Jacob hadn’t planned to start a business. He had instead assumed that he’d get a job in one of the local plants and maybe some day move up to a manager’s role. But Jacob’s lawn mowing for neighbors while he was in middle school had gradually grown into landscaping services for his family’s friends and acquaintances when he was in high school. By the time Jacob graduated from high school, he already owned a pickup truck, trailer, and equipment. He was also hiring his buddies to help him out. Within a few short years, Jacob had bought an old building and lot, and was fixing up the place for his landscaping business. Most of his buddies were by then working in the local plants, while Jacob continued to hire high schoolers or recent graduates who were looking for other jobs. But Jacob knew he was doing better financially and in other ways than he would have done working in the plant. He loved business.
Business
Law provides substantial structure and support for building a business. Building your own business can bring great benefits to you and your family, employees, customers, and community. A profitable business can produce substantial financial and other rewards. You can support yourself and your family, provide a good job and wages for friends and acquaintances, and bring your customers valuable goods and services. You might also fund charitable missions or establish a corporate foundation out of your business profits. A business can also become a valuable asset to sell to fund retirement or other plans, or to convey to children, grandchildren, or long-term key employees. Even if you are employed full-time in a rewarding job within your career field, developing a business on the side can spur your creativity and productivity, and offer career development and financial security. See in the following discussion how law helps you along the way in building and growing your business.
Organization
Law first helps you organize your business, when organization can be critical to business success. You may operate a business as a sole proprietor. But businesses benefit from the identity, structure, perpetuity, and limited liability of a corporate form. Law gives you the options of a partnership, limited partnership, limited-liability company (LLC), subchapter S corporation, or C corporation. Each corporate form has its advantages and disadvantages as a business structure. An LLC is a newer and overwhelmingly popular corporate form that combines the advantages of limited liability and pass-through taxation. An LLC can keep contractual and tort liability at the corporate level, protecting you from personal liability. Yet an LLC does not pay income tax at the corporate level. Instead, the LLC’s member-owners pay income tax on the LLC’s net earnings. LLC owners thus pay income tax once rather than twice at the corporate level and on distribution to owners. See the guide Help with Your LLC for information, illustrations, and forms on how to start and operate your LLC. Get qualified legal representation to help you organize your business in the best form.
Audit: Identify which of the following advantages of a corporate business form could help your business along: (a) a corporate identity; (b) the perpetual life of a corporation; (c) the ability to bring in other corporate owners; (d) limiting contract liability to the corporate entity; (e) limiting tort liability to the corporate entity; (f) the ability to sell the corporate entity; (g) the ability to convey the corporate entity to heirs under a will.
Financing
Law also helps you finance your business. Businesses typically need start-up capital to acquire necessary equipment, facilities, goods, and services, and to fund the business until it becomes profitable. With a corporate form like a partnership, LLC, or corporation, you can recruit investor owners to help the business raise funds, acquire capital, and cover operating costs. Under federal legislation, the Small Business Administration offers favorable business loan terms to qualifying small businesses. Your business can also offer lenders security interests in the business’s real and personal property, and in the business’s accounts receivable. You may also be able to negotiate floor-planning agreements providing your business with a supplier’s inventory and negotiate other supplier agreements extending credit to your business. Get qualified legal representation to help you with the legal documents necessary to finance your business.
Audit: Identify which of the following financing methods your business may need for its start up or growth: (a) contributions from partners; (b) contributions from members of an LLC; (c) stock purchases from shareholders of a corporation; (d) an SBA loan; (e) a loan from a private lender; (f) floor planning of retail inventory from a supplier; (g) extensions of credit from other suppliers of goods and services.
Operation
Law also helps you operate your business. Your business may, for instance, benefit by protecting its name, logos, and other identifiers with trademark or copyright protection. Your business may also benefit from protecting its inventions and processes with patent protection. Your business may also have trade secrets to protect from competitors who would steal your inventions and methods to undermine your business. Your business may also need contracts with its customers providing payment or financing terms and disclaiming warranties, to ensure that your business can survive and operate without customers taking undue advantage of it. Your business must also comply in its advertising with consumer-protection laws, avoid fraud, and not violate pricing and anti-trust laws. And your business may need supplier agreements and service agreements that keep responsibilities on the appropriate parties and ensure that your business can receive needed goods and services on time and at the quality and consistency your business needs. Get qualified legal representation to prepare the legal documents your business needs to operate efficiently.
Audit: Identify which of the following legal documents, services, or protections your business may need to thrive: (a) trademarks on its name and logos; (b) copyright on its advertising and published materials; (c) patents on its inventions and processes; (d) trade secret protection of its methods and customer lists; (e) customer warranties or warranty disclaimers; (f) customer financing agreements; (g) special supplier and service agreements.
Personnel
You’ve seen from the prior chapter on employment laws that law has a lot to say about how a business hires, pays, and employs workers. Law places plenty of obligations on employers. Those obligations include not to unlawfully discriminate in hiring, pay, advancement, discipline, or termination. Your business’s compensation of employees must meet wage-and-hours laws, while the benefits your business provides to employees must meet federal employee-benefits laws. Your business must also meet payroll-tax obligations, addressed further below. Under OSHA laws, your business must also maintain a workplace free from recognized safety hazards likely to cause serious injury and may have to meet specific safety standards related to special hazards of your type of business. Your business must maintain worker’s disability compensation insurance for your employees and may owe unemployment benefits to employees your business terminates or lays off. If your business employs fifty or more, your business may need to permit employees to take up to twelve weeks of unpaid family or medical leave. Your business must also respect employee rights to organize and negotiate for a union labor agreement. Your business must also maintain secure personnel files and permit employee access to their file. Consult with qualified legal representation when facing questions over these personnel laws.
Audit: Identify which of the following personnel issues may present special challenges to your business, as it hires employees: (a) unlawful discrimination in hiring; (b) unlawful discrimination in pay or advancement; (c) violation of minimum wage laws; (d) violation of overtime pay laws; (e) violation of OSHA safety standards; (f) worker’s disability compensation claims for workplace injury; (g) family and medical leaves; (h) union organizing; (i) maintaining secure personnel files with employee access. Is your business adequately addressing the risk of transgressing personnel laws?
Regulation
Law also closely regulates certain businesses, for instance businesses in the healthcare field and in other professions, businesses supplying food and drugs, and businesses providing financial and consumer services. Consumer-protection laws closely regulate the terms of sale and advertising, to prohibit sharp or deceptive practices. Professional licensing and accreditation boards closely regulate healthcare professionals and facilities, teachers and schools, insurance agents and insurers, real estate agents and brokers, and professionals providing legal, financial, engineering, and other services. Securities laws regulate financial products, while other laws closely regulate fuels, transportation, agricultural products and methods, building materials and designs, manufacturing facilities, and industrial materials, facilities, and processes. Law regulates businesses for consumer protection, environmental protection, protection of labor rights and interests, financial integrity, the free flow of commerce, public health and safety, and other purposes. Violating regulations can lead to fines, injunctions, and even criminal charges. Consult a qualified legal representative if your business faces regulatory action or other disputes over government regulation.
Audit: Identify which of the following government interests your business may implicate, regulations for which your business may have to comply: (a) environmental protection; (b) consumer protection; (c) labor rights; (d) workplace safety; (e) financial integrity; (f) public health; (g) public safety; (h) commercial competition; (i) national security. Are you familiar with the regulations that apply to your business, enough to have confidence that your business complies? What risks does your business face from violation of regulations? Is your business adequately addressing those risks?
Contracting
Law helps businesses ensure that they can contract reliably for goods and services, and sell goods and services under enforceable agreements with customers and clients. Contract law governs formation and enforcement of agreements. Courts enforce contracts by holding breaching parties liable to pay money damages to the party suffering contract losses or by ordering specific performance of the agreement. Courts can also help parties foreclose on security backing the contractual agreement and can order garnishment of wages and accounts, and seizure and sale of assets. While courts can enforce oral agreements, statutes generally require a signed writing for enforcement of agreements relating to credit or real property rights, or that the parties cannot perform within one year. Minors generally lack capacity to contract, as may a mentally incompetent person. Contracts generally require consideration (value) given or promised by both sides. Contracts can involve bilateral promises or performance by one side, such as delivery of goods or services, and a promise by the other side, such as to pay within a certain time. Businesses may form standard sales agreements with customers, governed by a commercial code when involving goods having value greater than $500. Consult a qualified legal representative if your business has contract issues to address, negotiate, and resolve.
Audit: Identify which of the following contract issues your business is most likely to face, around which your business would benefit from skilled legal representation, when dealing with customers or clients: (a) negotiating all material contract terms; (b) confirming in writing the contract terms; (c) obtaining customer or client signatures on the written terms; (d) ensuring that your business can enforce contract obligations; (e) standardizing your customer agreement so as not to have to renegotiate it each time; (f) ensuring that your customer agreement meets commercial code requirements. Does your business have similar issues with supplier contracts that your business should address with the assistance of qualified legal counsel?
Liability
Law also addresses your business’s liabilities to others. Effective business practice requires managing potential liabilities. Accruing excessive liabilities can damage and destroy your business. Liabilities that reach you and other owners can damage and destroy your personal finances. Law permits your business to limit contract liabilities to the business entity, protecting owners. To limit liability to the entity, your business must execute contracts in its name rather than in your personal name, and you must avoid personal guarantees. Law also permits your business to limit to the business entity, tort liability for harm from careless wrongs that your business commits, malpractice in the professional services your business provides, or defective products your business manufactures or sells. Tax liabilities may also remain with the business entity, provided that you and other owners or managers do not deliberately ignore those obligations and divert entrusted tax funds. A commercial general liability insurance policy, and if your business involves professional services, a malpractice insurance policy, can ensure that your business is able to pay most liability obligations. Get qualified legal advice on liability issues related to your business.
Audit: Identify which of the following liabilities your business may accrue that you should take special care to manage wisely through the corporate form of your business and with liability insurance: (a) contract liability to suppliers; (b) contract liability to customers or clients; (c) tort liability for negligent operation of a motor vehicle; (d) tort liability for injury on the business premises; (e) products liability for injury from goods the business produces or sells; (f) malpractice liability from professional services the business provides. Are you satisfied that your business can control and manage these liabilities responsibly? If not, consult qualified legal counsel for advice on how to do so.
Taxes
Law also governs the taxes that your business must pay, while offering opportunities for tax planning to lawfully minimize those taxes. Businesses generally pay income taxes on their profits net of allowable expenses. You’ve seen above, though, that adopting a pass-through form of business entity, especially a limited-liability company (LLC) but also a partnership, limited partnership, or subchapter S corporation, can mean that the business owner receiving those profits is the only one to pay income taxes rather than face double taxation at the corporate and distribution levels. Businesses may also be able to lawfully reduce income taxes through depreciation and other expense strategies. Proper treatment of income taxes can make or break a business. Businesses also pay real estate taxes and may have to pay special business-equipment taxes, depending on the jurisdiction. Businesses may also have to pay sales taxes on purchases and collect and turn over to the state and city or other locale, sales taxes on sold goods and services, depending on the jurisdiction and nature of the goods or services sold. Businesses also pay the employer portion of employment taxes and collect and turn over to the federal and state governments the employee portion of those taxes. Get qualified legal and accounting services to determine your business’s tax liabilities and to lawfully minimize those liabilities in sensible ways.
Audit: Identify which of the following potential tax liabilities your business must address responsibly, for which you may need qualified legal or accounting advice: (a) corporate income tax; (b) personal income tax of owners; (c) real estate taxes; (d) business-equipment taxes; (e) sales tax on purchased goods and services; (f) sales taxes collected on sales of goods and services; (g) employment taxes; (h) special assessments related to your business’s peculiar product, service, or field. Have you adequately figured tax liabilities into the financial modeling, planning, and strategies for your business? Is your business missing opportunities to lawfully reduce tax obligations?
Disposition
Law also helps you dispose of your business through sale, gift, bequest, or other conveyance. The primary value of your business may be in the profit it produces and in its non-monetary benefits. Yet your business may also have great value to you and your family in its disposition. Business owners rightly plan to increase their business’s value to sell to fund retirement, fund a foundation or other philanthropic venture, or convey to other family members and heirs. Law facilitates the conveyance of a business either through transfer of the corporate entity itself, transfer of the business operations as a going concern, transfer of the business assets piecemeal, or merger and acquisition, depending on the goals, interests, resources, and relationship of the buyer and seller. You may also convey your business by bequest or in trust to family member heirs or others, although you may have wiser family succession plans. Corporations may also issue additional shares to sell or may sell the whole operation to employees, among other alternatives for the disposition of a business. Business brokers also sell businesses under broker agreements. Get qualified legal representation for the sale or other conveyance of your business.
Audit: Identify which of the following dispositions of your business are most likely, while considering when that disposition may occur and the qualified legal representation you should retain to plan that disposition: (a) sale of the whole business entity; (b) sale of additional stock shares or membership interests in the business entity, diluting your interest; (c) sale of the business operations as a going concern to a new business entity; (d) liquidation of the business assets; (e) merger of your business with another business; (f) family succession plan with children, grandchildren, or other natural heirs gradually taking over the business; (g) sale to the business’s employees; (h) sale to a key long-term manager or group of managers.
Key Points
Law promotes the start up, operation, growth, and sale of businesses.
Your business may benefit from a corporate form such as an LLC.
Law helps new businesses acquire capital financing in various ways.
Law aids business operations in protective and competitive ways.
Law closely regulates the employment of business personnel.
Law regulates business sectors for safety, health, and other goals.
Law helps businesses control and enforce contract obligations.
Law permits businesses to limit various liabilities to the entity.
Law imposes taxes on businesses while permitting tax planning.
Law helps business owners dispose of their business interests.