Chapter 19: Legal Foundations
Second-time founders hire lawyers first. They've learned that legal mistakes are costly to fix. Establish your legal foundation early.
What You'll Learn
- Choosing the right business structure
- Consulting while employed
- Intellectual property protection
- Essential contract provisions
Business Structure Selection
Single-Member LLC (Recommended Start)
For most consultants, start with a single-member LLC:
| Benefit | Why It Matters |
|---|---|
| Liability protection | Personal assets protected from business debts |
| Simple to set up | Can do it yourself in most states |
| Pass-through taxation | Profits flow to personal return |
| Flexible structure | Easy to change later |
| Professional image | More credible than sole proprietor |
When to Consider S-Corp Election
An LLC can elect S-Corp tax status for potential savings:
- Reduces self-employment taxes on portion of income
- Makes sense at certain income thresholds
- Consult a tax professional for your specific situation
When to Consider C-Corp
C-Corps make sense when: - Planning to raise outside capital - Retaining significant profits in the business - Potentially selling the company - Taking advantage of QSBS exclusions
Avoid Bright-Line Rules
"If you ever hear somebody talking about a bright line rule like 'if you make above this certain amount, you should be an S-Corp,' I'd be cautious. Everything is individual, everything is bespoke."
Consulting While Employed
Many consultants start while still employed full-time. This creates important legal considerations.
Review Your Employment Agreement
Look for: - Clauses about "devoting all business time" to employer - Prohibitions on moonlighting - Intellectual property assignment provisions - Non-compete clauses
Get Written Permission
If your agreement restricts outside work: - Request written approval from your manager - Position external activities as beneficial ("building expertise") - Email confirmation provides basic protection
IP Ownership Boundaries
"What we want it to say is everything you do that is related to the business is owned by the business. That's kind of the floor. Sometimes those are a little too broad—basically anything you do in any context, no matter where you are, at what time of day is owned by the company."
What to do. - Review for overbroad IP language - Negotiate narrower provisions if possible - Document pre-existing IP before starting
Intellectual Property Protection
Document Pre-Existing IP
Before any client engagement: - Maintain clear records of IP you develop independently - Include pre-existing IP clauses in all contracts - Timestamp your work (commits, blog posts, etc.)
The Open Source Strategy
One effective approach for protecting IP:
"In my contracts, I specify that I will use open-source tooling and reference documentation of open-source tools. This creates a situation where all of it is pre-existing IP since I'm working through my open-source project."
How to implement. 1. Create open-source tools related to your work 2. Document them with blogs and documentation 3. Reference these tools in contracts as pre-existing IP 4. Include language about using your open-source software
Clearly Scope Deliverables
| What Client Owns | What You Retain |
|---|---|
| Custom code written for them | Your methodologies |
| Specific deliverables | General knowledge |
| Client-specific solutions | Pre-existing frameworks |
| Data they provide | Right to similar work |
Essential Contract Clauses
Pre-Existing IP Clause
Pre-Existing IP: All methods, frameworks, tools, and know-how
developed by Consultant prior to this engagement remain the sole
property of Consultant. Client receives a non-exclusive, perpetual
license to use such Pre-Existing IP solely as incorporated into
the Deliverables.
Methodologies Clause
Methodologies: Consultant's general methodologies, processes, and
techniques shall remain the property of Consultant. Client acknowledges
that Consultant will use learnings from this engagement (excluding
Client Confidential Information) in future client work.
Resource Requirements Clause
Client Obligations: Client agrees to provide Consultant with timely
access to:
(a) Key personnel as identified in the Statement of Work
(b) Necessary systems, documentation, and development environments
(c) Timely decisions and approvals (within 48 business hours)
Failure to provide agreed resources may result in timeline adjustments
and additional fees.
Communication Boundaries Clause
Communication: Consultant will be available for asynchronous
communication via [Slack/Email] during the engagement. "Unlimited"
communication is subject to reasonable use. Consultant will respond
within one business day to non-urgent requests.
Send Your Contract First
When a client verbally accepts, send your contract immediately:
"I would prefer if you all had your own contract that you were sending to the client to start with a basis of strength from your position."
Why This Matters
- Working with terms you understand and trust
- Avoids heavily negotiating unfavorable client templates
- Your standard protections are already included
- Clients expect consultants to have professional agreements
When Clients Insist on Their Template
Frame it as a resource issue:
"As an independent contractor, I don't have the resources of a full legal team. I prefer starting from an agreement that I have familiarity with."
Even large companies often accept consultant agreements.
MSA + SOW Structure
For ongoing relationships, use Master Services Agreement plus Statements of Work:
What Goes in the MSA
- Intellectual property provisions
- Confidentiality terms
- Limitation of liability
- Dispute resolution
- General terms and conditions
What Goes in Each SOW
- Specific deliverables
- Timeline and milestones
- Payment terms and amounts
- Resource requirements
- Success criteria
Benefits
| Benefit | Why It Matters |
|---|---|
| Flexibility | Adjust terms per project |
| Efficiency | Legal reviews MSA once |
| Speed | New projects start quickly |
| Protection | Core terms stay consistent |
Pro tip: Put payment terms in the SOW, not MSA. This lets you adjust payment structures per project.
Action Items
-
Evaluate your structure. If you don't have an LLC, research formation in your state.
-
Audit employment agreements. Review for moonlighting and IP restrictions.
-
Create contract templates. Build or obtain templates with essential clauses.
-
Document your IP. List frameworks, methodologies, and tools you've created.
-
Find a lawyer. Identify a business attorney for when you need advice.
Key Takeaways
- Single-member LLC is the recommended starting point for most consultants
- Review employment agreements for moonlighting and IP restrictions before starting
- Document pre-existing IP before any client engagement
- Send your contract first when clients verbally accept
- Use MSA + SOW structure for ongoing relationships
- Essential clauses: pre-existing IP, methodologies, resource requirements, boundaries
- Get legal advice for complex situations—it's an investment, not an expense