Basics of Legal Advice for Small Business Owners

As a small business owner, it's important to obtain legal advice before making decisions or signing contracts. Commercial activities usually have legal implications, and an attorney can help you understand your rights, liabilities and obligations. Legal services, such as due diligence, can also reveal potential risks like scams and fraud — the benefits are many.

Benefits of Understanding Basic Legal Advice as a Small Business Owner

Commercial transactions can impact your business, and consulting an attorney can help you mitigate risks. Let's dive deeper:

• Contractual understanding: Commercial agreements can be complex, and an attorney can help you understand your rights, responsibilities and liabilities. Obtaining legal advice can reduce misunderstandings and protect your interests. Lawyers can also negotiate for favorable terms.
• Risk management: Legal services, such as contract review and due diligence, can help you identify potential risks, such as fraud and scams. Attorneys can also examine the transaction to ascertain whether it meets accepted legal standards, reducing legal disputes.
• Dispute resolution: Legal advice can empower you to resolve disputes efficiently and cost-effectively. An attorney can help you determine which dispute resolution mechanism best suits the situation, whether litigation, arbitration or mediation.
• Legal and regulatory compliance: Depending on your industry, you may be required to adhere to certain regulations or standards. Complying with the relevant laws reduces the risk of fines, penalties and lawsuits.

9 Basics of Legal Advice All Business Owners Should Know

You can obtain legal advice in diverse areas, but keep these primary considerations in mind:

1. Basics of Contract Law

A contract is an agreement between two or more persons. For that agreement to be legally enforceable, it should generally meet an established legal threshold. In other words, certain essential elements must exist, including:

• Offer and acceptance: An offer is the request a person — the offeror — makes to another person — the offeree — to enter into a contract. Once the offeror extends the offer, the offeree must decide whether to accept, reject or counter. The parties must accept the offer or counteroffer to create a valid contract.
• Capacity: Capacity is the legal authority a person has to contract with another. This party could be an individual person or a juristic entity like a company.
• Consideration: Consideration is a thing of value that a person delivers or agrees to deliver in exchange for a promise. Examples include money, properties or services. Consideration makes the contract enforceable and distinguishes the transaction from a gift.

Additionally, the parties must be ad idem, meaning “in agreement” or “at a meeting of the minds.” There should be a consensus, making it crucial to understand the contract terms.

2. Validity of Written vs. Oral Contracts

A written contract is a legally binding document or series of documents that outline the parties' rights and obligations. An oral contract is a binding agreement based on verbal communication. Both types of contracts are generally valid, but legislation may require certain agreements to be in writing. A typical example is a contract involving real estate.

While oral agreements are valid and enforceable, written agreements are ideal, especially in commercial settings. Written contracts provide proof of the agreements, which can mitigate confusion and misunderstandings. It can also serve as evidence when resolving disputes.

3. Protection of Intellectual Property

Like tangible assets such as real estate, intangible assets, including intellectual property (IP), are significant in commercial transactions. IP is a creation or invention that can be owned by a company or an individual. Common examples include:

• Copyright: This type of IP covers the rights creators have in artistic and literary works, such as music, books and paintings.
• Patent: This type of IP relates to the exclusive rights granted for inventions. An invention could be a novel product or process with an industrial application.
• Trademark: This type of IP refers to a sign that distinguishes goods or services belonging to different enterprises. Examples include logos, phrases and names.

IP laws are complex and ever-changing, especially with the emergence of technologies like artificial intelligence (AI). An IP attorney can help you understand how these assets work and protect your interests.

4. Safeguarding Customer and Company Data

Most small businesses collect and use significant amounts of data to enhance operations. While crucial in modern commercial settings, understanding privacy and consumer protection laws is equally vital.

These laws require business owners to implement security protocols and policies to prevent data breaches and cybersecurity threats. The requirements may also vary depending on the industry, and it is necessary to learn and comply with these standards. Compliance with data protection and confidentiality laws builds trust and reduces the risk of lawsuits and sanctions.

5. Tax Obligations

Federal and state tax laws generally require business owners to file and pay taxes. There are different types of taxes, including:

• Income taxes: These are the taxes you pay on the income earned from the business.
• Excise taxes: These are indirect taxes levied on certain goods and services. They apply to manufacturers, importers, retailers and consumers, depending on the product or service.
• Sales and use taxes: Some states levy sales taxes, which the seller collects when a consumer purchases a product or service and remits to the government. Where the seller does not collect the sales tax, the consumer must pay the use taxes directly to the tax agency.

Different tax rates and rules apply, and business owners should seek legal advice on compliance.

6. Keeping Accurate Financial Records

As a small business owner, you must keep records of invoices, receipts, canceled checks, bank statements and tax returns as proof of transactions. The following accounting records are also vital:

• Balance sheet: This reports on the company's assets and liabilities.
• Income statement: This reports the company's income and expenditure.
• Cash flow statement: This tracks the company's cash inflow and outflow.

Accurate financial recordkeeping is necessary for audit and compliance purposes and can help resolve disputes.

7. Basic Employment Laws

Business owners with employees must understand employment and labor laws, as federal and state legislation is keen on protecting workers. Employment contracts must comply with these regulatory demands and generally accepted principles to remain valid and enforceable. Moreover, employers who breach employment and labor laws could face lawsuits and legislative penalties.

Employment laws are numerous and technical. They cover various areas, including:

1. Wages and salaries
2. Benefits like health insurance, leave and retirement plans
3. Termination, demotion and suspension
4. Workplace safety

In addition to the legal benefits, adhering to employment laws can help build an efficient work culture.

8. Dispute Resolution Strategies

While businesses must try to reduce conflicts, internal or external disputes will likely occur at some point. Attorneys can assist in such situations by leveraging the various dispute resolution mechanisms.

Traditionally, parties resort to litigation to resolve their differences. This mechanism is effective, but not all parties benefit. For example, if you want a swift, relatively affordable and less adversarial option, alternative dispute resolution (ADR) solutions like arbitration or mediation could be ideal.

ADR mechanisms are consensual and have varying legal significance. For example, in arbitration, the arbitrator makes binding and final arbitral awards, which can be enforced like ordinary court judgments. With mediation, parties attempt a settlement with the assistance of a third-party neutral called the mediator.

Parties can insert an ADR clause into commercial contracts or agree to submit a matter to arbitration afterward. Considering the complexity of such matters, consulting an attorney is best.

9. Choice in Legal Business Structure

You can set up your business in many ways. Each structure has unique legal characteristics, and attorneys can help you determine which options best suit your needs. Classic examples include:

• Sole proprietorship: A single individual owns the business and usually runs it independently. There is no separate legal personality.
• Partnership: Two or more persons form and jointly manage the business. There are three types of partnerships — general, limited and limited liability.
• Corporation: A corporation legally exists as a separate entity from its owners. The assets, debts and liabilities belong to the corporation, not the owners. Common types are C and S corporations.
• Limited liability company (LLC): This hybrid structure combines the simplicity of sole proprietorship or partnerships with the liability protection of a corporation.

When choosing a business structure, consider three crucial factors — simplicity of formation, liability protection and taxes.

Benefits of Outsourcing Legal Advice

Small business owners outsource legal advice for multiple reasons:

• Most lack the resources to conduct proper legal operations.
• Hiring, training and maintaining legal professionals is expensive.
• Business owners can focus on core operations while a third-party expert handles complex legal matters.
• Businesses can drive growth by mitigating risks and making informed decisions.

Contact Business Consumer Alliance

BCA is a nonprofit with over 25 years of experience providing legal solutions to small business owners in California. We offer a wide range of services, including business formation, documentation, asset protection and arbitration support. Our trained and trusted attorneys are ready to review your situation and provide tailored legal services. Contact us now to learn more!