Legal Implications of Small Business Ownership

LLC vs. Corporation

 LLC stands for Limited Liability Capacity. An LLC protects you from personal liability under most circumstances. If your business is sued or if it declares bankruptcy, your personal assets including your home and vehicle will not be at risk. LLC provide a lot of flexibility. A corporation (or C corp) is a company that is legally a separate entity from its owner or owners. Corporations offer the greatest level of personal protection from liability out of all business structures. However, they’re more expensive and complicated to form. Corporations file separate income tax on their profits. Both types have their own benefits; however, because of these complications, LLC’s are becoming more favored.



Shannon found that her business was perfect for an LLC because it was easier for her for tax season and she did not want sole proprietorship.

Register Your Business Name

When determining your name, it is important to check if that name has already been claimed. Once you make that determination, there are four ways to register:

• An entity name: This legally protects your name at a state level.
• A trademark: This legally protects your name at a federal level.
• A DBA: DBA stands for Doing Business Act. This does not offer legal protection but may be required depending on your location and business structure.
• A domain name: This is to claim your business’ web address.



Each way to register serves its a unique purpose. It is important to keep the same name consistently. Without consistency, this can make tax time very confusing due to the differences in names. Even if you are thinking about starting a business, reserve the name. It is low cost and peace of mind to you knowing that that name is yours.

Apply for a Federal Tax ID Number

Your federal tax identification number is known as an Employer Identification Number (EIN) and it allows you to legally hire employees, pay federal taxes, apply for business licenses and open a business bank account. You can apply for an EIN through the IRS website.

Your business will need an EIN if you plan on doing any of the following:

• Hiring and paying employees
• Filing employer tax returns
• Operating as a corporation
• Using a tax-deferred pension plan



Although this is a simple process, it is needed. If it is not done right, there are implications surrounding it.

C Corp vs. S Corp

C corps make owners shareholders. It is the same status that Fortune 500 businesses hold—they are corporate entities separate from their owners Because the corporation is a separate legal entity, it is an individual taxpayer in the eyes of the IRS. It is the most sophisticated, making it an attractive option for independents. At Sivia Law, we have not applied for C corps because it is appropriate for big companies like a Fortune 500, not necessarily a small business.



S Corp is a specific business structure that has received the Subchapter S designation from the IRS. S-Corps are considered by law to be a unique entity, separate and apart from those who own it. Limited legal liability (separation of personal assets from your business) of a separate legal corporate entity as well as the separate tax entity. The profit from your business is reported under a separate tax return filing. S Corp is a bit more paperwork than an LLC, but they act the same in that they separate you from your business. It is not for everyone and that is okay.

Business Permits/Licenses

Depending on your industry and where your business is located, you may need to be licensed on the federal level as well as on the state level. Federal licenses are required for businesses involved in any sort of activity that is supervised and regulated by a federal agency. State licensing and permits will vary depending on location.



This work is a bit tedious. You will have to go to the city hall to get the license. It is important to register and keep that registration. Whether it is state or local, follow their codes and procedures. It is helpful to go to someone who knows the process and has that experience, as it varies from state to state.

Business Insurance

You need business insurance. If you do not have it, you will come across something in your business that will prohibit you if you do not have insurance. The types of insurance that are right for your business will vary greatly and depend on your industry, the size of your business, and the type of clients you work with, among other factors Here are a few types:

• General Liability Insurance: Necessary for independents. This insurance covers a wide range of incidents, including accidental damage to a client’s property, claims of libel or slander, and the cost of defending lawsuits.
• Errors and Omissions Insurance: Also known as professional liability insurance, provides protection in the instance that a client incurs financial harm due to an error or omission—that is, a failure on your behalf to perform an integral part of your responsibility on a project.
• Home-based Business Insurance: Relevant for independents who choose to work out of a home office. Most homeowners’ insurance policies do not cover losses sustained out of a home office, but an insurance policy for a home-based business can provide the protection you and your clients need.

Employees

If you terminate a non-performing employee, make sure he or she signs documents carefully drafted by an attorney upon termination to make the terms of dismissal crystal clear. Letting an employee go without any final termination forms leaves the door wide open for legal actions. It is not necessary, but it is good practice. Being prepared for a worse-case scenario situation is the best thing for your business.

Copyrights, Trademarks, and Patents

Trademarks allow protecting of names and trade information. Cutting edge companies in the tech industry often face aggressive patent litigation. Companies often sit on patents for years, hoping that another company inadvertently violates them, to get easy money through patent and copyright lawsuits. In the product development phase at your company, make sure your research and development teams thoroughly research the patents and copyrights of your current product, to avoid a messy legal battle should you step on a competitor's toes.

Customers

Customers who are dissatisfied can file class action lawsuits against your company, in which they gather in large consumer groups and attack your company over faulty products, services or promises. With enough dissatisfied customers, class action lawsuits can do more damage than any individual or corporation and irreparably tarnish your brand's image.



For example, LuLaRoe is a company that sells leggings to women. Over time, there were class action lawsuits because of faulty merchandise, pyramid scheme business structure, and others. They are currently still battling those lawsuits.



Remember to be proactive and keep a finger to the pulse of your customers through tech support, online message boards and e-mails. Promptly issue recalls for flawed products and be quick to address customer issues. Without transparency and active communication, your reputation could suffer and your business could dwindle.

Contracts

Each party to a contract has a duty to perform. If one party performs, and the other party doesn't, the non-performing party could face legal consequences.



Failure to perform under the contract amounts to a breach of the contract.

• If it's a material breach, you don't have to perform on your end of the contract. A material breach happens when you don't receive the substantial benefit of your bargain.
• Some contracts provide conditions for performance. They may provide that a party doesn't have a duty to perform unless a certain condition occurs. ○ Nonperformance doesn't always equal a breach of contract.
• Certain types of contracts must satisfy the statute of frauds before a court will enforce them. A contract satisfies the statute if the parties put the agreement in writing.



Contracts are always negotiable. It may be a contract where you can sell this product on this platform or in this store, these are the conditions and terms. Always read everything. If you are not sure what something is, consult with a lawyer to figure out what they mean. Written contracts are needed when it comes to contracts. No handshakes and verbal agreements are non-binding.

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If you need any help regarding your business or other legal matters please reach out to us directly here and schedule a call with one of our paralegals on our scheduling page here.