Back when I practiced business law, I cannot tell you how many clients I saw in my office who easily could have avoided the time, expense, and hassle of seeing me had they only known even just a little business law.
So let’s remedy that–at least for you!
As the U.S. Small Business Administration (SBA) suggests, there are six areas of law that a small business owner or manager should have a basic understanding of if they want to keep the business out of trouble. They are:
- Entity formation
- Tax law
- Employment law
- Labor law
- Intellectual property
1. Entity Formation
Most entrepreneurs launch their startup either as sole proprietorships or, if they have a partner, as general partnerships. This makes sense because these are the easiest and least expensive business structures to start. Pick a business name, get a business license, publish a dba ("Doing Business As") in the paper, open a bank account, hang your shingle, have a grand opening party, and you are good to go.
The problem with sole proprietorships and partnerships however, and why you would want to change your legal business formation from those sorts of entities, is that as a sole proprietor or partnership, you and the business are one in the same, legally speaking. Business debts are your debts, business liabilities are your liabilities. What does this mean? Your home, your car and even your bank account are at risk if something goes wrong with your business.
As such, it would behoove you to update your business plan and pick an entity type that affords you legal protection; one that protects you personally from the debts and liabilities of the business. You can do this by forming a corporation (i.e., “incorporating”) because a corporation is a separate and distinct legal entity that shields the owner from liability.
There are three types of corporations:
- C corporations
- S corporations
- LLCs or Limited Liability Companies (technically, an LLC is not a corporation per se, but practically speaking, they are treated the same and offer the same legal protections.)
Owning a corporation takes a little extra work, but it is worth it. Specifically, corporations have processes they must follow, including adopting bylaws (or “operating agreements” for LLCs), having annual shareholder meetings (even if you are the only shareholder), issuing stock, and so forth.
On the state level, and depending upon the state, corporations may need to file initial corporate reports, annual reports, and articles of amendments for changes of name, address, etc.
2. Tax Law
No, no one likes taxes, but do you know what is worse than dealing with taxes?
Dealing with the IRS and the federal government.
So here is a quick primer on the essentials of business tax law:
First, and not surprisingly, per various government regulations, you will need to file and pay a variety of taxes to different local, state, and federal authorities. The amount and type you will owe depends on the type of business you have and what sort of legal entity you choose. That said, here is a general outline of business taxes typically owed:
Income tax: Both federal law and state law mandate that small businesses have to file tax returns and pay federal and state income taxes on their profit. Needless to say, failure to file and pay your federal tax or your state tax will result in fines and penalties. The feds want corporations and LLCs to estimate how much they will owe and pay those taxes quarterly (called, naturally, “Quarterlies.”) If you don’t file and pay your Quarterlies, you will be charged a late-payment penalty.
Employee payroll taxes: if your business has employees, even if you are the only one, you are required to pay an employer share of your employee’s Social Security, Medicare, and unemployment insurance. You will also need to get workers’ compensation insurance. (Confused about payroll taxes? No need to be. My pals at Hourly got you covered!)
Sales tax: Only five states do not have a sales tax: Alaska, Delaware, Hawaii, Montana, and Oregon (but note that Alaska and Hawaii allow for local sales taxes.) In all other states, small businesses are required to collect sales taxes from customers and pay them to the state if the sale is, according to Debt.org, “a retail purchase of a tangible product (something that may be seen, weighed, measured, felt or touched)” Tangible goods include:
- Raw materials
- Rental Properties
3. Labor Law
When you have employees, federal regulations and labor law are a significant issue. Aside from having good record keeping, getting social security numbers, I-9s and the like, both state and federal agencies pass a bevy of laws and regulations designed to manage and regulate the workplace and treatment of employees.
The major labor laws are:
- OSHA /workplace safety: The federal Occupational Safety and Health Administration (OSHA) mandates that employers must create safe workplaces for their employees. You can learn more about how to be in compliance here.
- Equal opportunity: The federal Equal Employment Opportunity Commission (EEOC), as well as the Constitution, make it illegal to consider factors like race, creed, color, religion, gender, and age when hiring, promoting, or firing.
- Employee verification: Employers must verify that employees are legally allowed to work in the United States by filling out and submitting an I-9 form.
- Posters: Depending upon your type of workplace, the federal Department of Labor may require that you post labor law posters, such as, for instance, minimum wage laws, health regulations, etc.
- The Affordable Care Act: Obamacare mandates that employers with 50 or more full-time employees (or the equivalent) must offer at least minimum benefits health insurance to their staff. You can learn more here.
In addition, there are a number of laws that small businesses must follow with regard to hours and pay, including:
- Minimum wage: The federal minimum wage is $7.25 an hour but your state government or even your local government may have a number higher than that. You can find out here.
- Overtime: Hourly employees who work more than 40 hours a week must receive 1.5 times their wage for the overtime worked. Note that managers and salaried employees are exempt from being paid for overtime.
- Employee or contractor? Beware of hiring someone and labeling them an “independent contractor” when they are really an employee–the penalties are severe. What is the difference? There are various tests courts employ, but the basic distinction is whether you have the right to control the time, place and manner of the person’s work. If you do, they are employees.
4. Intellectual Property (IP) Law
There are three types of IP law to understand:
Trademarks: A trademark is a recognizable sign, design or expression which distinguishes a product or service. The Nike swoosh is trademarked, as is its catchphrase, “Just Do It.” Trademarks must be registered with the United States Patent and Trademark Office (USPTO.gov.)
Copyright law: Copyright gives the creator of a written work, such as this article or a song for example, exclusive ownership of that work. The great thing about copyright is that it is created automatically; there is nothing you need to do to get the protection once the work is published.
Patent: if you create products or other unique items, you may want to protect them so that other people cannot copy them. Patents give you that. Patents too must be registered at the USPTO. Note that while a trademark can usually be obtained without the assistance of a lawyer, and no lawyer is needed for copyrights either, patents are far more complicated and costly to obtain, and legal assistance is necessary.
5. Licenses and Permits
Various businesses are required to get various licenses and permits from various governmental agencies, and you will need to know which apply to your business. For example, say that you want to open a food cart in Los Angeles. According to the L.A. County Public Health Department:
“For food trucks and carts, operators must have permits, pass inspection, and follow the rules about handling food. Every approved food truck and cart in Los Angeles County must also have a Letter Grade and a certification sticker indicating that it is a permitted food facility.”
Consider the different city and state certifications your business may need:
- Business license from the city or county
- Health department permits
- Land use permits
- Sales permits for regulated items like alcohol
- Sales tax license
- Certifications from licensing agencies such as the Bar (for lawyers). Similar certifications are needed for medical facilities, plumbers, electricians, and so on.
- Zoning permits
On the federal level, you may need to register with the:
- Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF)
- U.S. Department of Agriculture (USDA)
- Federal Communications Commission (FCC)
- Federal Aviation Administration (FAA)
- U.S. Fish and Wildlife Service
6. Contract Law
Back in the day, I always told clients to think of a contract as “your own set of laws.” You and the other party are pretty much free to create whatever sort of agreement you want, as long as it is legal (you can’t contract to buy illegal drugs for example). But beyond that, you are essentially able to create whatever contract you want.
There are two key things to understand about contracts, insofar as small business is concerned. First, get it in writing–whatever it is. People remember things differently, people lie, people cheat, people forget. Your defense against all of those is an agreement that is written down. And it need not be complicated–even a basic bullet point list of what was agreed to with both parties signing it will do. Should the time come when you need it, you will be happy you got it in writing.
Secondly, as a general rule, and as my old Contracts professor used to say, “The first dirty written breacher loses.” Meaning, whoever breaches the contract first is usually the one at fault and who would likely lose in a court proceeding. But please note, that is a VERY general rule subject to change given the agreement, facts, and applicable law.
Know the Law
No, you didn’t go into business for yourself because you like the law (unless, of course, you are a lawyer!) but even so, having a basic understanding of business law will serve you well. Indeed, if nothing else, it will go a long way to helping you avoid the fate of my former clients, who unhappily found themselves sitting in an attorney’s office with the meter running.