Justia Legal Resources: Small Business Legal Center

Business owners can take pride as well as profits from the success of their entity. However, the path to success isn’t always easy to find. Justia provides a free resource that identifies some legal options to consider and obstacles to avoid.

Approximate Read Time: 5 Minutes

Running your own business can be exciting and daunting in equal measure. You’ll need to address financial and logistical concerns to make sure that the process goes as smoothly as possible. But you’ll also want to understand key legal issues in areas like business formation, employee relations, commercial property transactions, and more. Even a seemingly minor oversight could have major repercussions for a business and its owners or managers. The Small Business Legal Center in the Justia Legal Guides provides some basic answers to questions that may come up for entrepreneurs at the start of the journey or for established business owners eyeing the next step forward.

Which Types of Insurance Should I Get?

You’ll probably want property insurance to cover the physical location of your business and its interior. Property insurance also can cover equipment, furniture, and other items of value inside the business. You’ll likely want to get general liability insurance for certain legal claims against your business, such as those for injuries or property damage. Business interruption insurance can account for losses caused by certain events that interrupt business operations. If you hire employees, your state generally will require you to get workers’ compensation insurance (or be self-insured) for injuries and illnesses that employees suffer on the job. You’ll also need to get unemployment insurance if you have employees. Further types of insurance may be specific to the nature of your business, such as auto insurance if you plan to use vehicles.

What Are the Pros and Cons of Starting a Corporation?

The main advantage of starting a corporation is that it limits your personal liability. Corporations are legally independent entities, so a creditor or a person filing a lawsuit against a corporation usually can’t reach your personal assets, although there are some exceptions. One of the main downsides to forming a traditional corporation, known as a C corporation, is “double taxation.” This means that the profits of the corporation get taxed twice, once when the corporation receives them and again when they are passed to owners as dividends. (You can avoid double taxation by creating a distinctive type of corporation called an S corporation, but this is available only in limited situations.) Some people also may find it a hassle to comply with the strict requirements under state law for starting and operating a corporation.

Should I Incorporate My Company in Delaware?

Incorporating in Delaware is often a good choice for a large business or for a business that plans to eventually make a public offering. Advantages include tax benefits and a court system with special expertise in corporate issues. However, a smaller business might not want to incorporate in Delaware. This might require paying taxes in both Delaware and the home state of the business, as well as meeting filing, licensing, and reporting requirements in both states.

Are There Restrictions on Firing Employees?

The general rule (except in Montana) is that employment is at will. This means that you can fire an employee for any reason or no reason. However, there are some exceptions. For example, anti-discrimination laws forbid firing an employee because they have a certain protected characteristic, such as a particular race, national origin, gender, or religion. You also can’t fire an employee for “whistleblowing,” or reporting illegal activity at your business. Another major exception involves employment contracts, which may specify permitted reasons for termination. In this case, you can’t fire an employee if the contract doesn’t allow it.

Can I Enforce a Non-Compete Agreement?

A non-compete agreement limits the ability of a former employee to work for a competitor of the employer for a certain time after leaving the job. Their enforceability varies by state. For example, California almost entirely prohibits non-compete agreements. In states where they’re more often allowed, courts will look at whether they’re reasonable. This means that they shouldn’t last for many years, have a broad geographical scope, or span too many types of businesses. Courts don’t want a non-compete agreement to essentially prevent an employee from earning a living entirely.

Should I Hire Independent Contractors Instead of Employees?

Working with independent contractors has certain advantages. You won’t need to provide them with benefits or with physical space in your office. It can be easier to end the relationship if needed. If an independent contractor makes a mistake that harms someone else, you’re less likely to be on the hook than you would be for a mistake by an employee. However, you might need to pay an independent contractor more than an employee in proportion to the amount of work that they do, and you probably won’t have as much control over the process that they use. Keep in mind that you can’t simply label an employee as an independent contractor to avoid the costs and obligations of the employment relationship.

Should I Buy or Lease Equipment?

This may depend in part on how long you’ll need the equipment. For a long-term or permanent need, it may be cheaper to buy the equipment than lease it. However, if you buy equipment, you’ll need to account for any maintenance, which wouldn’t be your responsibility if the equipment is leased. On the other hand, if you don’t need the equipment for a long time, or if you’re not sure how useful it will be, a lease makes it easier to move forward from it. You might incorporate an option in your lease that allows you to buy the equipment if you want when the lease ends.

What Are the Steps in Buying Commercial Real Estate?

First, you will need to identify a commercial property that meets the needs of your business, possibly with the assistance of a commercial real estate broker. When you find a property that interests you, you can work out a general letter of intent and eventually a more detailed purchase and sale agreement with the seller. This triggers the due diligence period, during which you’ll inspect the property and related records. Any problems that you discover could lead to further negotiations with the seller. Finally, you’ll go through the closing process, which largely consists of signing certain documents related to the transfer of ownership. You’ll also probably get title insurance at this point.

Can I Resolve a Business Dispute Without Going to Court?

You can potentially resolve a business dispute through an alternative process like mediation or arbitration. Mediation involves asking a neutral third party to help the two sides of the dispute reach a solution that they each can accept. The mediator can’t impose an outcome on the parties. Arbitration is more formal than mediation but less cumbersome than litigation. It often involves presenting arguments and evidence to a panel of arbitrators, who will reach a binding decision. However, some disputes will need to go to court, especially if the stakes are high for each side.

How Do I Expand My Business to Another State?

In many ways, the process of expanding to another state resembles the process of starting a new business there. You’ll probably need to register your business in the new state, while getting licenses or permits similar to those that you have in your home state. You should check the laws in the new state to see whether you may need additional licenses or permits beyond those required in your state. You’ll also probably need to pay taxes and other fees in the new state, and you may need to collect sales tax if you have a physical location there.

Final Thoughts

Whether you’re starting a new business, growing an existing business, or navigating a complex transaction or dispute, you should carefully consider your legal options. When the stakes are high, there’s no substitute for consulting a business lawyer near you. They can provide you with guidance tailored to your specific situation. In the meantime, the Small Business Legal Center offers a readable overview of some key concepts in this area. Like the other Justia Legal Guides, it furthers our mission of making the law free and accessible to all.

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