Understanding Monthly Legal Fees for Small Businesses

What are Monthly Legal Fees?

In general, the current US legal market is compared to a fortress that’s closed to small business owners; it’s usually not interested in, or equipped for, doing the work that small businesses so desperately need. Although legally cognizant small business owners have learned the hard way that they need legal support for various important endeavors, most small business owners don’t understand the functionality of monthly legal fees.
Monthly legal fees are as simple as they sound. They are fees that your legal advisor charges on a monthly basis in return for certain services that are bundled together. The monthly fee represents complete legal coverage for certain areas and services, which allows small business owners to plan their legal budgets, without having to worry about being left in the dark when a business related legal issue arises. Monthly legal fees normally include the following:
Retainers are not replacements for monthly legal fees. They are also common in the legal industry. A retainer is a lump sum that you pay upfront in exchange for a specific number of hours (or other quantifiable unit) of legal service. Whereas monthly legal fees are nearly always paid regardless of how many legal services you require, retainers are only spent based on usage . The amount of legal work that is translated into billing time is deducted from the retainer. Retainers are either deducted by hourly billing or some other measure of legal work.
Retainers are usually more cost effective than monthly fees, but, in the real world, many small business owners still find that they pose problems. First of all, unless you can make unilateral decisions about what is or isn’t necessary for your business, your legal advisor plays a major role in determining when and why you need to use your retainer. Your legal advisor doesn’t have access to the internal information about your company that would allow them to make fully informed decisions about retaining your business. Secondly, even the most well-informed businesses owners don’t know when legal needs might arise; very few people can predict the future with perfect accuracy.
Monthly legal fees are certain, as opposed to retainer costs, which can be understated or overestimated based on the client’s relationship(s) with their legal advisor. Monthly legal fees cost about the same on a yearly basis as retainers, but they provide much higher levels of value and transparency.

Factors that Influence Legal Fees

There are a number of factors which can determine legal fees for Small Businesses. The location of the business can have a significant impact on costs. For example, hourly rates for attorneys in Chicago, Illinois will tend to be significantly higher than for most markets in the United States. However, this varies significantly by region, with some smaller markets carrying higher rates than larger markets.
The complexity of the Small Business can also have an impact on the cost of legal fees. Simple formations of small businesses which have no real assets and no complex business relationships are much lower in cost than businesses where legal documents must be prepared which are more complex or which involve more negotiations among parties.
The specific legal needs of a Small Business can also impact the cost of legal fees. An intense litigation matter, including pre-litigation settlement discussions, discovery and trial can carry a significant premium over other legal matters where careful planning and drafting can avoid the costly pre-trial process.
Of course, any needs for outside professional services such as tax planning or estate planning may carry additional costs beyond the legal fees incurred directly.

Types of Legal Service for Small Businesses

There are many forms of legal services a small business owner may need as their business develops and grows.  However, the most common forms of legal assistance needed are general contract review and negotiations, tax compliance consultation, commercial lease negotiation and drafting, employment agreements, and dispute resolution advice and services. It is imperative that a business owner consult with an experienced attorney for any sort of contract negotiation or drafting, as contracts are binding legal documents with financial implications.  While a handshake may be a shortcut to a contract, verbal agreements are extremely difficult to uphold in court if the agreement goes sour.  Contracts need to be drafted carefully, especially when discussing delivery terms, time-frames, payment terms, interest rates, personal guarantees, governing law, confidentiality, covenants, and stock options, just to name a few. As a business grows, it is only natural for the business to end up leasing space to accommodate more employees and its growing stock.  Therefore, it is important to have an attorney help negotiate leases to ensure the best value for the space.  In order to protect your business, it is also necessary to have an attorney draft subleases, amendments, estoppels, and termination agreements. Tax regulations are constantly changing, and it is crucial to have professional guidance to help avoid penalties.  Employment agreements not only help clarify wages, dates of hire, and hours worked, but it also helps clarify any restrictive covenants for the benefit of both employers and employees. An employment agreement generally establishes when the employee may use PTO (Paid Time Off), how much sick pay is accrued, termination policies, and benefits. Having free consultations as well as retail rates helps to create flexibility to avoid running up those legal fees.

Estimating Your Monthly Legal Budget

When you are not paying a "retainer," the easiest way to project your legal fees is by looking at your past use of legal services. Identify the significant transactions your business has undertaken in the last year, and evaluate how many hours of legal work each required, and at what cost. With these figures, you can look at the calendar for the coming year and estimate how much time you will need for transactions. Using a fixed hourly rate for each lawyer, you can estimate a monthly legal budget. Keep in mind, however, that every small business will encounter unexpected issues as it grows. It is smart to account for this and plan to have a cushion in your vision of your yearly budget.

Tips to Save Money on Small Business Legal Service

Several strategies may help you reduce your monthly legal fees. Consider the following:

• Use a prepaid legal service. Although you have to sign up with a legal services provider, many people find these services worthwhile. Of course, it’s important to carefully read all of the paperwork, including terms and conditions, so that you know exactly what type of legal services will be covered and under what circumstances.
• Optimize your relationship with outside counsel. Always ask a potential outside attorney how he or she would bill for services and attempt to negotiate a lower hourly rate . For example, the attorney may use a "blended rate" (a different rate for each person in the firm who works on your case) or may be able to lower the rate if you agree to hire the firm on a retainer basis.
• Use some online resources. There are many outstanding, free resources on the Internet, including the American Bar Association website. You can also try the local bar association, which may offer free or low-cost Web-based legal information. For basic and frequently asked questions, the National Federation of Independent Business offers a guide.

Selecting Law Service You Can Afford

When choosing a legal provider for monthly legal services, there are several things you should look for. It goes without saying that you want to make sure the attorneys have experience, the ability and capacity to do the work, and a down-to-earth personality that meshes well with yours.
However, you need to look further than that to make sure that you make the right choice because every service provider will make the same pitch. Of course you want to check with references, but I don’t think anything is more indicative of a good attorney than a firm that offers free newsletters or educational seminars and/or workshops, including webinars. The reason is because the more a firm is willing to give away its knowledge, the more knowledgeable the firm actually is, and the less likely the firm is to struggle with learning on the fly and building a fee, particularly when it comes to a flat monthly service, where every hour counts.
So what else are you looking for? You want to look at the firm’s website. Many, if not most, attorneys’ websites are terribly outdated and do not provide enough information about who they are and what they do. Frankly, if an attorney or his firm represents a lot of clients, there’s little reason for putting a lot of personal information on the website other than making it clear who they are and their backgrounds.
However, every attorney should have a robust set of articles on their website. The articles should be nicely organized by topic, so that you can find what you’re looking for. Because these articles should be written by the attorney(s) personally and for their own site, it should have more insight and detail than an article that has been re-printed elsewhere. I will caution you here that some attorneys’ sites have a lot of articles on their sites and some have very few. In this era of super-specialty firms, many times the smaller firms’ articles are better because they are not as specialized as those of the large firms, and they don’t have a lot of marketing resources to generate content.
You can also ask potential attorneys questions in the interview process. For example, you can ask what makes the firm different. You can also ask whether the attorneys at that firm have tried a case in the last five years. Although having a litigation practice does not make an attorney a good business attorney, it does mean that the attorney has better experience thinking through issues from multiple perspectives. Negotiation with a customer or vendor, creating an internal policy, or drafting an agreement, these all require the ability to be creative and see multiple perspectives in order to come up with the best solution.
Finally, you can ask about the business structure of the firm. Is it a partnership or a corporation? How does ownership work? How about income distribution? Those are probably the biggest two questions. When the firm is a partnership, it really goes to your ability to bring in clients. If the firm is a corporation, it is much more likely to have a corporate structure and be more stable over the long term than a firm which is just a partnership. Finally, income distribution can say a lot about the firm. If there’s an even distribution, it says a lot about the culture and the value placed on sharing information and working together by the partners. Even if there’s an even distribution, you should look at the quality of the articles on the website. If you see multiple authors on many of the articles, you know it is a team environment at that firm, and it probably means that the articles are of good quality.

Impact of Legal Fees on Growth of Small Businesses

When a business is forced to spend cash flow for a monthly legal retainer, it immediately feels a strain on its ability to invest in sales and marketing to promote business. Likewise, short-term cash flow is affected when a business must pay for legal services "as needed" on an hourly basis.
Most attorneys can appreciate the difficulty of collecting large unpaid fees from a client at the end of a matter. Many times this causes the attorney not to pursue the fees; however , this puts them in the position of borrowing money from their line of credit or taking from their reserves intended for other business activities. The best way to avoid such situations is to plan for legal fees and determine what amount is available within the company budget for monthly legal fees. It isn’t enough to budget legal fees just once; businesses should meet at least quarterly to assess progress toward their legal goals and adjust the budget to reflect any changes in the trailing quarter.