This guide outlines the 5 key business law tips every small business owner should know before they start. “Challenging” may be the best word to describe what it’s like to start and run a small business. Taking an idea or a concept and turning it into a fully operational and, hopefully, profitable enterprise takes time, money and a tremendous leap of faith by an owner to make it happen.
Navigating through an unfamiliar legal landscape is a challenge faced by practically all business owners. The choice of a business entity, regulatory compliance, protection of intellectual property, and employment and business law are only a few of the legal issues capable of destroying a business unless addressed early in the formative stages of a business.
5 key business law tips
If you are the owner of a small business and have not already consulted with a business attorney, you need to get sound legal advice now. Here are five business law tips that every small business owner needs to know.
Tip 1: Choose and create a business entity
The first of the business law tips is to decide on your “Business entity” — which refers to the legal structure of a business. State laws determine the types of business entities and the legal considerations that apply to each of them, including:
- Payment of taxes
- Management
- Legal rights and obligations of the owners to each other
- Legal rights and obligations of the owners to third parties
The following are the most common types of business entities:
- Sole proprietorship: It is the simplest type of business structure to set up with only one owner or two when the owners are married to each other. Operating as a sole proprietorship does not create a business entity that is separate from its owners, so profits and losses are reported on the owner’s personal tax return and creditors may look to the personal assets of the owner to satisfy business debts and obligations.
- Partnership: A partnership is similar to a sole proprietorship, in not being an entity separate from its owners. Profits and losses of the business pass through to the partners for payment of income taxes, and the partners can be held personally liable for debts and obligations of the business. The advantage offered by a partnership is the ability to raise additional capital to operate the business by adding another partner.
- Corporation: A corporation must be registered and set up through the state because it is an entity separate and apart from the shareholders who own it. The corporation can sue and be sued in its own right as an entity and pays taxes on its profits and losses.
- Limited Liability Company: An LLC combines protection for its owners as an entity that is separate and apart from them that corporations offer, but it retains the ease of management and pass-through taxation of a partnership. Also like a corporation, an LLC is formed by registering with the state.
Choosing the type of business entity is important and should be done early in the formation of a business. Speak with a business law attorney to choose and set up the structure that best suits the needs of your business.
Tip 2: Government compliance
Depending upon the nature of your business, there will be government-compliance issues at the federal, state and local levels of government that you must address and comply with beginning at its inception and continuing for as long as it operates. Business licensing and registration, building permits and safety-related regulations can result in fines and penalties imposed on businesses that do not comply.
In some instances, a failure to comply with government regulations and business law can lead to a business being forced to cease operations until it complies. An attorney will determine the laws and regulations that apply to your business and take whatever steps are needed to ensure that your business is in compliance.
Consult an accountant to ensure that your business complies with federal, state and local tax laws and regulations. For example, you may need a federal employer identification number from the Internal Revenue Service to file income tax returns. If the business collects sales tax from customers, your accountant can ensure that you file the necessary paperwork to collect and transmit sales taxes in compliance with state and local laws.
Tip 3: Protect intellectual property rights
If you do not think this section applies to your business because it does not have intellectual property to protect, think again. Names, including product and business names, are intellectual property under business law. Some other examples of intellectual property that add value to your business and should be protected include logos and designs, formulas, and techniques and processes developed and used in your business.
Equally as important as protecting intellectual property rights that belong to your business is avoiding infringing on the rights of others. Your business attorney can advise you about steps to take to avoid problems while keeping your company safe.
Tip 4: Use written contracts to conduct business
A verbal agreement can be as legally binding as a formal, written contract, but proving the terms of a verbal agreement in court can be difficult or impossible. Written contracts actually help to avoid disputes because disagreements over the terms of a written agreement can be easily proven simply by producing the document.
When presented with a contract to sign, have it reviewed by your attorney to ensure that its terms conform to what you agreed upon with the other party. The cost to review a contract is far less than what it costs to defend against a lawsuit for breach of a contract that you did not review before signing.
Tip 5: Retain an experienced business attorney
Your first contact with a business law attorney should be a consultation early in the startup process of your business. It is less costly to have a business attorney anticipate and develop ways to avoid legal issues than it will be to retain someone to defend your business against a lawsuit or regulatory action by the government. Some of the benefits a business law attorney offers to your business include:
- Help with the selection and creation of a business entity.
- Negotiating, reviewing and drafting contracts and leases.
- Protection of intellectual property, including patents, trademarks and copyrights.
- Ensure compliance with laws and government regulations.
- Assist with employee relations, including creation of employment contracts.
Successful business owners know that the efforts of an experienced business law attorney lets them focus on the operation of their business without fear of legal entanglements that can be expensive distractions.
