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5 Legal Tips For New Business Owners

As an attorney for businesses and business owners, I get a lot of questions, including when is the right time to consult a lawyer.

For entrepreneurs, your business is an extension of yourself. It’s personal and unique to you, and yet you can and should take comfort in the support of the entrepreneur tribe – knowing that you are not alone.

Your tribe should include other entrepreneurs like you and include professionals like an attorney, an accountant, an insurance professional, and a financial advisor.

From the legal standpoint, these five tips cover common questions and issues I see from new business owners when starting a new business or considering acquiring an existing business.

5 Legal Tips For New Business Owners

1. Limit your personal liability risk.

You limit your personal liability by forming a corporation or limited liability company for your business, as opposed to operating as a sole proprietorship or partnership.

In doing so, the law views it like your business is announcing its separate legal existence, distinct from just you.

Not doing this is like walking a tightrope without a safety net. You can do it, but it’s risky and not recommended.

Yes, there is a cost to do this (can vary from State to State) but it’s not a lot and is well worth it.

Look at it this way – if you are not willing to invest the minimal amount it takes to make your business take life as a true legal entity, then how can you expect others to do so?

2. Use contracts to protect your right to be paid for your work.

You have your first client for your new business? Congratulations!

In the excitement, don’t overlook the step of having a written contract signed, that describes what work you will do and for what pay, and provides some basic ground rules.

  • When will you be paid?
  • All at once, or in payments over time?
  • Will interest accrue?
  • What happens if payments are late?

The general rule in the US is that if you have to hire an attorney to help you collect on a bill, you don’t get to recoup your attorney fees from the debtor unless there’s a signed agreement to that effect.

So make sure to include recovery of collection costs and attorney’s fees in event of default.

If your business is online-based or spreads out geographically, I also suggest including a provision that provides for a mandatory dispute resolution venue or method.

This could be private arbitration or a court that is local to you, depending on circumstances.

If you have an online business, the “terms of service” page for your site should be considered as an extension of this.

3. Protect your brand and work product using trademark and copyright, as well as contract protections.

The first step with this is actually using your contract first, by including protections like non-disclosure and confidentiality covenants.

Don’t forget to contemplate what happens if there’s a default, like stipulating to your right to get an injunction to stop or prevent a disclosure.

  1. Trademark is about protecting your brand, either your business or product name, your logo, or both.
  2. Copyright is about protecting your creative works.

With both, you have rights automatically at common law, just by virtue of using the name and work in commerce.

But registering federally with either the Patent and Trademark Office or the Copyright Office uses federal law to better protect you, both to enhance your options in an event someone else infringes on your rights, and to protect you in case someone else was to register and claim ownership in your trade name, logo, or work.

4. Know your options – if you buy an existing business, should you go with an asset or stock purchase?

If you decide to buy a business rather than starting from scratch, there are two options.

  1. You can buy the equity
  2. You can buy the asset side of the balance sheet

For the seller of the business, these options differ in terms of how the income from the sale is taxed – is it ordinary income or capital gain?

As a result, sellers may push for the sale to be characterized as a stock sale. But for buyers, an asset transaction is generally preferable.

As the new buyer of a business, you want to be careful not to be acquiring liability for a past sin of the previous ownership.

With an asset purchase, you are not acquiring the previous corporation itself, but rather all the assets of that corporation, including its name and goodwill.

As the buyer, you will have a new corporation (or LLC) doing business in the same name as before, but legally it is a separate and distinct entity.

5. Know your options – what about franchises? Should you buy into a franchise, or go independent?

The other common question for entrepreneurs who choose to buy a business is whether to go with a franchise or an independent company.

The value of the franchise is tied to the established brand recognition and systems in place for the franchise to be successfully repeated in new locations.

When it works, a franchise can be a good way to start your business with immediate brand recognition.

Of course, this comes at a cost, in the form of the initial and subsequent fees the franchise charges for the privilege of using the franchise brand and systems.

These costs are usually substantial, and the systems sometimes can feel to the franchisee like more of a hindrance than a benefit.

Franchises when done right can be a good option for certain potential business owners, but can be absolutely the wrong approach for others.

Because franchises are regulated, they are required to provide you with a disclosure document that is legally required to cover areas about the franchise track record and is updated periodically.

You can also often obtain objective track record information from the State agencies that handle their registration.

As you start your new business, keep these five legal tips in mind to guard against risk so you can focus on the positive business development growth.

Below are the five points in review;

  1. When you form your new business, invest the small amount necessary to form a limited liability entity.
  2. Use contracts to ensure that you will get paid.
  3. Protect yourself with contracts and federal trademark and copyright, as appropriate, and make sure your contract helps you to get paid for your work.
  4. If you decide to spend more to acquire an existing business rather than start from scratch, consider the structure of the deal and make it sure it is the right fit for you – are you buying the assets or the stock?
  5. If you are buying into a franchise, what systems are in place and what is the track record of the franchise, and is the investment worthwhile, compared to the alternatives?

Nate Hinch is an Illinois attorney who advises clients in the areas of business law and estate planning and represents them in both transactions and in litigation and arbitration. He also blogs about legal issues at www.hinchlaw.blogspot.com and can be reached at www.mrh-law.com and nhinch@mrh-law.com.

21 Comments

  1. I had no idea that you need a lawyer for your business in order to ensure that your future clients will pay you for your services. My uncle is planning on starting a business as a contractor, and he wants to make sure that his future clients will pay him after he has provided them with the services that he was hired for. I’ll let him know that a corporate lawyer will protect his business and make sure that he is paid for his efforts.

  2. I liked your tip to protect your brand when you’re opening up a new business. My brother is thinking about starting a small business and he’s afraid of someone stealing his ideas. I’ll let him know he should seek legal aid to keep his brand his own.

  3. I like your tip to make sure that you have written contracts with your clients that include information such as when you’ll be paid, interest accrued, and late payments. My brother has been thinking of starting his own dog grooming business. In his case, I think he really needs a lawyer to help him out with writing contracts since he’s just starting out.

  4. There are several pros and cons to look into. You will also have to study the details of how the investment works for your benefit before you go for it. If you are a neophyte in business, you might have to deal with financial issues that are too tricky for you. Proper training is necessary, and so are business theories and applicable strategies to hit your targets.

  5. In coming into the world of investment, it is important that you just conceive your mind with investment tips that can assist you in getting on the proper track. Remember to do as much research as possible so that you’re familiar with the area that you’re interested in investing in.

  6. I liked what you said about how it would be smart to set up an LLC. That seems like something you would want to get a lawyer to help with. That way, you know you won’t get into any takes issues.

  7. I thought that it was interesting when you said that one thing to consider when you own a business is to hire an attorney and that it is dependent on each individual business since each company runs differently. I have been thinking about starting my own business but I haven’t been sure when to hire an attorney. I would be sure to find an attorney to have on hand so that I feel comfortable in knowing that I will receive help when necessary.

  8. Really thanks for sharing this useful post!! This post is very informative and I have got very good information about legal tips for business owners.

  9. I like that you said that you should know your options to start your business. I have a friend that is starting his own business. He might need to get advisory services.

  10. It makes sense that you should use contracts to ensure that you will be paid for your services. My uncle wants to start a business soon. Maybe he should hire a lawyer to help him learn the importance of using contracts.

  11. It was helpful when you said that you should protect your brand. My husband is wanting to make sure he knows all the legal tips about starting his business. He should probably look into hiring a lawyer to help him. Thank you for the legal tips about owning a business!

  12. Amazing article, thanks for sharing this valuable piece of information it’s of great help for a newbie like me

  13. This is a great inspiring article. I am pretty much pleased with your good work. You put really very helpful information. Keep it up. Keep blogging. Your blog provides interesting information always. Thanks to sharing the great information.Β 

  14. Oh, thank you for explaining how your trademark is your brand and that you need to protect it. I’m thinking of starting a business this year, but I’d like to talk to a lawyer before I do so. I really want to be sure I don’t get caught by any common pitfalls.

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