Business Law FAQs

There are many legal matters people must take care of when starting a business. Some of the most important ones are:

• Choose your legal structure. This is one of the most important decisions you will make, as it affects many issues, including the personal liability of owners, reducing taxes, how easy it will be to bring in investors, and what will happen to the company when the owner dies.

The main business forms are a sole proprietorship, partnership, corporation, and limited liability company.

• Obtain required licenses and permits from the city, county, state and, in some cases, federal government.

• Register your business’s name with the appropriate government entities.

• Obtain insurance to manage and control risks resulting from claims involving customers, suppliers, workers or government agencies.

• Have important contracts, including leases, franchise agreements, loan agreements, purchase and sale contracts and employment agreements drafted by an attorney or, if they have already been drafted, have them reviewed by your attorney before signing them.

Sole proprietorships are for people who run their business without co-owners. Sole proprietors are personally liable for their own acts and the acts of employees. Liability extends to all the proprietor’s assets.

Partnerships are structures for two or more people who jointly run a business. All partners have potentially unlimited liability for claims against the business (in the case of general partnerships).

There are several options for people who want to be owners yet have limited liability for claims against the business. Limited partnerships offer limited liability and the tax benefits of a partnership. Corporations offer shareholders the benefits of limited liability, a voice in the management of the business, and ease of transferring interests, but they do not offer the same tax benefits as a partnership (an exception is the “S Corporation”). Limited liability companies provide tax benefits of a partnership along with limited liability benefits of a corporation.

Each form has advantages and disadvantages. Our law firm can review your situation and advise you which form is best for your business.

Yes. Limited liability companies have become very popular because of the many benefits they provide to business owners, including limited liability of the owners as well as possible tax benefits. Existing businesses that were originally set up as corporations, partnerships, “S” corporations or limited partnerships should consider whether they would benefit by converting to a limited liability company.

People who do business under fictitious names must file and publish a “fictitious business statement” (sometimes called an “assumed name statement”).

The rules vary from state to state. Some states require filing a fictitious business name statement at the state level, others require it at the county level, and a few require it at both the state and county level. There are also deadlines for when businesses must comply with the filing requirements, with many states imposing deadlines of 30-40 days after the business’s first transaction. Some states also have rules for publicizing the new name.

There are also rules for renewing fictitious business name statements (in many areas, they must be renewed every five years).

You and your co-owners should have a written agreement covering important issues like who will manage the business, how key decisions will be made, how profits will be split, who will put in more money if needed, and what rights each owner has if someone wants to sell his or her interest. Depending on the business form you and your friends select, this can be done in a partnership agreement (for partnerships), shareholders agreement (for corporations) or operating agreement (for limited liability companies).

Before hiring employees, you need to get a federal tax identification number. This is necessary for reporting taxes and other documents to the IRS. There are also state tax filing requirements for employees.

Federal law also requires employers to verify that an employee has the right to work in the United States. Employers must complete an Employment Eligibility Verification Form (also called an “I-9” form) and, by reviewing acceptable forms of documentation supplied by the employee, confirm his or her citizenship or eligibility to work in this country.

There are also state rules for reporting new employees to a state directory.

You can ask job-related questions that focus on the applicant’s qualifications, such as skills, background and work experience. Don’t ask questions that directly or indirectly call for information that is an unlawful ground for discrimination, like asking about the person’s race, color, religion, sex, age or national origin. Some states have more protected categories, like sexual orientation.

There are things employers need to know in order to lawfully hire someone. For example, employers cannot hire people who are not permitted to work in this country. So it is permissible to ask if the person is legally allowed to work in the United States (as opposed to asking what country he or she is from). When in doubt about what questions are permissible, seek a lawyer’s help.

The Americans with Disabilities Act prohibits employers from discriminating against a person with a disability in all aspects of a job, including hiring, firing, salary and promotions. However, you can consider a person’s disability if it will prevent him or her from performing the “essential functions” of the job even if you make what the law calls “reasonable accommodations.” To help avoid legal problems stemming from a job interview, one approach is to inform the applicant of the essential functions of a job, and then ask how he or she would perform them.

Laws and court rulings in the area of sexual harassment make it dangerous for a company to allow sexually-oriented jokes in the workplace. If the jokes are offensive to a reasonable person, your company could be liable for a type of sexual harassment called “hostile work environment.”

There are several federal laws that cover job discrimination, including:

• the Civil Rights Act of 1964 prohibits employment discrimination based on race, color, religion, sex or national origin;

• the Equal Pay Act of 1963 prohibits sex-based wage discrimination for men and women who perform substantially equal work in the same business;

• the Age Discrimination in Employment Act of 1967 prohibits discrimination against workers who are 40 and older;

• the Americans with Disabilities Act prohibits discrimination against people with disabilities.

Many federal discrimination laws apply to companies with 15 or more employees. Some apply to all employers. It’s hard for business owners to remember which laws do and don’t apply, and state discrimination laws may cover smaller employers. You should avoid discrimination no matter the size of your business. If a special situation arises, consult a lawyer first.

To help reduce the risk of legal claims, employers should distribute a written policy to all employees — and enforce the policy — prohibiting discrimination and harassment and setting forth a procedure for making complaints. Businesses should regularly remind employees that all forms of harassment and discrimination are forbidden and to report such conduct promptly. If the business conducts a prompt and full investigation after a complaint of alleged discrimination or harassment, and takes fast action to fix the problem, it has a much better chance to defeat the legal claim.

The general rule is that workers are employed “at will.” This means that unless there’s an agreement limiting the right to fire someone, the company or the worker can end the employment relationship at any time. An agreement can be “express,” meaning there is a written or oral agreement. In some states, courts rule agreements can also be “implied.” This means workplace history and conduct create an implied agreement that an employee will be fired only for good cause. If there’s no express or implied agreement, you can let someone go if you are dissatisfied with his or her work. But you cannot let the person go for an unlawful reason. For example, you can’t fire someone for complaining about unsafe conditions, for refusing to do something illegal, or based on his or her sex, race, religion, national origin, age or disability.

You can have an employee manual that makes it clear workers are employed on an “at will” basis, and that this arrangement cannot be impliedly changed. Another way to avoid claims is to be sure a termination is not for an unlawful reason. Also, if you have high employee turnover, consider buying Employment Practices Liability Insurance to protect against wrongful termination claims.

Companies with 15 or more employees are covered by the federal Americans With Disabilities Act. This law requires employers to make reasonable accommodations for qualified individuals with a disability. If the employee can still perform essential job functions, the company must make a reasonable accommodation to let him or her do so. This may mean obtaining new equipment, changing work schedules or taking other steps provided they do not create an “undue hardship” on the employer.

Under the federal Family Medical Leave Act, if your company has 50 or more employees, workers are entitled to as much as 12 weeks of leave to care for a new child, certain seriously ill relatives, or to recover from their own serious health condition. Employers do not have to pay for this time off, but cannot discriminate against the employee for taking time off.

Some states have their own family and medical leave laws which apply to companies with less than 50 employees and/or offer different rules regarding taking time off for medical purposes.

This is property people create that is not tangible. It is called intellectual property because it is a product or creation of people’s minds.

There are four main kinds of intellectual property: “patents,” “trademarks, “copyrights,” and “trade secrets.”

Patents are a right the government grants inventors. The first person to invent something new and useful, by obtaining a patent, has the exclusive right to make and sell the invention, and to stop others from making and selling it.

Trademarks are distinctive words or symbols that identify a product or service. Some famous trademarks are “Coca-Cola,” which identifies a soft drink, and “McDonald’s” and its golden arches, which identify a hamburger chain.

Copyrights are a right, granted by law, to a writer or artist to control the use of their works, such as written works, pictures, music and even architectural designs. The copyright owner has the exclusive right to decide who can make copies, make derivatives based on their own work or perform or display a work to the public.

Trade secrets refer to confidential information that a company uses reasonable steps to keep secret and which has value from not being known to competitors or others who could use the information. Typical examples are customer lists, supplier identities, secret recipes, product formulas, and a range of other kinds of information.

The answer varies because different steps are needed to protect each kind of intellectual property.

Patents. Rights to inventions are protected by filing an application in the U.S. Patent Office, receiving a patent and placing a “patent pending” notice or the patent number on each product. It is important to file an application promptly after you conceive your invention. The application must be filed within a year from the time you first offer or sell a product that uses your invention.

Copyrights. Copyrights are protected by registering the work in the U.S. Copyright Office and including a copyright notice on each copy of the work. The notice includes the word “copyright” or the encircled C symbol ©, the year of first publication, and the name of the copyright owner.

Trademarks. These are protected by being the first to use the mark, policing to stop others from using infringing marks, registering the trademark in the U.S. Trademark Office and/or with your state’s Secretary of State, and including a notice of ownership (a common notice is the encircled R symbol ® for federally registered trademarks, and the tm superscript for marks that are not federally registered).

Trade secrets. Trade secrets are protected by using sufficient steps to keep the information secret, such as restricting access to confidential information, requiring workers to sign an agreement promising to protect the company’s confidential information, and taking fast action when confidential information has been misappropriated. These are basics. More may be needed depending on an owner’s circumstances.

Registration is not required, but can be important. Patents only exist when issued by the government, so it is essential to file an application to obtain a patent. Copyright rights exist automatically when a work is created. But registration is required as a condition to going to court for infringement. Trademark rights exist when a mark is used, and a court can aid a trademark owner even if the mark is not registered. But registration provides valuable notice to the world about your mark, and gives procedural and evidence benefits if a court’s help is needed. For trade secrets, the government does not have a registration procedure, so registration is not possible.

There are several strategies to protect personal assets when running a business. They include:

• Put your business in a separate entity like a corporation, limited liability company or limited partnership. An owner who follows the rules in using these entities and does not engage in personal misconduct normally is not personally responsible for the company’s debts or liabilities (an exception is general partners of limited partnerships, who are personally liable for debts of the partnership).

• Don’t give personal guarantees. Organizations you do business with (like banks or landlords) may ask for personal guarantees. If you give a personal guarantee, be aware that if the entity does not pay you will be personally liable, and the corporation or other entity will not shield you from this.

• Have your contracts protect you. Personal liability can be limited or even eliminated by terms in your company’s contracts or in your company’s sales invoice and purchase order forms. A lawyer can prepare language to put in your business documents to reduce the risk of personal liability.

• Have proper insurance. This helps assure the business will have enough money to pay any debt or liability so creditors won’t need to go after the personal assets of the owner(s).

• Other methods. There are other ways to protect your personal assets when you run a business, including transferring personal assets to your children or other beneficiaries, setting up a retirement plan creditors can’t reach, using certain kinds of trusts and using family limited partnerships to prevent creditors from reaching your personal assets. These strategies for protecting personal assets can be very complicated and have significant tax and legal consequences, so it is especially vital to seek legal assistance when considering them.

There are several steps business owners can take to reduce the risk of legal claims and help if a claim is made. They include:

• Review contracts before signing. Though virtually everyone knows this rule, surprisingly few people follow it. Business disputes arising from contract terms that one side either glossed over or failed to fully understand are very common.

• Keep your premises safe. Another common type of business-related lawsuits are personal injury lawsuits from customers and others. The risk of these lawsuits can be reduced by implementing a good safety program, including regular inspections to make sure all areas of your business are safe. In most states, businesses are liable not only for unsafe conditions they knew about but also for dangers they should have known about.

• Research your business’s name. Many businesses are surprised when a competitor asks them to change their business name, saying they’ve been using a similar name for years. To help prevent disputes over business names, have a trademark search conducted to ensure your business name is okay to use, and then have it trademarked to prevent others from using it.

• Protect yourself in case of disputes with suppliers. Problems can arise from dealings with suppliers, such as burdensome payment terms or getting poor quality products or services. A good supply or purchase contract tailored to your business helps protect you when buying goods or services, including by making sure there are proper warranties.

Employment related disputes are the most common kind of legal dispute faced by businesses. Whether it’s a former employee who feels he or she was improperly terminated or a job applicant who claims discrimination, these are reminders to take steps to prevent problems. To reduce the risk of job-related lawsuits, consult a lawyer before terminating employees if there is a chance of a possible claim. Also, have employment documents like job applications, contracts and employee handbooks reviewed by a lawyer to reduce disputes from their contents. Many businesses unwittingly have terms in their employee contracts, employee manuals and other job related legal materials that can open the door to successful claims by job applicants and employees.

Some ways to help reduce your business’s bad debts are:

• Use care in accepting customers. When in doubt, check a customer’s credit history and ask for a financial statement. It’s also a good idea to set a credit limit. This helps the customer from getting overextended and limits how much you could lose if the customer won’t pay.

• Make sure your invoices and other forms contain terms to protect you. In most states, terms in your business forms are binding on customers, especially if they sign the form, but often even if the form is not signed. Your forms can state payment terms, add interest for late payments, give you a lien as security for payment, waive other payment defenses, and require customers to pay your attorneys fees and collection costs. Words in your business forms can choose which state’s law applies, and which court to go to if collection action is needed.

• Ask your customer’s owners to sign a personal guaranty. This is a legal document in which they agree that if their company doesn’t pay you, they will.

• Get security. In addition to a guaranty, you can require the customer to give you a lien on their property, bank account, or other assets as security to make sure their company pays its debts.

• Get bank and credit information. If collection steps are needed and you win a judgment, this helps you identify bank accounts from which the judgment can be enforced. You can keep track of a customer’s bank by making photocopies of checks they use to pay their bills. This provides their bank name and account number.

Some ways to improve your business’s ability to collect debts and improve the chances of winning if court action is needed are:

• Keep good account records of payment history. This reduces the customer’s power to claim they paid you already. And in a court action, your account records can be vital to show the court how much is owed.

• Follow up quickly on past due amounts. When a customer doesn’t pay after one or two requests, or misses a promised payment, be prompt in turning the debt over to your attorney or collection agency. The longer you wait, the less likely you are to get paid. Also, there are statutes of limitations on collecting old debts.

• Keep records of your collection efforts. Keep notes of your phone calls with the customer and copies of any letters you send. These records may be proof if court action is needed. Also, make a record whenever the customer promises you they will pay. A promise to pay is a re-affirmation of the debt, which reduces some defenses the customer can try to raise later.

• Seek legal assistance for debts that you want to pursue aggressively. Our law firm can advise you about other procedures the law permits, such as placing a lien on or seizing customer assets at the start of the case for certain kinds of debts.

Act fast. Only a short time is allowed to respond to the complaint: 20–30 days in most courts. Sometimes a hearing is set faster, maybe as soon as 3–10 days. Your lawyer needs to use this time to learn the facts and prepare a response. So don’t set the complaint aside. Read it to get an idea what the claim is about, and find out how soon you must respond.

Contact your lawyer. Call and give the papers to your lawyer right away. The faster you do this, the more time your lawyer has to learn the facts, gather information, interview witnesses, and decide strategy with you. Tell your lawyer everything, even if it’s embarrassing. Your lawyer can provide you the best defense by knowing the weaknesses of your case as well as the strengths. Keeping secrets from your lawyer creates risk the other side will present the bad facts, and by then your lawyer won’t be able to defend them.

Preserve records. Any records that relate to the incident or dispute may be important in the case. Also, as many people know from the now famous cases of Enron and Arthur Andersen, discarding or destroying records while you are in a lawsuit may be illegal. Preserve all records, and this includes emails as well.

Consider compromise and settlement. When they are sued, many people want to defend and win at all costs. No matter how right you believe you are, there is already an opposing lawyer who sees things differently, and there is always a risk that the judge or jury won’t see it your way. Consider the benefits of being willing to compromise and settle the case.

Defending a lawsuit can be expensive due to court costs, investigation costs and legal fees. Depending on the kind of claim, your insurance company may pay or help pay for your defense, settle the claim and even pay any award against you. Check your business and homeowner’s insurance. Check your current and even old policies. See if you are covered by insurance of a trade association, your landlord, or policies bought by suppliers, vendors or others that may name your company as an insured. Talk with your lawyer and insurance agent about what insurance you have, so you can get help defending and resolving the claim. Do this fast because policies require that the insurance company be notified promptly, otherwise they aren’t obligated to help.

If you are in a family-owned business, there are many things you need to think about when planning the transfer from one generation to the next. They include:

• Clarify your goals, including whether you want to turn the business over to your children now so you will have more free time, or whether you want to keep running the company as long as you are healthy and productive.

• Assess, groom and train your successor. Be sure the person you want to take over the business has the skills and interest level to do this. It’s best to start training your potential successor as early as possible. This gives the successor more time to learn from you, and gives you more time to assess his or her strengths and weaknesses and make any necessary adjustments.

• Use outside consultants. Almost any succession strategy needs help from professionals, like an accountant to provide financial analyses and possibly an insurance agent, especially if life insurance is a part of the plan you develop. A lawyer is also a vital part of the succession planning, as there are many legal issues to resolve and legal documents to prepare, such as buy/sell and employment agreements. Also, estate planning documents providing for ownership succession need to be prepared.

• Choose the best way to transfer ownership. Your lawyer and other professional advisors can help identify strategic alternatives to best accomplish goals that family members identify. These can include incremental transfers of company ownership over time; preparing the company for a public offering; identifying a partner for the company’s future; or steps to train younger family members for greater management roles. There are many structure and strategy alternatives to choose from in creating a succession plan.

• Start planning now. Serious illness, disability or death can happen suddenly. So it is best to start preparing a succession plan as soon as possible, while you are still healthy and active. The worst time to prepare a succession plan is in the midst of a family crisis, when emotions are running high and it’s hard to make rational decisions.

There are ways businesses can resolve disputes outside of court. These are typically referred to as Alternative Dispute Resolution. The two most common forms of ADR are mediation and arbitration. Many businesses include provisions in their sales, employment and other contracts calling for arbitration (or mediation) in case of a dispute. These provisions can be very beneficial to business owners, as they can help reduce the expense and uncertainty of an outcome that is often involved in a lawsuit.

Mediation is a process using a neutral person (the “mediator”) to help explore options and communicate. The mediator does not make a binding decision for the parties, but instead helps the parties reach a solution that is acceptable to both sides. The mediator can talk directly to both parties, discuss the matter with just one side in the room at a time if the parties are particularly hostile to each other, suggest ideas for settlement, and do whatever else he or she feels will bring the dispute to a satisfactory end.

Arbitration is another way to resolve disputes without going to court. In arbitration, there is a neutral third person (the “arbitrator”) who listens to both sides state their case. But unlike a mediator, an arbitrator makes a decision that is binding on the parties.

Some key legal issues to consider when you buy or sell a business are:

• Payment terms and financing.

• What the sale includes and “Due Diligence”.

• How the deal will be structured, whether as a sale of assets like equipment and property, or a sale of shares of the company’s stock, units of a limited liability company, or interests in a limited partnership.

• Contracts in good standing. Another legal issue is making sure the business’s leases, loans and other contracts are in good standing.

• Compliance with “bulk sale” laws. These laws provide notice to creditors of the business and the public about a proposed sale. This lets creditors make their claim and get paid before a sale is completed. If bulk sale notices are given properly, the buyer is protected against liability to creditors of the seller.

• Non-compete provision. These are often part of a business sales agreement, since buyers want to make sure the seller doesn’t quickly open a similar business nearby and deprive the buyer of the benefit of what he or she bought. To be enforceable in court, the restrictions in a provision not to compete must be limited to a narrow scope of activity, in a limited geographic area, and for a limited length of time.