A Few Legal Considerations For A Small Business Owner
By Justin M. Jacobson, Esq.
As more entrepreneurs continue to create their own small businesses, the need for proper legal planning becomes of paramount importance. While there are many legal and business considerations a potential owner must consider before embarking on their own enterprise, we are going to explore a few important ones, including the formation of a business entity.
- Business Entities – Corporations & LLCs
A chief consideration for a small business owner is the creation of a business entity. Two of the most frequently selected ones are a corporation or a limited liability company (LLC). It is important to note that different states have different requirements and fees, so an attorney or other specialist in this area should be consulted prior to selecting the appropriate entity. These are both limited liability entities and exist to shield the owners from personal liability for any claims arising from any contracts or other arrangements entered into by the small business owner. This means that the entity, not the owners of it, is liable for any debts or contractual obligations of the business and creditors generally cannot recover against the individual’s personal assets.
While shielding an individual from personal liability is one important advantage of creating an entity, there are also several other important benefits. One is that having a separate business entity permits the company to open a business bank account in an assumed name. This facilitates easier tracking of company expenses and permits the deduction or “writing off” of relevant, properly documented business expenses. Another benefit is that a business entity typically is governed by a written contract (an operating agreement for an LLC or a shareholder agreement for a Corporation) that outlines how the business will operate. This includes an outline of the split of any profits and losses among owners so there is no misunderstanding between the parties. Also, it specifies how management decisions are to be addressed and how additional owners (and members) can be added (or removed) to the business. These forms also provide easy management over any business owned intellectual property (i.e. trademarks, product designs, photographs, logos) as well as any tangible property (e.g., company equipment, computers). Without these outlined procedures, it may be very difficult to make certain business decisions, especially when more than one individual is involved in these important choices. Any existing entity can obtain a Tax-ID/E.I.N. number, which is analogous to the company’s social security number and is frequently required when working with many third-parties. However, these forms avoid the dangers of personal liability associated with partnerships and private proprietorships.
While these business entities provide numerous benefits to its owners, there are potential ways a third-party could potentially “pierce the corporate veil.” That is an attempt to attach an individual’s personal assets and disregard an existing entity’s protection of its owners. Thus, it is essential that a company follows any and all statutory procedures and guidelines, which differ in each state. Some of these formalities include the preparation of annual corporate minutes to ensure the corporation is a real functioning entity as well as filing of certain state required documents, including annual reports.
- Taxes & Business Licenses
In addition to business entity formation and its associated formalities, a small business owner must be aware of any federal and state corporate tax obligations that it has for any income that the company earns. Furthermore, a business may be required to obtain sales tax authorization or some other business license to legally operate in a particular area. The requirements vary by state, so it is important for a small business owner to understand the applicable statutes that their company must adhere to. For example, many states require a seller to obtain a permit or license for any business that sells retail goods. Failure to follow the required licensing requirements as well as the failure to file applicable corporate taxes can subject a company to potential monetary penalties and fees.
- Intellectual Property – Trademark & Copyrights
Another essential consideration for a small business is protecting its intellectual property, primarily its trademarks and copyrights. A trademark registration provides a business owner with the exclusive right to use a particular business name or logo (trademark or service mark) to differentiate the goods or services that the owner provides from those of another. Trademark protection applies to a word, phrase, logo, sound, product packaging and design or a combination of these, which are used in relation to a particular good or service. For example, “Ralph Lauren” for clothing, “Rolex” for watches, and “Pepsi” for soft drinks are all examples of trademarks. A mark can be registered either at the state or federal level depending on whether the products are sold in one state or in interstate commerce. There are also international trademark considerations that need to be explored if one is creating an internationally distributed (or licensed) company. Each country has different requirements that must be adhered to for a mark to obtain protection in that country.
Generally, it is prudent to conduct a trademark screening search prior to preparing and filing a trademark application. The search reviews any registered marks as well as pending applications to see if any confusingly similar marks exist that could potentially prevent the registration and use of a mark for a particular good or service. A business owner may also check Facebook, Twitter, Instagram and any other social networks that they might use to promote their business to make sure that the desired name is available there too.
There are many other benefits to registering a trademark or service mark, including utilizing a registration to prevent others from adopting and using confusingly similar marks for the same or similar goods or services. Additionally, a registration is a valuable commodity, permitting the licensing of the mark to third parties and enabling the protection of associated “goodwill” in the mark. It also provides the owner with the ability to stop counterfeit or grey market goods bearing the owner’s trademark from entering the United States. Furthermore, a valid registration also permits the owner to file infringement claims with various Social Media platforms, including Facebook, Twitter, and Instagram, to retrieve or block potentially infringing accounts.
In addition to a company’s trademarks in its brand and product names, an entity’s copyrights are also a critical part of its business and must be adequately protected and policed. A copyright applies to a particular finished unique work, including a company’s logo, product designs and any associated media and created content such as images, photographs, videos, websites, and other promotional and advertisement materials.
It is prudent to file a copyright registration for a variety of reasons. First, the work must be registered with the U.S. Copyright Office prior to instituting a copyright infringement lawsuit if the owner believes that one of their copyrighted works has been infringed upon. Also, if the owner has filed for registration prior to the infringement of the work, the brand owner may be entitled to recover actual damages incurred as well as statutory damages and attorney’s fees. In many instances the ability to recover a business’ actual damages and attorney’s fees is crucial. These sums are sometimes quite substantial and the attorney’s fees recovered can even exceed the actual damage suffered.
- Ancillary Agreements & Business Documents
In addition to proper maintenance of a company’s intellectual property, it is important to ensure that a company has suitable agreements in place with any third-party who contributes any work to the business. This includes written contracts with any graphic, logo, or web designers, photographers and videographers as well as any other third-party who conducts any work on behalf of the business. These agreements should ensure that the business has the right to utilize the finished material for commercial as well as promotional purposes.
A small business should also aim to have written agreements with any employees to ensure that an individual is aware of any requirements and restrictions on their employment. If a company provides services to others, it is prudent to have a contract with the client or other written document listing the provided services in addition to other material terms, such as payment amounts, to ensure that all parties are in agreement.
Overall, there are many legal considerations for a small business owner prior to commencing business. The above are a few of the many factors that need to be taken into account. For a further explanation, please contact an attorney specializing in the field.
This article is not intended as legal advice, as an attorney and/or an accountant specializing in the field should be consulted.
© 2018 The Jacobson Firm, P.C