5 Places to Look for Legal Trouble in Your Business
If you made a New Year’s resolution to get your business on strong legal footing, here’s a cheat sheet. LegalZoom General Counsel Chas Rampenthal helped us compile a checklist of things any small business should consider to keep on the right side of the law for 2016 and the long-term.
LegalZoom has served millions of consumers and small businesses since it was established 14 years ago to make it “easy for anyone to create a last will, incorporate a business, trademark a name, or take care of other common legal matters.” Rampenthal says users of the online platform start new businesses every 3 minutes and file new trademark applications every 17 minutes, 24-hours a day. Attorneys who are available through the site have completed more than 200,000 consultations with LegalZoom customers.
Rampenthal points to 5 main legal topics for small business owners to address, with or without the help of LegalZoom’s experts.
1. Business Structure. “What is your goal as an owner?” Rampenthal asks. “Are you running a small family business, providing expertise as a consultant, or turning a hobby such as baking or furniture-making into a serious business? Are you looking to raise money, or do you plan to fund the business yourself? Do you wish to stay small or grow your business into something much bigger? There are many choices for the type of entity you form,” he says. A sole proprietorship or partnership might be all you need to establish. But, he says, “if you want legal protection and to separate your personal life from your business, it’s best is to form an LLC, a C Corporation, or an S Corporation.”
Some people have a good idea what business structure they want, while others need more handholding. Either way, Rampenthal recommends consulting a legal expert.
2. Licenses and Permits. Obtaining the right permissions to operate is another important legal step. If your business sells alcohol or firearms, does banking or baking, provides legal advice or carpentry work, there could be licenses and permits required by the federal, state, city, and county government. “If you’re in a regulated industry, you need to make sure its licensing agencies are aware you started this business,” Rampenthal says. Comply to avoid being shut down.
3. Legal Agreements. “When you’re operating a business, you make contracts with customers, vendors, landlords or property managers, and employees,” Rampenthal says. “A contract must cover a ‘meeting of the minds’ in writing. It memorializes what you have agreed to legally. You can go back to it in a month, a year, or 10 years and say, 'Yeah, we knew exactly what we were getting from this relationship.’“
Most disputes come about because individuals on either side didn’t understand what they were agreeing to or what their obligations were, he says. Among the legal agreements that small businesses are likely to need to draft are:
- Agreements between owners–a founders’ agreement or an operating agreement–that discuss rights and responsibilities, titles, roles, voting, and money.
- Employee agreements, or independent contractor agreements that describe that person’s responsibilities and rights.
- Contracts with customers, such as terms and conditions of purchases
- Development agreements, such as for the development of a design, software, content, or other intellectual property, that assign ownership rights to your business as opposed to the creator
- Confidentiality agreements, such as non-disclosure agreements, that protect your innovative ideas and trade secrets when you discuss them with investors and prospective partners.
4. Intellectual Property. Any business should consider protecting its rights through the U.S. Patent and Trademark Office. “If you’re building an online business, your value is your brand and your reputation,” Rampenthal says. “Protecting your logo with a trademark and monitoring it can make that business asset more secure. And entrepreneurs who dabble in inventions, getting a design or utility patent can be valuable to outside investors and for the overall value of the company,” he says. He should know: LegalZoom claims to be the nation’s largest filer of trademarks and patents.
5. Employees. Start by knowing whether someone who works for you is truly an employee or an independent contractor, Rampenthal says. “It has to do with whether or not that person is truly independent, on their own schedule and using their own equipment, or in your office on your schedule using your equipment. If it’s the latter, make sure you’re withholding taxes and paying for insurance before the IRS takes a look.”
It’s also important to know that you are on right side of the rules and regulations when it comes to human resources, health and safety, harassment, and discrimination, he says. There are laws you need to be aware of regarding how you hire, manage, and fire employees. Be sure you have good and understandable rules for interviewing and managing candidates, for written communications with employees, and letting employees go so that you do not run afoul of civil rights law and disability law.
For growing small businesses, Rampenthal also notes: "Once you hit the the magic number of 50 employees, a lot of federal laws kick in that you need to be careful of. Understanding the rules and regulations that go along with employees is a must for aspiring or current small business owners.”
Above all, Rampenthal advises, small business owners should secure a trusted legal advisor before they really need one. “Looking for a lawyer when you have a problem is like looking for doctor when you have a disease,” he says. “You should be establishing a relationship with them when things are good and getting them to understand your business. Then, when bad things happen – you get a letter saying ‘I’m taking you to court,’ or the Department of Consumer Affairs wants to talk to you about your business practices – you have someone you can turn to. You can pick up the phone and ask, ‘How worried should I be?’”