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1 in the US, what are the most common legal documents SMBs are dealing with, how many such documents do they deal with monthly, and how much does it cost them to get a lawyer (whether internal or external) to deal with such documents?
Hello, and thank you for your question about the most common legal documents dealt with by small- and medium-sized United States businesses! The short answer is that invoices are most likely the most common document processed by these businesses, followed by payroll forms and contracts. The highest legal fees are associated with patent filing, while some very common documents, such as business registration and invoices, may not require a lawyer's services at all. Below you'll find a deeper dive of my findings.
In this report:
-Methodology
-Registration
-Invoices
-Payroll
-Contracts
-Taxes
-Patents
-Non-Disclosure Agreements
-Terms of Service / Privacy
-Conclusion
-Calculations
Methodology
In order to determine the most frequently used documents, their frequency of use, and their associated costs, I consulted a wide variety of sources and have composited the findings as a whole below.
While no single index exists that explicitly lists the most commonly-used legal forms by SMBs, a number of industry and legal experts have weighed in on which documents are most critical to a SMB's success, and common sense combined with inferential statistics allows us to extrapolate some additional insight into which documents might be used most often.
First, we'll look at online lawyer community LinkLaw and their citation of the SME & and the Law's Survey on Biggest Legal Concerns in 2015. The survey found that the single-most-frequently reported concern was late payment from contractors and subcontractors, with 11% of respondents naming this issue. Since the most-relevant document in this issue is invoices, we'll be examining that document later. The survey further found that "almost 9% of all small and medium businesses last year faced legal problems concerning taxes." While there are many, many forms associated with taxation, the documents for initially filing taxes are necessarily the most commonly-used, so we'll look at this later, as well. The third-most-commonly-mentioned legal concern found by the survey was employment issues, at 8%. This is a pretty broad category, not tied to any single document or category of documents, but includes issues like claims of unfair dismissal, break of contract, and discrimination, as well as health and safety regulation violations. The fourth-most-frequently-cited concern was contract issues, at 7%--so again, we'll examine contracts later in this report. Finally, 5% of survey respondents mentioned facing intellectual property issues, which, again, can involve a range of laws and associated documents--patents and copyright laws for novel products or innovations, and trademark law for company identity, like names and logos. We'll revisit some of these categories later in the report, as well.
Of course, LinkLaw is discussing common legal concerns, not individual documents. For a more specific take on this topic, we'll turn to Nellie Akalp, CEO of CorpNet.com, who writes that the following 10 documents are the "most common legal documents" for a small business. Although she does not provide a clear mechanism for determining "most common," her expertise in the area suggests that her assertions are reasonably reflective of the legal landscape; the list is as follows:
1. Company bylaws for corporations. While these don't necessarily have to be filed, most states do require businesses to keep a written record of bylaws, which serve to prevent a range of potential legal issues down the road.
2. Meeting minutes. Like the bylaws, minutes usually won't be filed, but most states will require that they're kept, again with the goal of solving or preventing disputes within the company.
3. Operating agreements for LLCs. As with bylaws (1) and minutes (2), this is usually not required, but is recommended, and, once signed, becomes an official, binding contract.
4. Non-disclosure agreement. Nearly any business will process information that should be confidential, whether that be upcoming plans and strategy, a customer list, or simply financial records; an NDA help protect that info.
5. Employment agreement. While not necessitated by every new hire, this document can help decrease employee attrition, prevent disclosure of sensitive data, and dissuade employees from going to work for a competing business. This is one that Akalp notes "should be reviewed by an experienced employment law attorney before given to an employee to sign."
6. Business plan. This actually isn't a legal document, but if a business owner decides to sell the business or seek financing, it's required. There's no set form or length for this, just so long as it's clear and concrete.
7. Memorandum of understanding (MOU). "Somewhere between a formal contract and a handshake," this paperwork documents important conversations with potential partners, suppliers, or others involved in the SMB. While useful, this document, like the business plan (6), is not legally binding.
8. Online terms of use / service (TOS). Like documents 1-3, the TOS is not legally required, but is useful for limiting liability.
9. Online privacy policy. This one is legally required, if the business's website gathers any information on website visitors, such as email addresses; the policy should state what is being gathered and how it will or will not be used.
10. Apostille. For international businesses, an apostille, which authenticates the origin of the company's other public documents, may be necessary; this allows businesses from elsewhere in the world (specifically, those who have signed the Hague Convention) to formally recognize these documents.
Because most of these items either are not legally required, or do not follow a specific legally-specified structure, are filed only once, or apply only in niche cases, I'll be omitting some of them in order to focus on more pertinent legal documents; I will be focussing instead on NDAs, TOSs, and privacy policies, while the categories of employment agreements and business plans fall under some of the categories already brought up in my discussion of LinkLaw's report.
Registration
Let's start with the obvious: a SMB first has to register as a SMB; according to Forbes, roughly 543,000 new businesses are started per month (they note, however, that the number of employer businesses shutting down each surpasses that of those starting.) While this is not a frequently-recurrent legal document for a company (as registration, if all goes well, only needs to be filed once), registration paperwork is nevertheless very common in the total SMB business sphere simply by virtue of the volume of new business startups. However, the consensus seems to be that an attorney is not necessary for this process.
Invoices
All things considered, invoices are probably the most frequently-used legal documents by SMBs; Concur studied invoice data from September 2015 through August 2016 and found that a typical SMB (which they define as a company receiving and processing invoices for $50,000 or less) processes approximately 450 invoices per month. (We should note here that Concur is a company selling business-automation services, and their analysis of the data was motivated to find a high invoice duplication rate (which they peg at 1.29%); however, there is no reason to think their tabulation of the total number of invoices processed and received is skewed by this bias, which presumably would affect, if anything, only the stated duplication rate.)
An invoice, like a registration, does not require the assistance of an attorney; in fact, there's even a template for it built into Microsoft Word. That being said, if a SMB's invoice is not properly prepared, it may be necessary to go to small claims court, at which point filing fees do come into play, attorney or not; generally, suits up to $1,500 entail a fee of $30, while a $50 fee is required for suits up to $5,000, and a $75 fee for those suits up to the small claims court limit of $10,000.
Payroll
The frequency of payroll processing is a little trickier to determine, but we can infer this frequency by taking into account the average number of employees in a SMB, and the typical frequency at which they're paid. Forbes reports that there are nearly 28 million small businesses in the United States (Forbes is in this case using the Small Business Association's definition of a small business as an enterprise with fewer than 500 employees.) However, Forbes goes on to clarify that of these 28 million small businesses, over 22 million are self-employed, with no additional employees and thus, no payroll. This leaves us with a bit less than 6 million businesses employing between 2 and 499 employees.
A more recent analysis of the 2016 Census and IRS data suggests a similar picture; there were reported to be 29.5 million employers, with 23.8 million being self-employed, and a remaining 5.72 million businesses employing more than one person. A breakdown by company size reveals that 96% of companies are SMBs with fewer than 50 employees, and 79% of those 5.72 million business employ fewer than 10 employees. The Bureau did not report the total number of employees in these categories; however, the Forbes report mentioned earlier pegged the total number of employees in small business at 120 million; if we subtract the 28 million that were at the time of that report self-employed, we are left with 92 million employees of businesses with between 2 and 500 employees--that is to say, 92 million people for whom payroll forms must be processed. However, the Forbes data is from 2013; based on the expansion between 2013 and 2016 evident in the discrepancies between Forbe's data and the Bureaus, we can extrapolate the current number of employees at SMBs at to be approximately 96,968,000 (see Calculations 1).
But how often are these nearly 97 million employees paid?
Gusto.com reports that semimonthly payments (those occurring twice a month, typically on the 15th and 30th of the month, or on the 1st and the 15th) "is one of the most common choices for workers who are salaried because it’s easier on the benefits and accounting side." While this makes intuitive sense, hard data from the Bureau of Labor Statistics presents a slightly different picture; after a survey of 144,000 businesses and government agencies, representing approximately 554,000 individual worksites, the Bureau found that biweekly was the most common payroll schedule, used by 36.5% of U.S. private businesses (followed by weekly, semimonthly, and monthly.) Interestingly, when the Bureau broke the data down into eight categories based on the number of employees, from "1-9" to "1000 and over," they found that the popularity of the biweekly schedule only increased with the size of the company, while the monthly schedule's popularity was inversely proportional to company size; the popularity of the weekly and semimonthly schedules, while less pronounced, also tended to decrease with company size.
Based on all of this data, we may extrapolate that SMBs process approximately 193,936,000 payroll forms every month, approximately 34 per month per company on average (see Calculations 1).
Because of this high volume, the standard recommendation among experts seems to be that businesses employ electronic and automated payroll processing, in order to avoid incurring legal fees in the first place.
Contracts
As already established, there are approximately 96,968,000 employees at those SMBs with between 2 and 500 employees; there are also, as previously mentioned, 543,000 new businesses started per month. If we continue to assume that 19.4% (see Calculations 2) of these new businesses are businesses that employ more than one person, then 105,342 such new businesses start each month; if we similarly distribute the total number of SMB employees amongst the new businesses, we arrive at 387,872 new hires per month, just for new businesses! Per new business, that's 3 or 4 new contracts per month (see Calculations 2). Drawing up a contract may be relatively inexpensive if done with an online legal service, at $10-$50; a contract specifically tailored for a business may take an attorney one or two hours, which, depending on the attorney's hourly rate, will probably end up in the range of $100-$600. Reviewing an already-drawn-up contract, however, costs considerably less, typically around $50-$300.
Taxes
This is pretty self-explanatory: if there are, as previously established, roughly 5.72 million SMBs in the United States, and they all file taxes as required, there will be 5.72 million instances of tax filing; however, establishing an average monthly rate here would be largely fatuous, given that taxes are typically filed annually.
Patents
The United States Patent Office records receiving 589,410 utility patent applications (such as one would use for an invention), 39,097 design patent applications, and 1,140 plant patent applications in 2015, the most recent year for which data is available. Of these, 298,407 utility patents were granted, along with 25,986 design patents and 1,074 plant patents. Unfortunately, the Office does not record whether these applications were made by SMBs or otherwise. We can note, however, that utility and design patent applications are significantly more difficult to obtain, based on the ratio of applications to grants (see Calculations 3). This, therefore, suggests that these processes may be the ones most suited to consultation with a lawyer. It's relatively unlikely, however, that SMBs will be filing patents very often; in 2015, over 16,032 grants were awarded to just two companies (IBM and Samsung); a breakdown of the other 18 companies receiving the highest volume of patent grants suggests that the vast majority are concentrated among very large corporations like Google and Sony, not SMBs.
The fee structure for filing a patent is quite complex, but in general, the basic utility patent filing fee is $330, although search and examination fees amount to $760, with maintenance fees after three years coming to $980. This, however, does not take into account the attorney's fees involved in filing, which can run from $5,000 to $15,000. This high cost is another reason SMBs, despite being the majority of businesses in the country, do not account for the majority of patents granted.
Non-Disclosure Agreements
As one might expect, hard numbers on the frequency of processing of NDAs are ... not often disclosed. Estimates of cost range from
$8-$50 for online legal services, and flat rates of $100-$1,200 for an attorney to draw up an NDA that's tailored to a business's needs. (A simple NDA may be drawn up in a couple hours, for $100-$600, but more complicated situations necessitate the upper bound estimate of $1,200.) As with contracts, however, simply having an attorney review an NDA, rather than draw one up, costs considerably less, typically between $50-$300.
Terms of Service / Privacy
Market research firm Redshift has found that only about 40% of very small businesses maintain a website (of the 60% that do not, 12% maintain a Facebook page, although such a web presence would not necessitate a TOS beyond Facebook's own TOS.) Note that for Redshift's purposes, a very small business is one with 1 to 5 employees; for businesses with more employees, the odds of their maintaining a web presence are, one suspects, considerably higher; nevertheless, we can expect that there are, at the very least, 11,800,000 small businesses with a website, and 2,288,000 small businesses employing more than one person that also have a website (see Calculations 4). While we cannot know how many of these employ a TOS, or how many TOSs are drafted monthly, the potential market size for this service appears considerable. Figures on the typical cost of drawing up a TOS are a little harder to come by than for some of the other documents discussed here, but in checking around to see what various practicing lawyers had to say, the consensus seems to be that, while the cost for this process can "vary widely," it's going to be one of the more expensive legal processes for a new business; estimates range from a conservative $400-$1,000 to the rather far-reaching "somewhere in the five-figure range."
Conclusion
Invoices are probably the most common document processed by SMBs, at approximately 450 per month, followed by payroll forms, at approximately 34 per month, followed by contracts, which, while difficult to establish firm numbers on, are probably drawn up 3 or 4 times in the average SMB's first month of operation. Patent filing is the most costly legal process discussed here, with associated attorney fees of $5,000 to $15,000 in addition to the hundreds of dollars charged by the Patent Office itself. A SMB's TOS is probably the second-most-expensive document to draw up, relative to the other documents discussed here, with estimates ranging as high as $1,000 and higher; the costs of drawing up other documents, such as an NDA or employee contract, are considerably lower, and may be lower still if the attorney is simply looking over an extant document; least expensive of all are those document templates provided by online legal services.
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Calculations
1.
Extrapolated growth rate: 29,500,000 / 28,000,000 = 1.054
Extrapolated 2013 total employees of small businesses with 2-500 employees: 120,000,000 - 28,000,000 = 92,000,000
Extrapolated 2016 total number of employees of small businesses with 2-500 employees: 92,000,000 * 1.054 = 96,968,000
Most likely number of payroll forms processed monthly: 96,968,000 * 2 = 193,936,000
Per business: 193,936,000 / 5,720,000 = 33.9
2.
Ratio: 5.72 / 29.5 = 0.194
Extrapolated number of new businesses started each month that employ more than one person: 543,000 * 0.194 = 105,342
Ratio of previous number to total businesses: 105,342 / 29,500,000 = 0.004
Ratio applied to total number of employees: 96,968,000 * 0.004 = 387,872
Number of employees divided amongst number of new businesses starting each month employing more than one person: 387,872 / 105,342 = 3.682
3.
4.
Extrapolated number of 2016 businesses that have a website: 29,500,000 * 0.40 = 11,800,000
Extrapolated number of 2016 businesses employing more than one person and which have a website: 5,720,000 * 0.40 = 2,288,000
Misc.
Range of possible values for total employees in this category:
4,536,707 * 2 = 9,073,414 to 4,536,707 * 9 = 40,830,363
Range of possible values for total employees in this category:
718,052 * 10 = 7,180,520 to 718,052 * 25 = 17,951,300
Range of possible values for total employees in this category:
251,490 * 26 = 6,538,740 to 251,490 * 50 = 12,574,500