Podcast 2.5: Low cost business legal advice with Doug Moseley

Summary:

Doug Moseley is a lawyer with the University of Akron Law School’s SEED Legal Clinic, The SEED Legal Clinic provides very low cost legal services for entrepreneurs. It’s mission is to enrich their senior level law school students by giving them experience dealing with real client matters under the supervision of staff attorneys, while exclusively serving new businesses that can’t afford an attorney.

#entrepreneur #entrepreneurship #SmallBusiness #FoodTruck #podcast #NEO #Ohio #SBDC

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Transcript of Biz Chat Ohio’s podcast 2.5: Doug Moseley

Hello everyone. Welcome to Biz Chat Ohio, the podcast bringing you big ideas for small businesses and the best of small business news and industry trends from Ohio’s thought leaders. This podcast is made possible by Lakeland Community College and the Ohio Small Business Development Center. I’m your host, Cathy Walsh, director of the Small Business Development Center, and I’m joined by my co-host, Gretchen Skok Disanto, director of the Lakeland Community College Entrepreneurship Center and business advisor for the Ohio Small Business Development Center.

As I’m sure we all know, setting up a business on a firm foundation with good legal advice averts a lot of headaches down the road. And full disclosure for everybody listening today, I am a law school dropout. I did not cut it like our very seasoned guest today. But I did learn in one year of law school that, yes, there can be a lot of headaches if you don’t get legal advice.

So what we see at the SBDC is a lot of entrepreneurs often skimp on working with an attorney at first. They decide to just wing it and obviously they do that because they think they’re going to be saving some money. Today our guest is going to be discussing important areas of starting a business we’re winging it truly should be avoided. And he’s also going to offer some resources that can fit in any startup budget.

Yeah, thanks, Gretchen. So today we are joined by Doug Moseley, who directs the SEED Clinic at the University of Akron. Doug recently completed a long and successful career with Meggitt Aircraft Braking Systems, formerly Goodyear Aerospace Corporation, last holding the position of Vice President of Research and Technology. Doug played a major role in developing and implementing Meggitt’s current intellectual property protection program for comprehensively protecting IP from invention disclosure through patenting or other means. These experiences led him to pursue his juris doctorate degree from the University of Akron. Doug now, Professor Moseley, joined the University of Akron School of Law in 2018 and is the director of the Small Entrepreneur and Economic Development, or SEED Clinic.

Doug additionally holds a master’s degree in mechanical engineering from the University of Akron and a bachelor’s degree in physics from the Ohio State University. Sorry about that. He holds six patents and brings to the school of law the perspective of an industry executive who utilized both in-house and outside counsel services from a client’s viewpoint, appreciating succinct, timely, and on point legal guidance. Doug, thank you for joining Gretchen and me today. We are really looking forward to this conversation.

It’s my pleasure. Thank you very much.

So let’s dive right into this. And we want to first start talking about the basics of starting a business from a legal perspective. And we could spend an entire show discussing forms of ownership like partnerships and LLCs, but I want to skip over that and assume that our businesses have already crossed that hurdle. And let’s go a bit beyond the business formation. Can you talk a little bit about the importance of operating agreements and perhaps what key policies or protocols need to be addressed in an operating agreement?

Yes, I certainly can. And that’s a great question. Many times our clients start at exactly at that point when we begin to interview them so that we can provide services. One quick comment. That string of business types that you mentioned, they sounded like equals. Take your pick. It’s 31 flavors of ice cream. What do you like the best? But they aren’t. And just to quickly state business forms like sole proprietorships and partnerships do not have any liability protection between the owner of the business, their assets, and a claim or loss against the business. On the other hand LLCs and corporations do.

And so we always advise our clients to form one of those two types. We lawyers are risk averse. Our job is to protect our client from risk and loss. And so we always default to LLCs and corporations as business forms. And again, if you operate as a sole proprietorship or a partnership, a loss of the business is a loss against your personal assets, home, bank accounts, et cetera. We like to avoid that.

Let’s get back to operating agreements. That’s a great question. So operating agreements are associated with limited liability companies. And an analog for a corporation would be its bylaws. Now, it’s great to talk about operating agreements, because almost all of the companies that form these days in Ohio form as limited liability companies. More than 90% of Ohio registrations every year are LLCs. So it’s by far the predominant business form.

When an LLC with its unique liability protection for its owners, when it has more than one member, then it should have its operating agreement. The distinction is if there’s only one member of an LLC, that member makes all the decisions. You don’t need an operating agreement. They do need to follow Ohio Revised Code Chapter 1706. But where you have more than one member, you can still follow Ohio Revised Code, but it’s very restrictive.

And so what we like to do at SEED is interview our multi-member LLCs with a particular questionnaire and then establish an operating agreement, which is around a 10 page document. And it divides up the responsibilities that the members have in running the business. It does things such as lists the particular owners, lists the business purpose. It importantly allocates how revenues are going to be shared.

Who has more interest in the business or less? It allocates losses and it gives you the flexibility to declare voting rights amongst members and management roles, how a member may leave the LLC, which does happen, under what conditions. Do you give the LLC the right to buy out that membership? We usually do. But again, this is up to the individuals.

Who do you allow to join the LLC as an owner? Can it only be a family member? Can it be anyone? Does that require unanimous approval of all the existing owners? It almost always does. But these are the kind of questions we answer in the framework we build within this operating agreement. And that becomes your rulebook for how you operate your LLC.

Now that we have a better understanding of operating agreements, can an operating agreement protect you from liability? And also what are some ways a small business owner can protect their business from liability issues?

That’s another great question that is really typical with our clients. One would think when you’ve established this nice rulebook, this framework, here’s how we’re going to operate, and we’ve checked the box on liability protection. But in reality, that’s your guide. And it’s not the basis for your liability protection. And most people find that surprising. So it’s certainly worth talking about.

The liability protection that you get in forming a limited liability company comes at formation when you register with the state of Ohio or some other state if you live in another state. And that liability protection exists as long as you operate properly according to the state code and requirements. And there’s just two or three things that are most key to that and to keeping your liability shield.

One of those is that you generally need to carry general liability insurance for your company. An uninsured company is seen as not a company at all legally because it looks like it was formed purely to provide a liability shield but with no assets, take care of a liability if it occurred. So liability insurance is important.

And then the two other important things that we tell our clients is, number one, don’t mix your personal expenses with your business expenses. So the business is a standalone entity. It needs to have its own employee identification number. And I’m sure, Gretchen, you’re familiar with that through your SBDC role and so forth. It’s not hard. You apply the IRS for what is essentially a social security number identifying your business. Establish a bank account and you keep business expenses within that account. You don’t pay for your lawn care service for your home out of your business account. Isolate expenses and be very disciplined about that.

The other thing is tell the world that you’re an LLC. So that’s a funny legal term. Tell the world. Now, you’re really not going to get on your rooftop and shout. You could. But when you represent yourself to others, and this could be on a business card, typically these days on your website, prominently on that card or website, put your full business legal name, including the letters LLC so that you are telling everyone you are dealing with a with a business here, not me as a person personally. When you sign a contract, the party to the contract is your business name, not you personally. You have to sign it personally, but the party and the responsible entity is, in fact, your business.

So can I ask you a little bit of follow up question to that? I knew a business owner who was a sole owner of an LLC. He was the only member. Signed a contract as the member, managing member, whatever. That was all fine. But when there were some changes to the contract, he just initialed and ended up getting sued personally when things fell apart.

Wow.

So initialing changes, I mean, do you have just a quick you’d need to put still member next to that or how would they do that?

Yeah, that’s a really good question. It seems a little surprising that that action would result in liability.

I don’t think he lost the lawsuit, but he was sued. So lawyer fees and all kinds of stuff. It’s costly.

Lawyers are evil. Yeah, lawyers are very–

I didn’t say that. He had a good lawyer. [INAUDIBLE]

It’s OK. Sometimes they’re good and evil. But sure, so that’s really important. So the signature block, you would you would write a name because you are a person. But underneath that name, you would write duly authorized member or owner and then your business name. So you’re signing on behalf of the business. And you would follow that same convention with amendments and changes and things like that.

One thing that’s awkward for owners of LLCs, especially if there’s two or three or four owners, is to call themselves something besides partners. We want to take the word partner out of your vernacular. Of course you’re partners in this enterprise. But when you use that word, you confuse others that they’re dealing with a partnership. So you want to call yourself a member, a co-owner, a founder. You just have to train yourself not to use that word partner.

And we all know small business owners, they don’t purposely walk into legal hot water. It’s usually in situations like I was just talking about. They just do something not really thinking it through. One thing we talked to our small businesses about that does concern them is business competitive advantage, because it can be very competitive and cutthroat. What can you advise to business owners when it comes to non-disclosures, trade secrets, and employee secrecy?

I think most new business owners, and sometimes even folks that have owned businesses for some time, they don’t appreciate the value of their secrets, the competitive value of their operations and so forth. And they really need to protect that, because that sustains the business. We will walk through those sorts of concerns with our clients where you have to disclose your secret process, because you need to get a supplier to make parts for you, whatever it may be. Then we recommend a non-disclosure agreement and we can do those. And it’s relatively short and it binds the other party not to reveal your secret. Well, that’s good.

The other thing we tell our clients even when you have an NDA in place is don’t tell anybody any secret they don’t need to know. So yes, you have protection should you reveal your secret 11 herbs and spices that make your chicken. But if they’re selling you chicken, they don’t need to know the herbs and spices. So you keep that under your hat. It’s the same with family members and mailbox conversations. I know people are so proud of their processes and the unique things they do that make them more competitive, and they are wonderful. But number one rule is keep it a secret.

Now, we can also have you or have businesses and help businesses with employee secrecy agreements. That sounds so burdensome, but it isn’t meant to be. It’s when an employee signs up and works for the company. They sign a short form. They recognize that they’re going to learn processes in that role. They’re going to learn confidential information and they are agreeing not to disclose that. And those are very helpful and they’re just procedural things you can do as you get your business up and going.

I’ve got a question about what you do. Understanding the legalities of owning and operating a small business, obviously, is crucial. But many owners don’t yet have the resources available to meet with or retain a trusted legal advisor. I know you run the SEED Legal Clinic for Northeastern Ohio listeners. And can you tell us more about that clinic, who you help, and specifically what you do?

Sure. So the SEED Clinic is a resource, the SEED Legal Clinic is a resource offered to the University of Akron School of Law. In that role, we have eligibility requirements that our clients have to meet for us to help you. Those are that you’ve been in business less than five years, you make less than a threshold amount of money off of that business, and you cannot afford a lawyer. And so our outreach is to the community, those in financial need that are starting new businesses. Our fees for services are very, very reasonable. I won’t mention them here, but they’re very reasonable. And we utilize our students at the university of Akron Law School to get experience in this outreach mission and assist clients with real matters.

We are also serving Northeast Ohio college and university students and we’re trying to reach even more of them than we typically do. One advantage there is that those students almost certainly will qualify for our services to be free under a grant from the Burton D. Morgan Foundation. We’ve aligned our processes for higher efficiency. We’re taking on more clients. And we’re very anxious to help Northeast Ohio college and university students, community colleges and the like. We can consult even before pitch competitions and things like that. And we’re very happy to engage with those students.

Just to give you a little more information, our clinic serves between 100 and 150 clients every year. It’s a busy clinic, but we like to keep it that way.

Just out of my curiosity, during this last two years, the pandemic, have you seen a shift in an increase in people wanting to start a business or was there a certain issue that kind of floated to the top with some of the businesses? I mean, what were you seeing over the last couple of years?

Yeah, we have seen changes. For one thing, many existing small businesses are struggling. And they’re trying to figure out how they can sustain themselves. We have seen others that are leaving their conventional employment and wanting to start out on their own and follow their own ambition. And so we’re very happy to help those individuals as well.

Just a couple of key items that have come up. On business leases, we like to insert a force majeure clause. That’s an act of God clause that forgives performance under certain circumstances. We have to negotiate with the leaseholder, but we would insert a clause that forgives performance of the new business for a variety of disaster sort of events, including pandemic and the interruption that that causes to the business. So those are the kind of things that we see quite a bit these days.

Well, that’s good to know, because the whole lease issue is something I’ve heard from small business owners that it’s so important to have an attorney review your lease agreement or help you negotiate that. So I’m glad to know that you can help with that too, because I definitely suggest that to our small business owners.

Yeah, that’s an area we’re happy to assist in. And particularly sometimes you’re just informing the client that when you sign this, you committed to five years of payments or whatever the term of the lease is. And that’s a lot. And think about an investment you may have to put into the property. You may have to remodel. You may have to add appliances or certain facilities or lighting. And this lease says that when you leave your property, you leave all that behind. And all that’s fine. We just kind of want to set our client’s feet on the ground as to the commitment that’s being made and where we can, provide a little more advantage to our client.

Yeah, I had, just as an example, a client who was starting, this was years ago, starting a small retail business in a small strip center and signed the lease. Never got any assistance with it, just went ahead and signed it. And when the fire marshal came around, they told her that the space was not compliant and she had to put all the money into it to bring it up to code. It was over $10,000.

And she was wiped out of her working capital in starting her business. So right from the get go, she was completely behind and it really turned into a struggle for her. So I guess learning from her and from a couple of other stories I knew, that’s why I always strongly recommend that business owners don’t sign that lease until they’ve gotten some eyes on it to make sure that they don’t run into a problem like that. It can be so costly.

That’s really helpful, Cathy. And we do have clients that come in and show us their signed lease and then they want to talk about it. Well, we’ll tell you what it means. And you can attempt to negotiate certain parts of that, but it’s far better to have that discussion prior to signing.

Exactly.

OK, so for listeners outside of the Northeastern Ohio area and perhaps listening from other states, what resources are out there for business owners to explore that are similar to the SEED Clinic? Do you know of any mainstream resources that you feel are high quality that folks can take advantage of when it comes to understanding legal issues and getting help?

Navigating that entrepreneurship service provider landscape is a little burdensome on individuals. So I can tell you within Northeast Ohio the services we provide and some other providers. But outside of that region and outside of the state, it’s a little bit of a search, but it’s nothing you can’t do. I would start by searching out entrepreneurial service organizations. Sometimes they’re called ESOs.

Look for an organization that has a low cost or even a no cost option for you. One of the good places to start is check your local universities, their law schools, if they have them, their business schools, and see if they have leads. I would check community organizations, chambers of commerce of your local community, and things like that. I know in Akron, the Urban League has an entrepreneurial outreach section. And so you really have to scour around a little bit.

One of the best sources of information like that, at least locally, is our public library system. These people are very skilled in the business section of knowing who to talk to and what services are available. You have to do that legwork. It’s very important, I think, for a new business to get mentorship, such as SBDC. In Akron, we have resources available from the Bounce Hub, LaunchNET, Jumpstart, there are a number of them. And I just feel that– SCORE, Society of Retired Executives, is another good one. I think that mentorship helps a lot, and it can help lead you to legal resource that you may need as you form your business. In fact, we get quite a few referrals from SBDC and organizations like that.

Those are some good resources. Thanks for sharing that. Does the SEED Clinic have a website that you want to name for us? We can put it in the show notes as well, but I didn’t know if you want to.

We have no problem promoting ourselves. That’s what we do. So our website, we’ve recently updated it a little bit. The address is uakron.edu/seed. And even easier, if you just Google SEED Clinic Akron, it should be just about the first hit. And scroll down just a little bit on that website and you’ll see buttons to request services and join our mailing list. And I strongly encourage those seeking our services to just fill that form out to request services.

It’s very easy. It’s a few questions. It’s a contact information. Comes right to my desk, and we will get back with you and follow up and see if we can provide you with our services. In some cases, we can’t, but a lot of times we can, and get you on the way to providing legal advice. You can call me as well. There’s phone numbers available. But most of the time I just ask my callers to go back to the website and fill the form out, because I get all the information in a real nice, concise form. And we integrate that with our backlog and our scheduling system.

Thank you so much for joining us today. It’s been a real pleasure talking to you.

Well, it’s been my pleasure as well. I wish you success in this venture. Keep the SEED Clinic in mind to your listeners where we can help with businesses that qualify, in particular with Northeast Ohio college students. We’d welcome the opportunity to help to help those students along in their entrepreneurial adventures. So thank you very much.

Perfect. Thank you.

Professor Moseley’s statements do not constitute legal advice but are provided for general informational purposes only.

Thanks for listening. Look for Biz Chat Ohio on Apple Podcasts, Google Play, or Spotify and subscribe to receive our latest episodes and business blogs at bizchatohio.com. If you would like to learn more about the Ohio Small Business Development Center at Lakeland, please visit our website at www.lakelandcc.edu/sbdc.