You’re a busy business owner wearing many hats – you’re always marketing your business, constantly trying to secure clients and collect your fee for services rendered or products delivered. You know the importance of having your legal affairs in order, but there aren’t enough hours in the day to do it all, or perhaps there isn’t enough money to pay a professional to handle those matters.
Many entrepreneurs and business owners face this challenge. But it is crucial to address certain legal concerns so that you can remain in business and do so successfully. Here are top concerns you need to know and address… right now! This is not a comprehensive list, and all may not apply to you, but they are general concerns to be considered.
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1. Choosing the Right Business Structure. There are four (4) basic structures – the sole proprietorship, general partnership, corporation and limited liability company (LLC). The riskier your business, the more you need to shield yourself from personal liability for any debts or wrongdoings of the business. Operating your business as a sole proprietorship or general partnership means that you may be personally responsible for claims brought against your business or for paying its debts. One lawsuit could destroy your business. Carefully consider the pros and cons of each structure and determine which one works best for your business.
2. The importance of good legal record keeping. Maintaining good records is a must, particularly with a corporation which is legally required to keep strict records of meetings and other actions required to be taken by its Board of Directors or shareholders. The failure of a corporation to keep adequate records could mean that its “corporate veil” is “pierced” and essentially the corporate status is negated. A third party bringing an action against the corporation may be successful in attacking the personal assets of the shareholders, and in some cases, those of the directors or officers.
3. Entering into Formal Agreements with Co-Owners. So many people are in business with others – family members, close friends or business associates and without a formal agreement. This is a MUST, regardless of the relationship. The reality is that business relationships don’t always go as planned and owners may need to ‘divorce.’. Without an agreement which makes it clear as to the ownership interest each person has, how and if interests may be transferred, the duties of each owner and terms of any non-compete clause, the departure of an owner or dissolution of the business can be difficult and costly.
4. Entering into Formal Agreement with Third Parties. Failing to document business arrangements in writing has been the downfall of many businesses. Common agreements include (i) consulting agreements with agents acting on behalf of the business; (ii) employment agreements for key officers; and (iii) non-disclosure agreements to preclude third parties from disclosing confidential information about your company. Also consider agreements that prohibit consultants or employees from competing against the business and/or soliciting agents or employees of the business (or include such provisions in an existing consulting or employment agreement). Without a non-compete or non-solicitation agreement or provision, a business could lose a significant of business to someone who has gained knowledge of your business and the specific industry and then snatched your clients and trusted employees/agents.
5. Labor and employment. In order to avoid issues with the Internal Revenue Service (IRS), be clear as to whether someone working for you needs to be classified as an employee, or whether they are a consultant. The general test is whether the person is instructed by the company as to when, where and how to work. In some cases, the IRS has fined a company for not properly classifying a worker as an employee and back employment taxes are imposed, resulting in a great financial burden for the business. The possibility also exists that a claim may be brought by consultants who then maintain that they are employees and are legally entitled to certain benefits such as workmen’s compensation or unemployment insurance.
6. Entering into a Commercial lease. If you operate your business outside of your home, it is best to have a written agreement to ensure business continuity. Negotiate the right lease term, rent amount, etc. Without a written agreement you run the risk of the landlord asking you to leave even if you are a good tenant, and generally with just thirty (30) days notice. This could result in a significant loss of business income – having to move could mean the loss of good clients and a serious business interruption until a new space is secured.
7. The impact of taxes on your business and its owners. The four basic business structures all have different tax consequences and could therefore affect your bottom line differently. Discuss the tax reporting of each, and how each relates to your personal financial situation, with your tax advisor.
8. Raising Capital to Grow Your Business. Many business owners seek to grow their business through equity offerings to investors. Ascertain the types of documents required to be provided to potential investors to ensure compliance with federal and state securities laws, and to ensure that proper manner of soliciting investors.
9. Buying or Selling a Business or Assets. Conduct due diligence if you decide to sell your business or a significant amount of its assets or intend to buy another business. Evaluate all problems you may inherit if you are buying a business, such as pending lawsuits or outstanding debt.
10. Protecting Intellectual Property. If your business uses a trademark or service mark, protect it against all others by filing an application with the U.S. Patent and Trademark Office. Similarly, confirm that you are not using a name that legally belongs to someone else, which could mean infringement, and a successful lawsuit brought against your company. This could be catastrophic to your business.
Jacqueline J. Warner, Esq. is a seasoned attorney at the national law firm of Hinman, Howard & Kattell, LLP, in White Plains, New York with over 19 years of experience with corporate, securities, real estate, and estate planning and administration matters. Attorney Warner regularly advises clients on starting and growing their business, raising capital via private offerings and negotiating a wide array of contracts. She is the author and publisher of a book entitled The Mini Legal Toolbox for Entrepreneurs and Small Business Owners and a soon to be released second book in the The Mini Legal Toolbox series entitled Raising Capital for Your Business; Understanding Private Offerings.
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