Making a profit should be the core principle and driving force behind any new business venture, yet two-thirds of them fail to ever accomplish that basic, rudimentary goal. It's a tough world out there, but entrepreneurs who ignore the naysayers and move forward with their dreams to become part of the one-third of startups that make it recognize the need to avoid legal mistakes that can doom a business to failure.
As an entrepreneur, recognizing the importance of complying with the laws and regulations that control much of what happens in your business may be a fundamental key to becoming one of the one-third of business ventures that succeed. Here are five legal tips to discuss with your business law attorney to help get your business started and keep it in compliance with the law.
Tip #1 -- Selecting the proper legal structure for your business
A legal issue that arises even before your business begins operations is the choice of its legal structure. The legal structure of a business affects practically all aspects of its operation including the taxes it pays, its ability to raise capital and add new owners, and how well personal assets of its owners are protected. The structure of a business must be established early in the formation process. Some of thecommon legal structures for a business include:
- Sole proprietorship: This type of structure has limitations because it is limited to one owner or an owner and spouse. It does not create a separate business entity from its owner, so business income is reported on the owner's personal income tax return. Sole proprietors do not benefit from protection of their assets from claims against the business because they are, in the eyes of the law, the business.
- Partnerships: Two or more people operating a business for profit may do so as a partnership. Partners must report profits and losses of the business and remain personally liable for debts and other obligations of the business in the same way as sole proprietors. The advantage of a partnership is the ability to raise capital by adding new owners. Certain types of partnerships, including limited partnerships, can be created to offer limited protection of personal assets of some of the partners.
- Corporation: Unlike partnerships and sole proprietorships, which were not entities created to be separate and apart from the owners, establishing a corporation creates an entity recognized by state law as having rights, including the right to sue and be sued in its own name, similar to those enjoyed by a person. Tax advantages and protection of the personal assets of its owners are some of the benefits offered by corporations.
- Limited liability company: An LLC operates separately from its owners because it is created under state law as a legal entity. It offers similar advantages as those enjoyed by owners of businesses operating as corporations.
Three primary factors to consider in choosing the right business structure include tax benefits, protection of personal assets of its owners, and flexibility in its formation and operation. A consultation with an experienced business law attorney can help you choose and form the legal structure that is right for your business.
Tip #2 – Ongoing Legal Compliance
Remaining legally compliant with federal, state and local laws that apply to your business is an ongoing process. Depending on the legal structure that you choose for your business, you may need to create and maintain specific documents. For example, if you operate as a corporation, you must create bylaws that govern its operation and hold annual meetings of shareholders and directors as required by state law. Minutes of the meetings must be created and kept available to prove the corporation continues to meet the requirements to maintain its status as a legal entity under the law. Businesses in certain types of industries must obtain permits and licenses in order to comply with the law. For example, a restaurant needs permits and periodic inspections by state or local health agencies in order to serve food, but it also must obtain a state liquor license if it intends to serve drinks containing alcohol.
Tip #3 – Protecting intellectual property
Many businesses hire managed IT service providers to protect their computer systems while doing nothing to protect themselves against the theft of their company's name or logo. Innovative ideas and concepts you depend on to make your business a success can be lost unless steps are taken to protect them. Everything from the name of your company to the design of the products that it sells can be taken away from you by competitors unless steps are taken to protect it. Patent, trademark and copyright protection can protect your intellectual property by establishing your legal right to it. Nondisclosure agreements offer a way to ensure that trade secrets developed by your business remain confidential.
Tip #4 – Compliance with state and federal employment laws
Numerous state and federal laws regulate the hiring, firing and compensation of employees, so have your attorney determine which laws apply to your business and prepare whatever documents are needed to ensure that your business complies with them. For example, use of a written employment agreement that specifies the responsibilities and compensation of a new employee avoids misunderstandings that can turn into disputes and litigation.
Tip # 5 – Get it in writing
A verbal contract may be as legally enforceable as a written one but proving what was discussed and agreed upon can be challenging when a dispute arises. A signed, written contract containing the terms of what the parties agreed upon makes it easier to settle disputes before they get to the litigation stage. When more than one person starts a business, a written agreement between the owners detailing the ownership interest of each owner, their management role in the business, and the compensation to be paid to each owner will avoid or ease resolution of disputes that may arise. The lawyer handling the formation of the business can help you decide what needs to be included in the document.
It takes a lot of planning and hard work to launch a new business venture. Working with a lawyer and accountant during the formative stages increases the likelihood that your business will avoid legal issues that can stand in the way of becoming a success.