Legal Structures of a Business
Sole Proprietorships
The earliest form of business structure is the sole proprietorship. In this structure, there is one owner of a company who has total control over the day-to-day activities of the operations of a business. While this method does not require a lot of formalities to begin operating, it can expose the owner to personal liability. In this structure, the owner is typically personally liable for the debts of the company. If the liabilities of the business cannot be collected, creditors will seek to collect the debt from the individuals forming the business. This could include exposure to lawsuits, creditors, tax liabilities, or other business operations. Sole proprietors do not have to make separate filings or pay separate taxes for being in business. The individual makes a filing with the Treasury Department for a business license for a declaration of operating a business on a federal, state, local or municipal basis. While simple, the sole proprietor should consider the risk of exposing the owner to personal liability on the debts of the business.
Partnerships
A partnership is a business entity that has two or more people. A partnership has two forms of operation. These are a general partnership and a limited partnership. Like the sole proprietorship, there is not a lot of formalities to forming a partnership. However, the partners are personally liable for the debts and liabilities of the business. In a general partnership, each partner has the rights at equal decision making for the operations of a business. In a limited partnership, there are both general partners and limited partners. The general partners have full control over the decisions of the operation of the business . The limited partners are responsible for the debts of the partnership, but they have no say in the day-to-day settlements of the business.
Corporations
There is a third method of structuring a business. This is the basic form of structuring a business as a corporation. A corporation breaks the business into its components. The first component is to allow the owners to have protection from personal liability. The owners of a corporation are called shareholders. Their investment in the business is limited to their investment in the stock. A corporation is a considerable expense to formalized affiliates. There are various laws and filings to enable the corporation to operate on both the state and federal level. Corporations are considered the most expensive form of structuring of a business. However, the advantage of a limited liability on the owner is a strong benefit of establishing a corporation.
LLC
The most recent development in structuring a business is the creation of a limited liability corporation or LLC. LLC’s are very similar to a corporation. The owners of the LLC has limited liability in the debts of the LLC. However, an LLC is passed through for tax purposes. The profits and liabilities of the LLC are being taxed to the owners. The owners, like the corporation, have limited liability on the profits and liabilities of the LLC. LLC’s have become a method of a simplified method to incorporate on the state and federal level. It is less expensive to create than a corporation. However, it is generally a pass through for tax purposes. Owner’s need to consult with an accountant to determine if it is beneficial to form an LLC.
Essential Legal Documents for Businesses
Contracts:
From sales agreements to service contracts, businesses require a range of contracts to carry out transactions. These should always be in writing with terms clearly outlined to avoid potential pitfalls and misinterpretations down the line.
Employment Agreements:
A solid employment agreement protects your business from legal disputes with employees. It delineates job duties, compensation, confidentiality requirements, and layoff procedures. Non-competition and non-solicitation clauses are common as well, although overly restrictive ones can lead to legal battles unless precisely crafted.
Non-Disclosure Agreements:
NDAs and similar agreements prevent employees from revealing proprietary information or intellectual property to third parties during and after their tenure with the business. Many companies include confidentiality clauses in regular employment agreements; however, get legal counsel to ensure these are enforceable.
Like any other risk, protecting yourself with foresight is essential. Remember to keep these documents updated and consult a lawyer if you have questions about how best to apply specific terms to your business.
Legal Compliance
In addition to the common law legal issues mentioned above, there may be numerous administrative regulations to which your business may be subject. For example, if you decide to start a food-based business, there may be local regulations concerning sanitation and the licensing of traffic in foods. If you work in the construction industry, there may be significant building code regulations to follow. On the other hand, if you are a software developer or otherwise involved in the computer technology industry, depending on your work you might not be subject to many regulations beyond those set by your customers or clients. Despite the risks associated with non-compliance mentioned and the lack of direct industry regulations, businesses working in and around technology do have to be aware of privacy laws, both at the state and federal levels. While this list greatly oversimplifies the issue, it becomes clear that most businesses will at some level have to, or at least be aware of, compliance with either industry-specific regulations, general administrative licensing requirements or, at a bare minimum, general basic compliance with local laws and regulations. Many of us have experienced disclaimers on virtually every kind of product imaginable that the product is not for sale to minors. In most cases, it is difficult to imagine how these regulations could ever be enforced against end-users, especially since the "offender" only has to turn 18, or pass a similar local barrier to be able to purchase the product. That said, there are many other examples of stricter regulations. If you are in a regulated industry or choose to work closely in the computer field, you must be aware of compliance issues, as in many cases failure to comply can result in jail time or hundreds of thousands of dollars in fines. Beyond this, failure to report compliance properly or simply put customers in compromising positions by not being in compliance can result in losing the very license or industry that some businesses spend years or decades building. In other words, the consequences of your lack of compliance could end your company.
Intellectual Property Protection
Protecting your Intellectual Property is the final aspect of addressing business legal affairs. Protectable ideas take various forms. These include trademarks, patents, copyrights, and trade secrets. Each type of protection has different characteristics. The law relating to these forms of protection is highly specific, technical, and settled only in recent years. For that reason, you should employ an attorney or other professional who knows the law relating to the specific protection you seek.
Trademarks are distinctive symbols, words, or phrases that identify goods and services. Examples include the golden arches of McDonald’s. A trademark can be renewed indefinitely and endure throughout the lifetime of the business or individual.
Patents protect inventions or discoveries. That includes many innovations that are technologically complex. For example, the simple ball point pen is protected by a patent. Patents are time–limited. They last for a maximum of 14 years, depending on the date of application. After 14 years expires, others are free to make, use, and sell products that were previously patented . For example, after 14 years, others were free to make and sell scientific calculators, first patented in the early 1970s. Many patents expire every year. Some of these patents may relate to quickly evolving technologies like computers. Other expired patents may apply to products or processes that are broadly applicable to many industries.
Copyright protects what is contributed by authors, artists, musicians, and other creators. Under copyright, the creator of an original work has exclusive rights to publicly display, copy, and distribute that work. Copyright applies to books, films, music, software, and many other artistic or creative works. Copyright lasts for many decades, depending on when the work was created.
All forms of intellectual property protection apply to collective works, meaning works that incorporate materials from many different authors. A single song can be the product of many authors, such as the songwriter, the performer, and the music producer. Copyright applies collectively to all authors of the song. Likewise, a movie can involve several screenplay authors, directors, actors, and sound technicians, each of whose contributions are protected collectively under copyright.
Commercial Disputes
In the course of business, disputes are inevitable. Whether it’s over a contract, intellectual property rights, liability, or another matter, businesses need to know how to properly handle such situations for the protection of all involved.
Litigation and arbitration are the two most common ways to settle business disputes, and both differ greatly in their process and outcomes. While some franchises require arbitration to settle disputes, others may leave it up to you. If you are open to both methods, however, you have the ability to choose – but do so carefully.
Litigation is a process similar to what you see on television and in the movies. It is a business dispute settled in a court of law. An arbitrator hears both sides of the argument, examines the evidence, and decides upon an outcome. There are three potential outcomes. You could win the case and receive any damages you are requesting, you could lose the case and owe the other party damages, or the arbitrator could dismiss the case entirely. Since arbitration is generally faster, cheaper, and less formal than litigation, that is why it is the preferred choice. But there are a couple of notable exceptions. In a few cases, like antitrust actions, class actions, and racketeering cases, litigation is mandatory. Litigation is also better for those looking to set precedent. For businesses engaged in a lawsuit against a large corporation with plenty of resources, litigation may be the better choice. Because arbitrators are usually very cost-conscious, they can be stingy when it comes to the discovery process and might find certain documents irrelevant to the case – potentially leaving out critical pieces of evidence.
Arbitration is almost identical to litigation, except it takes place in a much less formal setting. An arbitrator or panel of arbitrators acts as a judge, listening to both sides of the argument. It is not a public trial but a closed-door discussion. Arbitration – if agreed upon by both parties – is usually mandatory if outlined in the franchise agreement. Once the arbitration decision is made (typically a written award), it’s final and can only be appealed in cases of fraud or where the award went against the law. The paperwork required for arbitration is reduced and the hearings themselves are short – often just one day. Since there’s no chance for appeal, arbitration is generally favored over litigation because both parties have more control over the situation. Not only can both parties negotiate a settlement to avoid the arbitrator’s decision, but they also have more control over various other elements, including the choice of arbitrator, the timetable, the place of arbitration, and the confidentiality of hearing evidence.
The nature of your business will ultimately determine the legality of how you choose to deal with business disputes. Above, we listed the pros and cons of litigation and arbitration, so be sure to weigh these factors carefully. Because once you’ve made your decision, it could cost you everything.
Role of Legal Professionals
The importance of legal professionals for any business cannot be understated. Whether an organization is a small start-up or an established corporation, legal matters will certainly arise as a part of everyday operations. A legal professional determining the services that will be needed from their client’s company can be critical to the organization’s success. Knowing what a legal professional can help with can save time, money, and effort throughout the whole process. Moreover, there are considerations regarding the type of counsel a company will need . General business legal counsel deals with a variety of high-level concerns. On the other hand, transactional legal counsel focuses on specific business transactions. Depending on the needs of a company, either type would be applicable. One of the most important aspects of tending to business legal affairs is being informed on the potentially complicated nature of the law. A business will be able to more clearly navigate challenges when they understand what their legal professional can do for their company.