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Running a business

5 legal issues every business owner needs to know

Many business owners are busy working in their business, rather than on their business. There is never enough time in the day, and thus, details such as legal compliance and contracts are placed on the backburner.

Just like going to the doctor, people avoid seeking legal assistance until it's too late, leaving a major problem on their hands. The good news: With just a few preventative measures, you can have peace of mind that your business has a solid foundation and can avoid expensive litigation.

It’s important to be aware of fundamental legal issues that may arise, and the measures you can take to avoid them. This article covers five common legal issues that business owners face, along with advice to adequately protect their business.

1. Selecting the right entity for your business

Business owners should do everything possible to minimize liability. An easy solution is to form an LLC or corporation, in order to protect your personal assets from being subject to creditors, or at risk due to a potential lawsuit. If your business doesn't go quite as planned, but you have a business entity that separates you from the business, you can protect your personal assets.

By following the legal requirements to separate yourself from the business, you can utilize the "corporate veil" to help insulate you and your personal assets, if your business is subject to litigation. Review the options of which business entity is right for your business.

2. Have the necessary agreements in place

For your business to thrive, you should clearly define how your business will be run, before you enter into any agreement with your business partner(s) or co-owners. This means you need to formalize agreements with your business partners, investors, and anyone else with an interest in your business.

If you form an LLC, an operating agreement can outline the responsibilities and rules for the management of the company. Similarly, if you have a corporation, you are required to have bylaws, and if you have a partnership, you should have a written partnership agreement.

These agreements should also state who will take over the management of the business, in the event the owner dies or becomes incapacitated. Think of it as a prenuptial agreement, but for your business. When the relationship breaks down or a business partner has to leave the company for any reason, having the terms agreed to far in advance can save you a tremendous amount of money and stress.

3. Protect your intellectual property

Intellectual property plays a significant role in your business. Intellectual property includes items protected by a trademark, copyright, or patent to protect your brand. A trademark can protect your business name, logo, slogan, any unique names of your products, and more.

You need to conduct due diligence in developing your brand, which includes ensuring that you aren’t infringing on the intellectual property rights of other businesses. In order to protect your intellectual property, you must register for a federal trademark. A copyright protects original works of art, such as music, writing, and software code. If you have an invention that you want to protect, consider discussing applying for a patent with an attorney.

4. Working with employees and independent contractors

When you hire an employee or independent contractor, it’s important that you comply with federal and state employment laws. At a minimum, you should have a contract with all of your employees and independent contractors. If you have employees, you should also have a documented employee handbook and company policies that you issue to each employee, and confirm in writing that they’ve reviewed and agreed to the terms. You should also include a non-disclosure clause in your agreements to protect your company's confidential information.

When hiring someone to work for you, another thing to consider is that you may have an independent contractor who is considered an employee, based on the laws in your state. In California, for example, strict guidelines determine whether someone is considered an employee. You should research employment laws in your state, or consult an attorney, to avoid issues when hiring or firing employees, or deciding if you can designate someone as an independent contractor.

5. Tax concerns

It’s equally important to seek advice on how to best structure your company, in order to minimize your tax obligations. It’s best to meet with an attorney who specializes in tax law, or your tax advisor, to understand what is best for your business. Also, find out the tax requirements that your business must comply with, including whether your business is required to pay sales tax.

It’s recommended to have monthly or quarterly meetings with your tax advisor, giving you adequate time for proper tax planning and staying on top of your taxable expenses. Ideally, you should plan for tax payments throughout the year. That way, you’re not left scrambling at the tax filing deadline, trying to find deductions to reduce your tax liability and staring at a huge tax bill that you didn’t anticipate.

A good lawyer can help you strategize about how to address these areas for your unique business. Having a strategic legal advisor, or outsourced general counsel, can be extremely helpful in supporting your business, in case anything goes awry. It’s far less expensive to work proactively than wait until you are involved in a lawsuit to engage an attorney.

Disclaimer: Nothing in this article constitutes legal advice. If you have a specific legal issue, you should contact a licensed attorney in your state.

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