An ounce of prevention is worth a pound of the cure.
Among the many worries for small business owners and entrepreneurs who are starting or are already running a business is the question of whether they need a business lawyer. Starting a business can already be costly so many business owners stay away from hiring a lawyer until a problem arises. As a result, most small business owners only hire an attorney when fronted with a serious legal problem.
However, the same way you want to talk to an accountant before the IRS does an audit, you need to make sure you talk to a business attorney to safeguard yourself from possible future problems.
Unless everything goes perfectly, your small business is probably going to need help from a lawyer at some point. It’s often a good idea to confer to one right from the start. Business lawyers are professionals who have experience and knowledge of issues surrounding the starting and running of a business. This article will talk about three instances when small business owners need a business attorney.
1. Setting Up and Deciding on a Business Structure
The most important part of opening up a new business is determining whether you should form a sole proprietorship, partnership, corporation, or the many other business entities available. Often times determining which business entity to set up can be challenging, but with some knowledge of the different types of business structures and with the assistance of a business attorney, it can be a very pleasant and rewarding experience. Outlined below are a few of the most common business structures along with details as to why you would pick one over the other.
The most basic of all the business structures created by default, the sole proprietorship provides a single owner with maximum control over his/ her business.
- Formed easily and inexpensively. Only requires registration of fictitious business name (DBA)
- Owner makes all management decisions and gets all business’ profits
- Business owner is personally liable for all business obligations. Creditors can go after personal assets for any unpaid debts
- Not a tax paying entity for federal tax purposes - all income is owner’s and all losses deductible on individual’s tax return
Also one of the most basic business forms to set up, the partnership enables two or more owners to make all the management decisions and to share business profits equally.
- Created by default when no other business entity is formed with two or more owners
- Partners assume personal liability for business’ obligations - creditors can go after personal assets
- Not tax paying entity for federal tax purposes - all income is partners’ must be reported whether or not distributed, and all losses deductible on partners’ tax return, losses deductible without limit
Limited Partnership (LP)
A limited partnership includes both 1 or more general partners and 1 or more limited partners.
General partner has unlimited liability while limited partners has no personal liability
- Can either be taxed as a partnership or as a corporation
- If taxed like a partnership, general partners report income and losses on individual tax return, losses deductible without limit. Limited partners pays federal income tax on their share of the profits of the business, may deduct losses only to extent of investment in business
- If taxed like a corporation, LP pays federal income tax on net income - partners pay tax on compensation, profits distributed
Limited Liability Partnership (LLP)
A Limited Liability Partnership is similar to a partnership but no liability for most LLP obligations.
- LLP may be taxed liked partnerships or corporation - if taxed like a corporation, the partnership pays federal income tax on income, partner pays federal income tax only on compensation paid and partnership profits distributed
- Good choice for professionals - accountants, attorneys, consultants, allows management flexibility with little personal liability
A Corporation is owned by shareholders who elect board of directors to manage business.
- Shareholders, officers, and directors have limited liability for obligations of business
- Tax-paying entity for federal income tax purposes - potential for double taxation
- Corporation pays taxes on profits
- Shareholders only declare profits on individual return if get dividend, sell investment,
- Don’t deduct corporate losses but may deduct investment loss after selling shares
In an S Corporation shareholders may elect to have corporation and shareholders taxed under subchapter S of the IRC.
- Taxed almost just like partnership - income and losses of business reported on shareholders’ individual tax returns
- Can’t have more than 100 shareholders
- Losses deductible on individual federal income tax returns
Limited Liability Company (LLC)
A Limited Liability Company is a business form intended to combine nontax advantages of corporations with favorable tax treatment of partnerships and no limits on number of owners (like an S Corp has)
- Owned by members who have limited liability for business obligations
- LLC can be taxed as partnership or corporation
2. Drafting Contracts
Starting a new business consists of many legalities and may require the formation of contracts to set clear terms to the ownership percentages of the business, sharing of profits and losses, and the duties and roles assigned to each owner. With the help of a knowledgeable business attorney, drafting contracts can prove to be a valuable asset to your new business.
Hiring a business attorney when drafting contracts can be beneficial for several reasons. An attorney familiar with business may be able to change up the wording of contracts to be better suited for that line of business. Further, businesses often face the potential risk of a lawsuit at some point in time. However, with the inclusion of certain clauses within the business contract, a business may be able to prevent a lawsuit and more importantly the potential of a huge financial loss.
No matter what kind of contract your business may require, getting some insight from a business attorney when drafting such contracts may prove to be priceless. A business attorney will know all the ins and outs for your line of business and use that to your advantage when drafting contracts.
3. Preventing Employee and Customer Lawsuits
In the day-to-day operations of a business, it is important that a business owner implement certain regulations and designations to prevent the possibility of lawsuits by both employees and customers. Using a business attorney to help set up your new business can assure that all regulatory requirements and proper designations have been met.
One of the simplest ways to prevent employee lawsuits is by adhering to Title VII employment guidelines. Title VII of the 1964 Civil Rights Act prohibits discrimination in employment based on membership in one of the five protected classes: race, color, sex, national origin, and religion. It’s important to consult with a business attorney and draft set employment policies in regards to the hiring, firing, job assignments, and pay of all employees in accordance with Title VII.
Designations of employees and independent contractors is also crucial to preventing employee lawsuits. An independent contractor is designated as such when the employer does not control the day to day job assignments of the individual, and instead the individual is responsible for completing his or her own tasks any way he or she sees fit. Generally speaking, an employer is not liable for negligent acts performed by the independent contractor, reducing the likelihood of a lawsuit.
Customer lawsuits can also be easily avoided by clearly defining terms in business agreements/ contracts. This would prevent any misinterpretation of services/ goods rendered, and provide the business owner with safeguards to any personal liability.
Mollaei Law specializes in Business Law. We cater legal services to new and existing businesses, entrepreneurs, and artists to further their career. We help businesses and entrepreneurs by tailoring legal documents for your business, assisting transactions, drafting and reviewing contracts and agreements, negotiating, business planning, setting up businesses, and helping with any of your business transactional forms.
For more information, visit www.mollaeilaw.com or give us a call at (818) 925-0002.
This guest post is written by Eman Zokaeim. Eman is an aspiring law student with a background in Finance and Real Estate. Currently attending CSUN, he plans to attend law school shortly after receiving his bachelor's degree.