Legal Office Hours for AI Consultants¶

I want to invite my lawyer, Luke, to talk a little bit about the legal side of consulting. If you're new you should also checkout our consulting stack post.

In August, Luke officially launched Virgil. Their goal at Virgil is to be a one-stop shop for a startup’s back office, combining legal with related services that founders often prefer to outsource, such as bookkeeping, compliance, tax, and people operations. We primarily operate on flat monthly subscriptions, allowing startups to focus on what truly moves the needle.

He launched Virgil with Eric Ries, author of The Lean Startup, and Jeremy Howard, CEO of Answer AI. He's able to rely on the Answer AI team to build tools and help him stay informed about AI. He's licensed to practice in Illinois, and they have a national presence. That's his background and the essence of what we're building at Virgil.

Now let's get into the legal side of consulting

What type of contracts do you sign with collaborators in your network?¶

Luke’s Answer:
“Yeah, anyone can jump in and add a little bit more color, and that is because you can contract basically anything as long as something is not illegal or wildly unfair, you can put a contract together for most things. So, in the context of if you’re a consultant, consulting for various engagements, some of the more common ones would be maybe co-licensing or co-marketing agreements. If you team up with somebody to pool resources, promote each other, you can do referral agreements back and forth. If you’re bringing somebody in to help on a particular project, that might look like a subcontractor agreement. Do make sure that the underlying agreement that you have with your client—whether that’s a services agreement, a master services agreement, a consultant agreement—allows for subcontractor relationships before you pull somebody in. Would certainly not want anybody to be in breach, having not known that they weren’t supposed to subcontract with somebody. But feel free to chime in if this was your question, and you want to ask any specifics. But those are a couple of contracts that you might see on a contracting, consulting gig relationship.”

I’m working full-time at a company while trying to do consulting on the side. How do I navigate the legality of my work, especially around IP?¶

Luke’s Answer:
“Yeah, so this is a fantastic question, because this happens all the time. So there’s two big things that you need to be aware of. One is, pay close attention to the contract that you have with your employer. Some will have language that you need to devote all of your business time and interest to the company. Some will preclude you from moonlighting. That being said, those are kind of boilerplates, and if you have some relationship that you can talk to the company and create a little wiggle room for consulting, especially if it’s going to enhance the recognition of the company some way, drive benefit to the company, oftentimes they are comfortable with it. But make sure you get that in writing. It doesn’t necessarily have to formally amend your agreement—that would be the preference—but if you have an email from your boss, your supervisor, the company itself granting you permission, then you should be in the clear.

Now, with intellectual property, a lot of your agreements with your full-time employer will have either, if you signed a proprietary information and invention assignment agreement, or even within your employment agreement, it’ll usually have terms around intellectual property. And 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 of what you would expect. Anything that you do that is in service in your role to the company is ordinarily understood to be assigned to the company, and that’s what that contract would say. Sometimes those are a little too broad, and it’s basically anything you do in any context, no matter where you are, at what time of day, is owned by the company, and you want to be on the lookout for that.

So surface any of the agreements that you have with your W-2 employer, see if it allows you to have these types of engagements. If it doesn’t, chat with somebody, make sure you get some sort of approval to do these things. And then if the intellectual property section needs to be adjusted to make sure that your engagements, or even stuff you’re doing on your own time—I imagine a lot of you are putting together your own materials, your own methodologies that you want to have ownership of, because it is essentially your intellectual property that you’re turning into consulting arrangements and ultimately revenue—so make sure that it’s not flowing to the company. So those are two things that you need to be aware. It’s not per se legal; it’s all up to your contractual arrangement.”

Is it possible to open a company based in the U.S. when you’re living abroad, especially creating a bank account as a British citizen?¶

Luke’s Answer:
“It is. So a lot of the modern tech stack banking—Brex, Mercury—allow international folks to set up bank accounts. They will often require a U.S. entity, but you can also do that as an international individual. You can, for instance, set up a Delaware LLC and set up a bank account with Mercury or Brex. There is nothing too problematic about that, but make sure you are just complying with the onboarding flow through that particular bank. Don’t fudge anything, don’t lie about anything. If they’re requiring a certificate of incorporation or your LLC formation documents, that will be the barrier to entry, making sure that you meet all their requirements, having a local entity. But yes, you certainly can do that.”

Why is Jason converting his LLC to a C-Corp? What is the advantage besides being able to take outside capital?¶

Luke’s Answer:
“Yeah, so I will be careful here not to divulge anything revealing, breach attorney-client privilege, and just a caveat, I’m not a tax attorney, general corporate attorney. But there’s two main reasons. So one is, if you become very successful, like Jason is, there are certain thresholds of revenue that you make that it actually starts becoming more advantageous to be a C-Corp, and that is because if you’re doing a pass-through entity, you have to take that revenue off your eventual tax return, whereas if you want to keep money in the business, you want to invest in other areas of the business, you want to develop intellectual property, grow your team, there are some reasons why you may want to keep that in the entity without it necessarily translating to your individual tax return at the end of the year.

The other big thing is if you have this idea of basically turning yourself into a company, and there are pretty important tax advantages that you can take advantage of in a C-Corp that you can’t otherwise, and the main one is qualified small business stock. If you hold QSBs-eligible equity—which almost every C-Corp is, you have to fit it within a couple parameters, but it’s usually if it’s under 50 million, if it’s original issuance, I can chat about that in a little bit more detail—but if you hold that for five years and then sell the business, you don’t have to pay any federal tax. So that is a pretty big incentive, especially if you are building up a repertoire of intellectual property, branch into other businesses, if you have some consulting, if you have some digital products, it starts to look a little bit more like a full-on enterprise rather than a consulting gig.

So two biggest things are if you make a certain amount of money, sometimes it makes sense to keep things in the business to avoid it coming through on your personal taxes, and then two is to have the formalities of QSBS if you ever think this is an entity that could be sold at some point. Those are the two biggest things. But I do recommend if you have any more specific questions, especially the difference between an LLC taxed ordinarily and an S-Corp, I highly recommend talking to your personal tax folks, your accountant, because that depends a lot on your situation.”

How do you handle company relationships with personal branding? Should the company own the personal entity or just be involved when a contract is sent?¶

Luke’s Answer:
“Yeah, if you are consolidating pretty much all of your operations in a single entity—so if you’re consulting, your newsletter, all of your assets, so to speak, are flowing through one entity—I do recommend having the formal contracts in place that assign all the intellectual property to the company. Adds a little bit of protection. Obviously, these entities are designed to provide limited liability protection rather than in your own individual capacity, and as much as you can consolidate it under the auspices of a formal legal entity is going to be beneficial for you, especially from that protective point of view. And just know that if this is a single-member, entirely owned LLC, if the LLC ever shut down, that would just revert to you. So you don’t have to worry about it being tied up in this limbo situation. If you dissolve that company, it’ll flow back to you.

But there are a lot of reasons that you want it behind the curtain of the limited liability protection.”

If a company and a bank is in the U.S. and you’re living elsewhere in the world, what are the tax implications? Do you only pay U.S. tax on business revenue plus your income?¶

Luke’s Answer:
“Unfortunately, I probably shouldn’t speak to that. That’s a little bit outside of my expertise. I highly recommend talking to a tax expert, which, unfortunately, I am not.”

Should I operate as an LLC, S-Corp, or sole proprietor? My consulting business is just me, with no additional team.¶

Luke’s Answer:
“Yeah, so this goes back to how it’s a pretty specific situation, although I would urge you to not go the sole proprietorship route. I would recommend a little bit more formality, even doing a single-member LLC. They’re really easy to set up. You don’t even necessarily need a lawyer—I shouldn’t be saying that, maybe it’s not in my best interest—but places like Northwestern Registered Agent let you set it up for a pretty minimal cost. LLCs are highly flexible, highly streamlined, and not terribly expensive. There’s a couple filing fees you have to do on a yearly basis, but I highly recommend doing it under the formality of a limited liability entity for that additional protection. Obviously, with limited liability protection, any creditors, any lawsuits are limited to recovering what is in the entity rather than going after your personal assets. There are very, very few exceptions to that rule. There are situations where they can pierce the corporate veil if it looks like it’s kind of a faux entity and you’re paying for some things out of your personal credit card, some things through the bank. I do recommend having as much as possible flow through the formal entity. Get a bank account for that entity, get cards for that entity, try not to mingle cash too much, try not to pay for personal expenses out of the company. Keep that corporate hygiene intact. Treat it like it is a real business, because that’s going to maintain that limited liability protection.

But I always recommend opting for the LLC rather than sole proprietorship. Whether you should check the box to be taxed as an S-Corp—by the way, for consultants especially, there’s very few reasons to actually set up an S-Corp. Usually what we’re talking about is an LLC that chooses to be taxed as an S-Corp. S-Corps as a corporate structure are more convoluted; it takes more setup time. I would always start with an LLC and then, with guidance from your personal tax folks, decide if opting to be taxed as an S-Corp makes sense in your personal situation. But I do recommend starting with an LLC.”

If I work as an AI engineer at a company and am under a pretty standard non-compete, should I worry about consulting falling under that? What about blogging?¶

Luke’s Answer:
“We’ll touch on blogging. I can’t think of any reasons why blogging would be problematic unless you are divulging confidential information and, for whatever reason, casting the company in a bad light. Usually blogging is totally fine, even if you stand to make a little bit of money from that. For consulting, unfortunately, it entirely falls down, it comes down to the language of it. Non-competes are usually going to work for a competitive company, so if your consulting is not inherently competitive or you are not lending services to a competitive company, you start to be placed outside of that. But I think it’s a little bit more important, when we’re talking about consulting, to look at that language. If it prohibits moonlighting and it prohibits engagements outside of your full-time employment—I’m not saying to dismiss that language, because there’s a lot of ways to write a non-compete—it’ll have pretty clear instructions of what you can and cannot do. But for consulting, it’s not always kind of wrapped up in those prohibitions within your contracts.”

What key topics should I ask a lawyer about to probe their suitability for advice on AI, technical contracts, etc.?¶

Luke’s Answer:
“I really like this question. So lawyers are not known as the most technical people. On the technical front, it’s kind of more about your network and who you know rather than what a particular lawyer might know. I will be the first to say that it might take me a while to get up to speed on any specific AI technology to best protect it, but I fortunately can rely on my team at Answer AI to build fun tools for me and educate myself on all things AI. So if lawyers demonstrate that they have people to turn to, to better educate themselves, so you don’t have to do the education—the last thing I want, especially for a lawyer that charges hourly, is to spend three hours teaching them enough to be able to put your contracts together—you certainly don’t want that. Look for people who have the resources and the initiative to go learn those things themselves.

In terms of what you actually want accomplished, the best way to do that is ask if they have done what you are asking them to do before. If you are putting together a consulting agreement, ask about the type of consulting agreements they work on. Is it mostly consultants, AI consultants providing services for companies? If you need entity setup, ask if they do this routinely and in your jurisdiction. I did see somebody asked about when you should look for a lawyer in your state or in your country—it should always be in your country. But for state, that’s a little bit squishier. Contracts as a body of law is rooted in common law and does not change dramatically from state to state. Usually you can have a lawyer work on your NDAs or services agreements that isn’t necessarily in your state. But if anything derives specifically in state law—so for the entity setup itself, if you’re setting an LLC up in Texas, I highly recommend you get a Texas attorney. If you’re dealing with something like employment law, which does vary quite a bit from state to state, make sure it’s within your jurisdiction. There’s one big loophole: lawyers can partner with people in other jurisdictions to have that gut check and final say so that they can deliver services to you. So if I was working with a New York company, one of my partners at Virgil is licensed in New York, I could substantively do pretty much everything and pass it over to her, and she’d be like, ‘Yes, this complies with New York law,’ and then we’re good to go.”

If consulting is a stepping stone to a future SaaS product, how should I approach contracts and incorporation now?¶

Luke’s Answer:
“Yeah, and this is kind of multifaceted. So one thing, you need to look at the confidentiality requirements. We want to be really careful that the definition of confidential information coming from the client you’re working on doesn’t somehow preclude you from doing something in the future. So we want to be really careful about saying it’s only things that are not publicly known about that specific company. It carves out big exceptions like if you learn it from a third party, if it becomes public information. Look for standard language around confidentiality, because you don’t want to be in a situation where you develop a SaaS product and they’re like, ‘You built this in part on stuff that you learned from us.’ That is an issue.

Also, that ties neatly into intellectual property. I’ll go back to what I said before—make sure that it’s narrowly scoped to the things you’re specifically delivering to the client, but carves out things that you have developed in other contexts and pre-existing intellectual property. Some clients try to make that as broad as possible to capture as much of a universe of intellectual property as they can. You want to make sure the stuff that you’re developing on your own time or previously is not passed to the company but is owned by you.

Provided it’s carefully scoped around confidentiality and intellectual property, and make sure none of the contracts you sign say you can never create a competitor to what we’re doing—hopefully that’s not in the consulting agreement, that would be very unusual and nonstandard. They shouldn’t really put too many parameters around your future work unless it’s actually infringing on their IP. I’ve seen this time and time again—consulting is a really good launch pad for a future SaaS or digital product—just be mindful of the contracts you sign with your clients.”

How can I keep legal costs down? Can I use AI or get a notated template from a lawyer?¶

Luke’s Answer:
“Yeah, so I want to be a little careful with encouraging people to DIY with AI. AI is such a valuable tool, and I use it as a co-pilot. But I like to think of it as a partnership between the lawyer and the AI tool, but that lawyer has that final approval. They know what they’re trying to accomplish, they know what outcome they’re looking for, and they can speed up the drafting process. One thing that I do recommend that I really like doing is maybe going a little step farther than asking for a template and ask your lawyer for a highly annotated template, so you have the language of the contract, but any real meaningful points of negotiation have a note or footnote saying, ‘They might ask for this, you should be thinking about this, but this is your bottom line, this is what you can cave on,’ and so forth. Yes, it’ll take a little more time to put into that original template, but it should be a whole lot more fungible, useful, and protective than just a contract that they take off the shelf.

AI is getting more sophisticated. There are platforms that let you buy things off the shelf. A founder I know runs the company Common Paper, if you’ve heard of that. Take a look at that. They have some really standard agreements that you can set up. I would generally caution against entirely doing it yourself through these AI tools, but there are certainly lawyers who are using them in their practice to keep costs more reasonable.”

If I have clients in different countries (Europe and U.S.), should I incorporate in the U.S. or maintain multiple entities, maybe a subsidiary?¶

Luke’s Answer:
“Yeah, and at the risk of getting too specific to your case, are you being asked to have a presence in a particular spot? Like, are the U.S. clients uncomfortable with procuring services through an international entity? If you feel like there is an importance of having a local nexus, a local bank account, local presence generally, then I would recommend the subsidiary situation, or at least affiliated entity situations, to make sure everything is owned collectively. So the U.S. company could be a subsidiary of the UK entity, or vice versa, and it’s pretty easy to do that. An LLC can be wholly owned by another company. That tends to be the most clear-cut and legally sound way to do it. But a lot of cross-border transactions happen all the time, so if you don’t need that local nexus, it may not be necessary.”

I have a dormant C-Corp and am currently consulting as a sole proprietor. Should I use the existing C-Corp or form a different structure?¶

Luke’s Answer:
“The existence of the C-Corp probably shouldn’t be the end-all be-all of your decision, because it’s a pain in the butt, but not that difficult to shut down and wind down a company. So if you decide that it’s more favorable from a tax perspective to be an LLC—even if it’s an LLC taxed as an S-Corp—I wouldn’t consolidate under an entity just because it already exists. If a C-Corp is not the best-suited entity to your purposes, go with what is best long term. If that happens to be a C-Corp, you can certainly consolidate under the existing entity. If it tends to be an LLC or an LLC taxed as an S-Corp, go ahead and wind that down or convert it. You can convert an entity into another entity. Just take a more long-term approach. You’ll be working under this entity for many years, and you want to make sure it’s the most favorable from a tax, logistics, administrative standpoint rather than just going with what already exists.”

What startup stack do you recommend for banking, contracts, bookkeeping, etc.?¶

Luke’s Answer:
“In terms of a registered agent, which if you are incorporated in a state that you don’t have your principal business in, so you’ve probably heard lots of people incorporate in Delaware—it’s very popular—but not very many people live in Delaware, anytime you’re physically in a state other than where you’re incorporated, you’ll need a registered agent. I highly recommend SingleFile. They’re quite reasonable, they send trickle email campaigns when you need to do something, they take the big burden off of filing your annual report, both at Delaware or wherever you’re incorporated, and in your physical place of business. They receive that official correspondence on your behalf in a really nice, easily managed dashboard. If the beneficial ownership report ever comes back, SingleFile handles it.

I do really like banking with Mercury. Common Paper is great for contracts. QuickBooks is generally fine on a bookkeeping side. If you’re doing it yourself, if you want something a little bit more sophisticated than QuickBooks, or at least more integration with modern technology, I like Puzzle, which is bookkeeping with an AI component.”

I get paid upfront without a formal contract. Why should I still bother with a contract?¶

Luke’s Answer:
“In the absence of a contract, there’s fewer regulations and fewer provisions that ultimately benefit you. If something were to go wrong down the road, the contract will spell out exactly what happens. Most will have an arbitration clause, which you might think is in the best interest of the company, but I tend to think of it as being in the best interest of both parties. Full-on lawsuits are not something that anybody wants to deal with. You do want a lot of specificity around what’s going on with the intellectual property. In the absence of a contract, it defaults to state law. While state law is pretty favorable for these sorts of things, it may not say what you think it says. I would say always try to get a contract in place. It’s easy to say, ‘Well, I got paid,’ but there can be some lingering obligations and issues if they come after you later.”

My clients want to own all the IP I build. How can I handle IP ownership so I can still use my work elsewhere or license it?¶

Luke’s Answer:
“So I said look out for making sure there’s a pre-existing IP provision, but sometimes if it becomes clear that IP is a contentious topic and they’re really eager to capture as much as possible, just a pre-existing IP clause is not sufficiently specific. You can put together an appendix that lists all of the intellectual property you have developed previously, so it’s crystal clear that stuff is carved out and not transferred.

Also, there is a difference between ownership and a license. They don’t have to own your IP to achieve what they need. If you have a piece of software, a product—call it product A—for them to fully use product A does not mean they have to take it from you. You can provide a fully paid, upfront, worldwide, non-exclusive license that allows them to freely incorporate it into their product and turn it around, white-labeling it, and selling it to a company. This is a very standard provision. You just need to be specific about making sure you are not passing along ownership for something that they could have their goals accomplished with just a license.”