-1751261.htm.
[18] See supra note 20.
[19] Supra note 20.
[20] Matt Faustman, How Entrepreneurs Are Saving Tens Of Thousands On Legal Bills, Venture Beat (Nov. 23, 2012, 2:55 PM) http://venturebeat.com/2012/11/23/startup-legal/#8jPkgEiycvCWFHYq.02.
[21] Id.
[22] William D. Henderson, & Rachel M. Zahorsky, Law Job Stagnation May Have Started Before the Recession—And it May be a Sign of Lasting Change, ABA Journal, Jul. 1, 2011, available at http://www.abajournal.com/magazine/article/paradigm_shift/.
[23] Id.
[24] Id.
[25] Id.
[26] Milton C. Regan, Jr., Lawyers, Symbols, and Money: Outside Investment in Law Firms, 27 Penn St. Int’l L. Rev. 407, 409 (2008).
[27] Id.
[28] Lisa Mary Thomson, What is Corporate Governance, The Economic Times (Jan. 18, 2009) http://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_corporate-governance-satyam-books-fraud-by-satyam-founder.
[29] George Kell, Corporate Governance: The Foundation for Corporate Citizenship and Sustainable Business, Global Corporate Governance Forum-International Finance Corporation (2009) http://www.unglobalcompact.org/docs/issues_doc/Corporate_Governance/Corporate_Governance_IFC_UNGC.pdf.
[30] Lisa Mary Thomson, What is Corporate Governance, The Economic Times (Jan. 18, 2009) http://articles.economictimes.indiatimes.com/2009-01-18/news/28462497_1_corporate-governance-satyam-books-fraud-by-satyam-founder.
[31] Rocket Lawyer Releases the 2013 Small Business Index, Market Wired (Jan. 30, 2013, 9:00 AM) http://www.marketwire.com/press-release/rocket-lawyer-releases-the-2013-small-business-index-1751261.htm.
[32]Top Ten Legal Mistakes Made by Entrepreneurs, Harvard Business School Working Knowledge (March 3,2003) http://hbswk.hbs.edu/item/3348.html
[33] The Business Value of Good Corporate Governance 2, Microsoft download.microsoft.com/download/e/5/0/…/corporatecompliance.pdf
[34] The Business Value of Good Corporate Governance 1, Microsoft download.microsoft.com/download/e/5/0/…/corporatecompliance.pdf
[35] The Young Entrepreneur Council, 14 Legal Tips for Starting Up, Inc. (Aug. 31, 2012) http://www.inc.com/young-entrepreneur-council/unexpected-legal-issues-while-starting-up.html?nav=pop.
[36] See Cassady Brewer, Social Enterprise Entity Chart as of March 5, 2013.
[37] Small Business Administration, Federal Licenses & Permits, http://www.sba.gov/content/what-federal-licenses-and-permits-does-your-business-need
[38] Catarina Alexon, External Directors Boost Startups, Business Week http://bx.businessweek.com/entrepreneurship-in-a-recession/view?url=http%3A%2F%2Fcatarinasworld.com%2Fexternal-directors-boost-startups%2F.
[39] The Business Value of Good Corporate Governance 2, Microsoft download.microsoft.com/download/e/5/0/…/corporatecompliance.pdf
[40] Peter G. Klein, Entrepreneurship and Corporate Governance, Quart. J. Austrian Econ. (1999) 2:19-42,
[41] Small Business Administration, Frequently Asked Questions about Small Business Finance (2011), http://www.sba.gov/sites/default/files/files/Finance%20FAQ%208-25-11%20FINAL%20for%20web.pdf
[42] C. Steven Bradford, Crowdfunding and the Federal Securities Laws (Draft) , page 10, Oct. 7, 2011, http://www.sec.gov/info/smallbus/acsec/bradford_crowdfunding.pdf
[43] See supra note 51 at 11.
[44] See supra note 51.
[45] Stephen Ma & Bryan Sillivan, Ten Ways to Avoid Getting Sued Over Your Next Kickstarter, (May 15, 2013), available at http://www.forbes.com/sites/ciocentral/2013/05/15/the-ten-commandments-of-crowdfunding/?utm_campaign=forbestwittersf&utm_source=twitter&utm_medium=social
[46] The Young Entrepreneur Council, 14 Legal Tips for Starting Up, Inc. (Aug. 31, 2012) http://www.inc.com/young-entrepreneur-council/unexpected-legal-issues-while-starting-up.html?nav=pop.
[47] The Young Entrepreneur Council, 14 Legal Tips for Starting Up, Inc. (Aug. 31, 2012) http://www.inc.com/young-entrepreneur-council/unexpected-legal-issues-while-starting-up.html?nav=pop.
[48] What is Business Expansion, Legal Match, http://www.legalmatch.com/law-library/article/business-expansion-lawyers.html
[49] Id.
[50] Karen E. Klein, Recession-Proof Your Business (Jan. 30,2008), http://www.businessweek.com/stories/2008-01-30/recession-proof-your-businessbusinessweek-business-news-stock-market-and-financial-advice.
[51] Barbara Taylor, How a Lawyer Can Help You Sell Your Business (March 8, 2010, 10:21 AM) http://boss.blogs.nytimes.com/2010/03/08/how-a-lawyer-can-help-you-sell-your-business/
[52] Brian S. Cohen, Corporate Governance and the Entrepreneur 23 (The Berkley Electronic Press 1997)
[53] Tan Wee Lang & Tan Keck Meng, Applying Corporate Governance Codes to Entrepreneurial Firms, Singapore accountant (February 2010) available at www.icpas.org.sg/…/20110124053556634314873565781250.pdf.
[54] Russell S. Sobel, The Concise Encyclopedia of Economics: Entrepreneurship, Library of Economics and Liberty (2008) http://www.econlib.org/library/Enc/Entrepreneurship.html.
[55] See, William Witherell, Corporate Governance: A Basic Foundation for the Global Economy, OECD Observer, http://www.oecdobserver.org/news/archivestory.php/aid/317/Corporate_governance:_a_basic_foundation_for_the_global_economy.html
[56] William J. Baumol, Good Capitalism, Bad Capitalism 6 (Yale University Press 2007)
[57] Id. at 7.
[58] Id.
[59] Id. at 3.
[60] Rocket Lawyer Releases the 2013 Small Business Index, Market Wired (Jan. 30, 2013, 9:00 AM) http://www.marketwire.com/press-release/rocket-lawyer-releases-the-2013-small-business-index-1751261.htm.
[61] Small Business Administration, Frequently Asked Questions (2012) http://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf
[62] Id.
[63] Id.
[64] See, Recession: What Does it Mean to Investors?, Investopedia (Mar., 19, 2010) http://www.investopedia.com/articles/02/100402.asp.
[65] Small Business Administration, Frequently Asked Questions (2012) http://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf.
[66] See supra, note 81
[67] See supra, note 81.
[68] See supra, note 81.