Introduction

Running a small business is like juggling flaming torches—you’re doing fine until someone throws in a chainsaw. And if that chainsaw is a legal issue, you better hope your budget isn’t too thin. So, what is the average legal expense of a small business, how can you keep legal expenses down, and how should you approach legal budgeting? Let’s explore.

Read: How to update your contracts to increase profits

The legal price tag

Legal expenses can vary significantly depending on your business type, location, and specific needs. But let’s talk numbers: the average legal spend for a small business is $13,300 according to statistics. Here’s a closer look at what those expenses might include.

Business formation and setup

Want to register your LLC? That'll cost you anywhere from $500 to $2,000. This covers filing fees, initial consultations, and basic legal documentation.

Contracts and agreements

Need a lawyer to draft a client contract or a partnership agreement? Expect to pay around $500 to $3,000 per document. If you're piecing together a Frankenstein's monster of contracts off the internet, just remember: not all free templates are created equal.

Ongoing legal advice

For businesses that want a lawyer on speed dial, legal retainer fees can range from $1000 to $5000 per month (or more). This is ideal if you frequently need quick legal advice but don't want to pay hourly rates every time. It also helps you budget your legal expenses in advance.

Dispute resolution and litigation

Legal disputes are the financial equivalent of setting your money on fire. Litigation can easily start at $5,000 to $10,000 and spiral into the tens of thousands if things get complicated.

Compliance

If your business is in a heavily regulated industry (like finance or healthcare), you’ll need regular compliance checks. Budget $1,000 to $3,000 minimum annually to ensure you're not accidentally breaking any laws.

Read: The top 5 contracts every small to medium-sized businesses should have

How to keep legal expenses down as a small business

You don’t need to sell a kidney to cover legal expenses. Here are some tips to keep your legal expenses in check.

Use templates

For straightforward agreements, free or low-cost templates can be a lifesaver. Websites like LawDepot offer a variety of templates for contracts, such as non-disclosure agreements or employment contracts. However, don’t just download and use them as-is.

Always customize the template to suit your specific needs and have a lawyer review it to ensure it's appropriate for your business. A poorly drafted contract can lead to costly legal disputes down the line.

Consult before you commit

Many lawyers provide free or reduced-rate initial consultations. Use this opportunity to get a professional opinion on your legal issues before they escalate. Prepare your questions in advance to make the most out of these consultations.

If a lawyer offers a “flat fee” for a service (like drafting a specific contract), consider it over hourly billing, as it provides cost certainty and can help you budget more effectively.

Consider legal insurance

Legal expense insurance is like having a legal safety net. It can cover the costs of legal representation in cases like employment disputes, tax audits, or contract issues. Plans vary, but basic coverage might cost around $300–$500 annually, which can be far cheaper than out-of-pocket legal fees for a single issue.

Providers like ARAG offer plans tailored for small businesses.

DIY where possible

Some legal processes are more straightforward than they seem. For example, registering a trademark or setting up an LLC can often be done without a lawyer. The U.S. Patent and Trademark Office and many state government websites provide step-by-step guides. Just be meticulous in following instructions, as mistakes can be costly to correct later.

Use legal technology tools

Legal tech platforms like Cobrief can automate and simplify many legal tasks, such as contract review. Cobrief uses AI to simplify legal language for non-lawyers, highlighting potential issues and suggesting changes. These tools don’t replace lawyers but can significantly reduce the time and cost associated with routine legal tasks.

Outsource legal work

For smaller legal tasks, consider using freelance legal services. Platforms like UpCounsel and LawTrades connect you with vetted legal professionals who can handle specific projects at a lower cost than traditional firms. This approach is ideal for tasks like drafting simple contracts or providing employment law advice.

When to call in the pros

While cutting corners is great for some things (like that haircut you convinced yourself looked ‘artsy’), legal stuff isn’t one of them. If you’re dealing with something complex—like raising investment, IP disputes, or sticky employment issues—it’s best to get professional help.

Read: What’s a non-compete clause and should I have one in my business contract?

Benefits of preventative legal action

You know that old saying, “An ounce of prevention is worth a pound of cure”? It’s true for your health and definitely true for your business. Skipping preventive legal measures is like skipping the dentist for ten years—eventually, you’ll be paying for a lot more than just a cleaning. Here’s why spending money on lawyers for your business can save you a lot of pain later on.

Lawsuits are costly (and painful)

Consider this: the average cost of defending a lawsuit for a small business is around $3,000 to $150,000, depending on the complexity of the case and other factors. If you lose, it can be much higher, especially with damages and legal fees tacked on. A well-crafted contract or compliance check could have prevented the issue for a fraction of the cost. It's like spending $500 on a high-quality helmet instead of tens of thousands on a hospital bill.

Regulatory compliance isn’t optional

Let’s say you’re a small business owner who’s blissfully unaware of GDPR (General Data Protection Regulation). No big deal, right? Wrong. Non-compliance with data privacy laws can lead to fines as high as $20 million or 4% of your annual global turnover—whichever is higher. A one-time consultation with a privacy lawyer could prevent that nightmare for a few hundred bucks.

The contract conundrum

Imagine that a small marketing agency signed a handshake deal with a client. The project scope kept expanding, but the payments didn’t. Without a solid contract, they couldn’t enforce the original terms and ended up losing over $25,000 in unpaid work. Investing in a properly drafted contract from the start could have saved them a ton of time, stress, and, well, money.

Employee issues—it’s not just a human resources

Employment disputes are among the most common legal headaches for small businesses. Misclassify an employee or mishandle a termination, and you could face a lawsuit with damages running into the tens of thousands. Proactively setting up clear employment agreements, job descriptions, and compliance with labor laws can shield you from these issues.

The ROI of being proactive

Sure, spending on legal services upfront might seem like an unnecessary expense, but think of it as insurance. Businesses that invest in preventive legal measures can reduce their litigation risks. Plus, avoiding just one lawsuit or compliance penalty can save your business tens of thousands of dollars.

Think of preventive legal action as paying a bouncer at your business's front door. It’s way cheaper and easier to keep trouble out than to deal with the fallout once it’s inside. So, invest a little now to avoid the big, ugly legal bills (and sleepless nights) later on. After all, nobody wants to spend their profits on a lawsuit instead of something more fun—like that tropical vacation you've been dreaming about.

Read: What are defined terms in a contract?

How to budget for legal expenses as a small businesses

When running your business, your legal expenses shouldn’t be a mystery. Knowing what to expect can help you avoid sticker shock when it’s time to pay the bill. Here are some tips on how to budget for your legal spend in a practical way.

Estimate your annual revenue

A good rule of thumb is to allocate about 1-2% of your annual revenue to legal expenses. For a business earning $500,000 a year, that’s $5,000–$10,000. This covers routine legal needs without breaking the bank.

Identify core legal needs

Every small business has basic legal requirements, kind of like needing coffee in the morning—it’s non-negotiable. At a minimum, you should be prepared to handle things like forming your business entity, drafting essential contracts, and ensuring compliance with local and federal laws. These aren't just bureaucratic hoops; they protect your business and help prevent costly mistakes down the road.

Use historical data as a guide

If your business has been around for a while, review past legal expenses. Look at patterns and unexpected costs from previous years to help forecast future needs. This can give you a realistic starting point for your budget.

Plan for unexpected legal expenses

Legal disputes are like surprise parties—except nobody wants them.

Even minor disputes, like employment or contract issues, can escalate quickly. Set aside a portion of your budget as a legal emergency fund to avoid scrambling for cash if things go south.

Schedule for regular legal check-ups

Just like your annual health check-up, schedule regular reviews of your legal situation. This could include updating contracts, reviewing compliance, or planning for new regulations. It helps catch small issues before they become big problems.

Invest in legal resources and training

Sometimes, spending on training can save you in legal fees. For instance, invest in training for your team on data privacy or anti-harassment policies. This can prevent issues from cropping up in the first place and reduce the need for legal intervention.

Monitor and adjust your budget quarterly

Legal needs can change as your business grows. Review your legal budget as a small business every quarter and adjust based on your current needs. Maybe you need more support with contracts this quarter, but less with compliance. Being flexible helps you allocate funds where they’re needed most.

With these tips, you can build a legal budget that keeps you prepared without overspending. It’s all about being proactive and knowing where your money is going, so you’re ready for whatever legal surprises come your way.

Conclusion

Legal budgeting is a necessary evil for small businesses. By understanding the average legal expenses for a small business and knowing when to bring in the pros, you can keep your business protected without breaking the bank. After all, the goal is to make money, not spend it all on legal fees.

Read: What is a business contract?

How Cobrief can help with contract review

Reading your business contracts can feel overwhelming as an owner-manager of a small to medium-sized business. That’s where Cobrief comes in. Cobrief helps business owners and operators review their business-to-business contracts for legal risks.

Upload your contract to Cobrief's AI contract review software, click review and you’ll get a list of all the risks, in plain English. This helps you decide whether to sign, negotiate or reject the terms of your contract, or hire a lawyer. Think of it as a heat map for your contracts.

Get started here.