When you start up your small business, you might have a lot of knowledge and passion about the products or services that you offer. You might even be a leading expert in your field. But even with all of your specialized knowledge, do you know how to start and run a business without accidentally running into legal trouble? A new small business can be vulnerable, and while you don't need to go out and get a law degree, there are a few key legal requirements that you should know about to keep your business safe and above board.
Legal topics small businesses should know about
Small businesses should decide on the right business structure or entity when getting started
The very first thing you should decide when you start your small business is what kind of legal entity your company will be. Choosing the wrong structure for your business could have serious consequences. For example, establishing yourself as the sole proprietor could set you up for personal liability. You have a few different options to choose from, including sole proprietorship, partnership, LLC, C-Corp and S-Corp. These possibilities might also vary depending on the province, state, or country you're in. It's worth doing your research on which entity best fits your business model, or even hiring a lawyer to help you decide on the best option.
Shareholders' agreement
If your business has more than one shareholder, you should have an agreement in writing. Because small businesses sometimes start as passion projects run by friends or family, it might never have occurred to you that an official agreement would be necessary. Even if your shareholders are your family or close friends, drawing up a contract that you all can agree on will protect you from potential conflict in the future if you decide to divide or sell the business, or if some shareholders want to pull out to pursue another project. Establishing a contingency plan for these situations can save you from hurt feelings, conflicts or even legal action.
Licensing
If you're starting or running a small business, you should also develop an understanding of the business licenses, permits, registrations, and so on that your business needs. For example, if your company does any construction, you might need building permits, health and safety-related permits, construction permits and so on. Even if you run an online business that doesn't have a physical presence, you might need a local business license or a permit for a home-based business. Since these requirements can vary across cities, states, provinces and countries, it's a good idea to get legal advice about which ones are necessary for your business. You don't want to set back your small business by accidentally breaking a law and getting into financial and legal trouble.
Small businesses should know about intellectual property laws
When you're sure that your business is registered properly and has the correct licenses and permits to run legally, you should make sure you have a solid understanding of intellectual property laws so that you can legally protect your hard work and innovation. For example, if your business is structured around a new product or manufacturing innovation, you should protect it with a patent.
What kind of products can have patent protection?
You can get a patent for inventions including a new process, machine, chemical compound, recipe and more—as long as your invention is useful, new and inventive, you can apply for patent protection, which could give you up to 20 years to prevent others from copying, using or selling your invention. You probably know that you can get copyright protection for original literature, art or music, but you can also get it for software and other original creative work. if you're developing new software with original code, you should consider copyrighting your work so that others can't take and profit from it without your permission.
Copyright laws vary according to country, but you can often get protection from copycats for your own lifetime and then some if you want to pass on your work to another generation. For example, under Canadian law, new software is considered a literary work and copyright gives the owner the right to prevent others from copying or using the code for the life of the author plus 50 more years. You might even want to get legal protection for specific business details, like logos and symbols. To protect your branding from copycats, you can apply for a trademark from your federal government. If your business is still small and local, these measures might seem unnecessary, but it's important to think about the future and protect yourself, your business, your shareholders and even your family or heirs to your estate from intellectual robbery.
Small businesses should know employment laws
When you've ensured that your business is properly registered and your products, methods and branding are properly protected by law, you should make sure that you have a proper understanding of employment law as you begin to make employment decisions for your small business. There are several things you should be aware of, from classifying employees correctly, to understanding and abiding by employee rights.
Employee classification
The first thing you should know as you begin to hire for your small business is how to properly classify your employees. For example, are you hiring independent contractors, freelancers or regular employees? Employees have to personally do all of the work they have been assigned, while independent contractors and freelancers don't—they could choose to hire outside help or outsource the work as long as they complete the task they were hired to do. It's best to have these differences in mind when making employment decisions. Private employers might initially start by hiring independent contractors and freelancers, but not understanding the difference between these laborers and regular employees could lead to misunderstandings about what is expected from each party, or worse, tax errors, financial penalties and back wages. Classifying employees correctly from the beginning could save you heartache and civil penalties later.
Different types of workers have different legal requirements
One of the most important differences between employees and contractors or freelancers is the way they are paid and taxed. While employees are on a business payroll, contractors work for an agreed-upon wage for any work they decide to complete. This means that employers deduct taxes from employees and often provide employee benefits like health insurance and vacation pay, while contractors are responsible to pay their own taxes and find their own health insurance. Contractors and freelancers also have more freedom over the jobs they agree to and the hours they work, while employees usually work specific jobs for set hours.
What type of workers should small businesses choose?
There are pros and cons to both freelancers and employees. If you are just starting a small business and don't require a full staff working regular hours, hiring a few reliable freelancers might be a better option. However, if you need staff to work specific hours and complete set tasks, it's better to hire employees outright.
The key takeaway is to make sure you know the difference between these two categories as you are setting up and growing your business so that you don't run afoul of labor laws—and to continue to categorize workers correctly if they ever change status from one category to another.
Employment labor laws vary depending on your small business
Even if your small business only employs one or two people, it's crucial that you stay up to date on labor laws in your country. According to employment law attorneys, failing to abide by labor laws in your country could result in civil money penalties and, in some situations, even jail time.
There might be many laws that fall under the umbrella of employment labor laws, depending on the area where your business is located. For example, many countries have regulations on the number of hours of work in a standard work week, when employers need to pay overtime hours, vacation and holiday pay, amount of paid and unpaid leave employees are entitled to, minimum wage requirements, steps to follow for employee termination, and more. These labor laws could vary depending on what type of small business you own and what industry you’re in. For example, agricultural workers often fall under a different category due to the number of consecutive hours necessary during certain times of year. It's important to know how exactly you and your employees are categorized by law so that you know which regulations apply to you.
Employment labor laws are important for small business owners
You should also have a good, working understanding of employees rights within your country or region. For example, in many places including the US, employees have the right to unionize, collectively bargain, and participate in concerted activity for their mutual aid and protection, which includes the right to discuss the terms and conditions of employment, such as wages without facing adverse action.
The US and many other western nations also have laws regarding workplace discrimination. In the US, the Equal Employment Opportunity Commission (EEOC) enforces workplace anti-discrimination laws, including the Americans with Disabilities Act (ADA) and the Rehabilitation Act, Title VII of the Civil Rights Act (which prohibits discrimination based on race, color, national origin, religion, sex and pregnancy), the Age Discrimination in Employment Act, and the Genetic Information Nondiscrimination Act. Laws like these are designed to protect and provide accommodation for marginalized people who could face discrimination based on race, gender, disability, sexual orientation or age in the workplace.
Some of these laws might not only apply after an employee is hired, but even in the interview process. For example, in some places it is illegal to discriminate against job applicants on the basis of disability or health conditions, or even to ask specific medical questions. If you are an employer, you should be familiar with the anti-discrimination laws in your area, not only to avoid lawsuits and penalties, but to ensure that your business is operating ethically and that you are providing reasonable accommodations where you can.
Workplace safety requirements
Depending on the industry you are in, you might need to know about occupational safety and health for your workplace. Your employees might have to go through specific workplace safety training, you may have DOL poster requirements, or you may need particular workplace signage or protective gear around certain materials or equipment.
During the COVID-19 pandemic, public health authorities in many places required additional safety precautions, such as wearing masks, installing directional arrows or social distancing markers in queues or installing fiberglass screens next to cash registers. Though many of these regulations have been phased out, it's important to stay up to date on current public health department recommendations and requirements both to avoid liability and to provide the safest possible environment for customers, clients, employees and partners.
Workers' compensation insurance
Depending on the type of business you own and the state, province or country you live in, you might also want to purchase workers' compensation insurance, which protects both your employees and your business if someone is injured at work. Workers’ compensation insurance can be a benefit to both employer and employee because it typically covers medical expenses and lost pay for the employee and protects the employer from potential lawsuits. In an extreme situation, it could even support individuals with disabilities, cover lost wages, and provide survivor benefits for affected families.
Small business owners should know about business taxes
One of the most important things a company can do to avoid falling afoul of the law is to ensure taxes are managed properly and in a timely fashion.
First of all, unless your business is a sole proprietorship or single-member LLC, if you’re in the US, you'll likely need an employer identification number (EIN) in order to file business tax returns and open a business bank account. Failure to do so could cause problems later on, so even if you are just starting a business and don't have any employees yet, it's wise to set yourself up for the future and get the paperwork done as soon as possible.
Secondly, make sure you know the taxes you need to pay. There are several categories of taxes for business owners, which could vary depending on where your business is located and what kind of business you operate. For example, you might be required to withhold federal income tax from your employees' wages. If you deal internationally, your country might also require you to pay excise taxes and duties and other levies. You should also know what sales taxes your small business needs to collect. Sales taxes can vary depending on whether the items you sell are made in your home country, if your product is essential or non-essential and so on.
Small businesses should know which tax exemptions and deductions they qualify for
As a small business owner, you're likely always on the lookout for ways to save a little extra money, so in addition to keeping track of the taxes you need to pay, it's worth paying attention to which tax benefits or exemptions your small business might be eligible for. A tax deduction is an amount of money that your government allows you to subtract from your total taxable income. Your small business might be able to write off business expenses like rent and office supplies—qualifying for enough tax deductions might even drop you to a lower tax bracket, so you should try to claim every expense you can.
Depending on where your business is located, tax deductions could include:
- -Start-up costs like equipment, machinery, supplies, legal advice from professionals such as business attorneys, and so on
- -Marketing fees including radio, TV and internet ads, website domain, and more
- -Business necessities and office supplies that your company needs to offer its products or services
- -Rent for the land or building where your company is located, including a home office
- -Utilities like heating, electricity, maintenance, property taxes, insurance, phone plans, internet and more
- -Employment costs like wages, benefits, pension plans, employment insurance, independent contractor fees, freelancer fees, and so on
- -Business trip related costs such as travel, meals and the cost of entertaining clients
- -Shipping, transportation and mailing costs
- -Accounting, bookkeeping, and tax software
- -Vehicle expenses including gas, insurance, repairs, maintenance and registration
If your small business has a budget to match, including as many tax deductions as possible in your business plan will help you survive the first few years and get your new company off the ground. It may be worth it to get some legal advice to make sure you can claim all that you're eligible for.
Advertising and marketing laws
As you begin to advertise your product or service to get the word out about your business, you should also make sure you aren't in violation of any of the advertising and marketing laws in your area. Some countries specify that advertising claims must be true and non-deceptive and prohibit ads from being unfair or deliberately misleading.
Many governments have strict regulations on marketing and advertising activities
There may also be regulations in your area about who you are allowed to contact for advertising purposes. In the US, the CAN-Spam Act regulates commercial emails by prohibiting false or misleading header information and deceptive subject lines, requires senders to identify the message as an ad, and allows recipients to opt out or unsubscribe from email mailing lists. Similarly, the American Telemarketing Sales Law prohibits companies from advertising to potential customers on do not call lists. Before reaching out to email or telephone lists, you should ensure that you are not legally prohibited from contacting these potential customers.
Small businesses should get familiar with international laws if they hope to expand internationally
Finally, if your business venture is going well and you hope to investigate overseas sales opportunities, you should get familiar with the legal requirements of the market you'd like to join. The product you're used to selling in your home market could be regulated differently abroad, and you could face new and changing duties and taxes. You should hire an international lawyer to help you avoid mistakes in the expansion process, but you should also develop a basic understanding of some of the legal issues involved in international expansion.
Small businesses should have a basic understanding of relevant legal topics
The best way to protect your small business from big legal trouble is to get familiar with the laws and regulations that govern it, from setting up your company in the first place to daily requirements and prohibitions on anything from employment laws to advertising. It's much better to be prepared in advance, anticipate the kind of legal problems that could happen, and set up properly, than to forge ahead without enough guidance and risk getting into legal trouble. Of course, this is only a starting point, but having a basic understanding of the issues we've covered here will help you to set up your small business for success!
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