As a small business owner, you are bombarded with tasks to occupy your time. You have to determine financing, marketing, product design, engage with customers, and much more. In the hustle of daily life as a small business owner, some of the essential legal considerations might fall to the side. This article discusses five essential legal considerations that every small business owner must address immediately.
1. Entity Formation
A major pitfall of small business owners is not forming the correct entity, or worse – not forming a legal entity at all. There are various types of legal entities including limited liability companies, S Corporations, limited liability partnerships and corporations. Each entity structure has various benefits and drawbacks including tax liability, ability to issue ownership interests, and control of the business. There is one major benefit to them all: potentially limiting the legal exposure of the owners.
Forming an entity also provides three main practical benefits. First, establishing a legal entity allows business owners to put accounts in the business’ name which makes it easier for company assets to be separate from personal assets. Second, most state statutes require business entities to follow formalities of a business such as regular meetings and appointing leaders. Finally, establishing an entity allows business owners the opportunity to determine how the company is going to be financed.
Engaging a lawyer early in the process can assist with difficult decisions about which entity is correct for your situation and how to properly establish that entity.
2. Day-to-Day Operations
After forming a legal entity, another major threat to small business owners is not having written policies that govern the daily operations. Who is going to run the organization? How is the entity going to be funded? Can one party act on behalf of another? What if an employee gets sick? These are some of the questions that should be determined prior to opening your business. Two main documents can help avoid future headaches: an operating agreement/bylaws and an employee handbook.
The Operating Agreement (or Bylaws) is the “user manual” for the entity. Generally, it includes basic information such as the leadership of the entity, who gets a say in decisions, and determines ownership interest. This document will be essential if there are dispute among owners.
If your organization has employees, an employee handbook could be vital. An employee handbook is helpful to define the relationship between an employees and management and sets clear expectations of each party. It can also serve as a rule book for when there is a dispute between employees or between employees and management.
3. Customer Agreements
Whether your business sells products or services, has physical stores or is online, it is essential to define the relationship with your customers and potential customers. For example, if your business allows returns, you should provide terms and conditions that outline how returns are conducted. If you have a customer loyalty program and you collect customer information, you should have a privacy policy that outlines exactly what your company does with sensitive, customer information.
Depending on your specific business, there may be additional disclaimers or information that needs to be provided to customers (or potential customers).
4. Government Registration / Federal Employment Identification Number (FEIN)
Federal, state, and even some municipal entities require you to register your business (which is generally accompanied by a fee). At the federal level, a business will have to obtain a Federal Employer Identification Number (FEIN or EIN) to pay taxes. At the state level, if you conduct business in more than one state, you will have to register as a foreign-business entity in each state in which you do business. At the local level, some municipalities require you to register.
The consequences of not registering are severe. For example, in Illinois, a foreign corporation that does not register is not allowed to use the court system until authority is obtained. See 805 ILCS 5/13.70(a). In Florida, a foreign corporation can be assessed a civil penalty of up to $1,000 for each year it transacted business without authority in addition to any unpaid taxes and fees. See Fla. Stat. 607.1502(4).
5. Dissolution / Merger
In the growth stage, the last thing small business owners want to think about is winding down the business, however, this is an important consideration. There are various ways that business owners can cease operating, including merging, passing down the business to an heir, or winding down the business altogether. No matter what path an owner chooses, there are various legal requirements that must be met. In a merger, governmental entities will want to know when assets are transferred. Even if you want to cease operating, there are legal requirements that must be met to ensure that consumers and governmental entities know that the business does not exist.
While these are just five essential considerations for small businesses, there are many other situations and scenarios that small business owners will face. Having the assistance of competent legal counsel can make each of these considerations (and many others) less daunting.
For more information about this article, or small business law in general, please feel free to contact Albee Law PC via telephone at (312) 279-0115 or via email at info@albeelaw.com.
