LEGAL AND ACCOUNTING ASSISTANCE FOR THE SMALL BUSINESS
Lynn K. Saubert, Drake University R. Wayne Saubert, Drake University ABSTRACT Two of the most important decisions facing the small business owner or entrepreneur at various stages, are when and how to obtain legal and professional accounting assistance. Both the timing of when such assistance is obtained as well as the ultimate selection of the appropriate individual or firm are critical to the success of the business operation. This paper discusses the basic factors that a small business owner or entrepreneur should consider in making these decisions. The paper is based on the experience of the authors in consulting with small business owners and is designed to familiarize individuals who are advisors to small business owners and entrepreneurs with the basic considerations that should be addressed when the need for legal or accounting assistance arises. Considerations such as when is legal or accounting assistance required, where to obtain such assistance, and how to obtain the best qualified individual are some of the major areas addressed. Small business owners and advisors of such are informed of appropriate steps that should be taken to assess the need for assistance and then obtaining the necessary assistance. INTRODUCTION A large number of preliminary considerations face the entrepreneur who is either formulating or in the start-up process of a new business venture. Obviously, management, financial and marketing concerns must be addressed. The literature in regards to these aspects of starting a new business is extensive. Just as important as the above mentioned areas are legal and accounting considerations. It is the intent of the authors of this paper to show why the selection of an attorney and an accountant should be among the first decisions made. In addition, the professional selected is of the utmost importance. Often times, the entrepreneur does not know how to select such a professional nor what criteria to consider in the selection process. This paper will address this issue as well and will provide several factors that should be considered in this selection process. The paper briefly examines some of the roles that the attorney and accountant selected should play in the development, organization or running of the small business venture. WHY THERE IS A NEED Legal There are numerous legal considerations that must be weighed by an entrepreneur in forming a new business venture. These considerations include, but are not limited to various structural alternatives available to a new business, e.g., sole proprietorship, partnership, corporation or a variation thereof; the necessity of dealing with state and federal regulating agencies such as taxing authorities; acquisition of property; employee relations; antitrust considerations; contracts; workman's compensation; leases; zoning; franchising; credit collection; financing; trademark and patent protection; insurance and litigation. Clearly, the above list is extensive and covers a wide range of subject areas which could have important ramifications of a financial, operational and legal nature.
The majority of small business entrepreneurs recognize the need for legal advice or assistance once they have been served with notice of a lawsuit against them or the business. Most also recognize a need for some type of assistance in regards to incorporating a small business venture. However, few entrepreneurs recognize that legal assistance beginning with the inception of a small business will often reduce or even avoid legal troubles. That is, they do not consider the concept of "Preventive Law" in their strategic planning process. Therefore, the most important aspect of preventive law, the early identification of potential legal problems is lost [6]. Because of the breadth of the legal principles involved in the formulation, formation, and operation of a business enterprise, it is impossible for entrepreneurs to know, much less to recognize, their opportunities and rights or to be aware of their obligations or liabilities in all applicable areas. An attorney has available numerous resources to recognize and to deal with legal problems before they arise. Not only does an attorney have his or her legal training, which alone has prepared him to recognize legal issues in a wide variety of situations, he or she may have actual experience in many of the previously mentioned legal areas. Attorneys have received training and undoubtedly will have experience in researching areas of concern of which they are not intimately familiar. Other resources, such as fellow lawyers and contacts built up through their practices are also available for consultation and assistance. The typical small business person has neither the training nor the time to conduct legal research. Combining this legal expertise with the entrepreneur's knowledge of the business venture creates a formidable team for the exercise of preventive law. For a lawyer to effectively practice preventive law, he or she must acquire an intimate knowledge of the business. A lawyer should be involved in the planning process of the business at its earliest point in order to acquire this knowledge. To wait until legal assistance is mandated may be too late to allow the attorney and entrepreneur to exercise options they otherwise would have had available. By being involved at an early stage, a lawyer may be able to instigate an early change of plans by management before there has been a significant investment of time, talent and financial resources [9]. Another reason for the entrepreneur and small business owner to immediately obtain legal assistance is, quite simply, to establish the attorney-client relationship. An attorney is to provide assistance to his client. How comfortable a business owner feels with an attorney's representation depends to a large extent on the trust that the entrepreneur or manager has in the attorney's ability to adequately and effectively counsel and represent his or her interests. The development of this attorney-client relationship best serves both the attorney and the client if initiated at an early stage of the small business. A small business owner should not wait until legal representation is mandated to try to find a good attorney. If the relationship has been established, a good attorney, whom the business owner trusts, has already been located and may already be aware of the current legal problem. In addition, when legal advice or counseling on day to day business problems becomes advisable, the owner has already gone through the selection process and feels confident in his or her choice of a legal advisor. Accounting When asked the primary needs of small businesses for accounting services, many would initially respond that tax preparation and providing audited financial statements are the basic needs. While these may be required for some companies, there are other services that are of fundamental importance if the firm is to obtain the assistance and information needed to survive and prosper in our current economic environment. Although the firm may have superior product lines or provide excellent services, lack of data with respect to accounting and financial needs may have severe detrimental effects. In a study by Ronald C. Clute [3], in which he examined 359 business failures, roughly 40% were found to be in financial difficulty because of accounting problems. Among the problems
identified were inventory control, lack of complete accounting records, poorly trained or no accounting personnel, lack of control over cash, no cash or working capital analysis and lack of budgets or forecasts. Another study [1] indicated that executives of small businesses have a wide array of needs for financial and accounting based information. They have identified ten basic management needs: Capital planning Cash management Compliance with government regulations Cost reduction Internal accounting control systems Management information systems Personnel management Planning Price strategies Raising capital We will focus our discussion on the following generalized accounting needs of the small business entrepreneur: Tax problems Systems design and implementation Compilations and reviews Audit of financial statements Financial advising Not all of these areas will be needed by every small business nor will these services be required on an ongoing or continual basis. However, the identified needs would cover activities from the formation of the firm, acquisition of resources, initiation of and control over operations to expansion or dissolution of the firm. The general categories are broad in nature and may be required in varying degrees. Tax Problems While the preparation of state and federal income tax returns require specific expertise, other tax reports must be filed on a timely basis, including sales tax, employee withholding and unemployment compensation forms. Knowledge of statutory requirements is obviously required for the preparation of the various tax returns; however, the entrepreneur needs the accountant's expertise at earlier stages for the purpose of tax planning. Decisions as to which form of business enterprise and whether to purchase or lease assets are examples of decisions having significant tax, financial, and legal implications, that must be made in the formative stages of business development. The complex and ever-changing tax environment cannot be ignored; therefore, tax planning must be a part of the services provided by the accountant and attorney when legal issues are involved. Systems Design and Implementation Minimal needs would dictate a system that would provide information from which to compile monthly financial statements summarizing the results of operations and financial position. Management should very early sit down with their accountant to determine what their information needs are. Assessing not only their basic reporting needs but also the information needed for making operating and financial decisions, will allow the team to develop a system for providing this data. Management will probably need more timely data on some factors, such as sales, inventory levels for purchasing, and cash balances, than that provided by monthly reports; therefore the system ultimately established must provide this current information. Certainly payroll, receivables and data regarding
payables must be available. For many service and small manufacturing firms, developing the overhead or burden rate is extremely important and management could benefit from an accountant's assistance in developing this rate. The sophistication of the system will depend upon the needs assessment as jointly determined by management and the accountant. The availability of financial resources and personnel to devote to the system will also be influencing factors. The accountant should be informed as to the potential of computer applications in many of the accounting areas. At a minimum, the relatively inexpensive cost of a personal computer could be justified for many uses, such as payroll, receivables, payables and inventory applications. Compilations and Review An accountant may be needed periodically to prepare unaudited financial statements. This type of write-up work, called compilation, involves accumulating financial data from the accounting system and organizing it into conventional accounting statements. The accountant is not auditing the statements nor are tests made to necessarily determine the reliability of the system. The primary purposes of these types of service are to determine that financial statements are prepared in conventional format, that they are computationally correct and that adequate disclosures are included so as to meet accounting standards. While many small businesses require this write-up assistance on a monthly, quarterly or yearly basis, more extensive assistance may be advantageous. As a business grows, management may continue to provide unaudited financial statements, such as those provided by the compilation, but they might also desire to provide relatively greater assurance than that provided in the compilation. Accountants could be retained to provide review services, which fall between no assurance level as provided by the compilation and the assurance of an audit. After extensive consultation with management, review of the accounting principles and procedures used, and inquiry as to the methods of accumulating data, the accountant can formulate ratios and make comparisons of the firm's results against prior years and industry averages. While the accountant's report on a review states that no audit has been performed and therefore no positive opinion is being given, the report must state that the accountant is not aware of any material modifications which are needed to make the financial statements conventionally acceptable. This negative assurance can generally be provided for the small business at a cost substantially less than that of an audit. Audit of Financial Statements Further assurance may be needed than that provided by the processes of compilation or review. Many small businesses may be required to file audited financial statements with stockholders, creditors or regulatory agencies. In this case, the firm must hire a certified public accountant to provide this audit opinion. In the course of the audit, the auditor is obligated to provide an extensive review and evaluation of the firm's system of internal control, which is of substantial benefit to management in determining the reliability of data generated within the system. Financial Advising While accounting assistance is vital in designing and evaluating the accounting system as such, many small business executives need a broad range of other financial advice. Small businesses have frequently failed in the early stages due to lack of cash management skills. Assistance in raising capital, both of a long-term nature and for short-run liquidity needs, is vital. An adequate knowledge of the cost structure of the products, along with assistance in developing a pricing policy, can benefit the firm. For these and other related problems, the accountant must be familiar not only with the specific firm, but also with the industrial and economic environment in which the
firm operates. Evidence of these problems were indicated in the study by Arnold [1, pg. 76], as one participant noted, "We expected concrete answers and directions. We received only generalizations. The firm had no grasp of our business -- the professionals knew the system, not the business." HOW TO SELECT A PROFESSIONAL Once the entrepreneur or small business owner acknowledges the need for legal and accounting assistance, the appropriate professional must be selected. Selecting this professional can be a perplexing task. The following are some factors to consider in making this selection. Before entering the selection process, it is necessary that the entrepreneur or small business owner attempt to pinpoint his or her professional needs. For example, an entrepreneur or small business owner would generally find that a general practitioner, who is well versed in contracts and commercial law, would be the most appropriate attorney in most instances. However, there may be exceptions. A business may be dependent upon the existence of a new product or manufacturing concept. This would require the services of a legal specialist in patents or trademarks. Even though the services of a specialist may be required at a particular time, the need for the general practitioner will be one of a continuing nature. The most important criteria in selecting an attorney or accountant must be to locate one who is competent in his or her practice, is accessible and who understands and appreciates the needs of a small business venture. The best way to find a professional who meets all of these criteria is by comparison. For example, there are several sources that will assist the entrepreneur in starting his or her legal search. Available at most large public libraries is The Martindale-Hubbell Law Directory which gives basic information about lawyers, including education, publications, areas of expertise and representative clients. Other reference works which may be available are The American Lawyer Guide to Leading Law Firms and National Law Journal Directory. These latter guides are more limited in scope, covering only major law firms in selected areas. The entrepreneur can also obtain names of attorneys and accountants from local and state associations. Most legal and accounting associations have established referral systems. However, all one is getting is a name with very little other qualifications. By listing an attorney or accountant on the referral list, the respective association is not making an endorsement as to the competency or qualifications of the particular professional. An advantage of seeking a C.P.A. or attorney is that the requirements for licensing are rigorous and are regulated by the respective state licensing boards. Therefore, one can start with an assumption that at least at one point in time, both a C.P.A. and an attorney have demonstrated at least minimum competence to an examining board. Perhaps the best method to use in finding names of potential candidates is to solicit recommendations from friends and business associates. Get more than just a name. Find out how and why the person retained this particular attorney or accountant. Ask whether he or she was satisfied with the way the professional handled the problem. However, do not rely exclusively on a friend or associate's recommendation. Use these only as a means to gather information for a personal interview. Just as the small business owner would not blindly hire a key employee, neither should an attorney or accountant be selected solely on this basis. The easiest and most efficient method to ascertain whether an attorney or accountant meets the qualifications that are desired is to conduct a personal interview with several different prospects. As indicated earlier, this selection process should be done at the business inception. Don't wait until there is a sudden emergency need that develops. This is not the best circumstance in which to enter into a business commitment.
The size of a firm can sometimes be a consideration, although the ultimate task is to select an individual not a firm. However, both large and small firms have their advantages and disadvantages. The range of sizes of firms that the small business has to choose from varies from the local to regional to national to international firm. Each level offers advantages in different areas, yet will have disadvantages with respect to other factors. The national and international firms offer many advantages, some due purely to the size of the firm. Typically, they will offer a wider variety of services, with specialization being offered in differing accounting and legal areas as well as industries. For example, tax specialists, extensive audit services and consulting expertise are available in the larger accounting firms. Library facilities and in-house continuing educational experiences are usually provided for the professional staff, and many seminars are made available to clients. In constantly changing areas such as tax legislation, these services are very beneficial. On the other side, the personnel assigned to a small business client may tend to be the younger, less experienced staff members, since the higher ranked personnel may tend to devote more time to larger clients. With the development of the "Small Business" section of many larger firms, this disadvantage may be somewhat eliminated. Smaller firms of a local or regional nature may tend to specialize or develop expertise in certain industries. While the following are generalizations, the smaller firms may devote more time and attention to small business clients. There is greater probability that consulting or advising services will involve partners or middle-ranked professional staff; however, for the routine work this would disadvantage small businesses since junior staff with lower billing rates would provide these services in larger firms. Regardless of this problem, small firms typically charge less and are more eager to serve small clients. These firms may be very busy in certain months, such as tax season for accountants, and may not have as extensive specialized services or training as their larger counterparts. Regardless of the size of firm selected, the entrepreneur should insist upon an initial interview to determine whether you will be able to receive the type and extent of services needed. Timeliness is extremely important for the executive of a small business, therefore, will the professional be available when you need assistance. A less tangible but very important factor involves the entrepreneur's subjective appraisal of the accountant's or attorney's expertise and ability to communicate his professional advice. Unless you feel confident and comfortable with the person, you may benefit from looking further. It is at these interviews that the small business owner should ascertain whether there is a "fit" between him or her and the prospective professional. It gives the client and attorney or accountant a chance to "choose each other". At the interview, questions should be asked about numerous areas, including; 1. 2. 3. 4. 5. 6. Fees (All aspects) Experience in business matters Who will handle your work Accessibility Expectations of client and his or her staff Will the client be kept advised of progress on all matters pending
Do not be afraid to ask any questions in regards to the above. Remember, the client must feel confident and have trust in the person or firm selected for him or her to obtain the most for his dollar. The most important aspect is that the small business owner should feel comfortable with the professional he or she proposes to retain. This will go a long way toward establishing a long-term relationship that will significantly aid the small business owner or entrepreneur.
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