Because business law can be complex and the penalties for non-compliance severe, it is generally a good idea to employ the services of an attorney to ensure your business remains compliant.
Running a business comes with an obligation to adhere to a sometimes complicated set of rules and regulations that govern how businesses can legally operate in a state, country, county or municipality. Failure to comply with the law can result in anything from fines to jail time. These are three of the legal issues businesses commonly face.
1. Financial Reporting
There are many financial reporting laws that businesses must be aware of. One of the most important is complying with state, federal and local tax laws. Not only are businesses required to calculate and pay in taxes on their revenue, but there are specific requirements that govern how businesses are allowed to calculate what the revenue is, including rules about revenue recognition. To make sure you are getting everything right, it is usually best to employ a mixture of reliable accounting software and human help. In addition to an internal bookkeeping or accounting staff, it is a good idea to have an independent accounting firm or CPA review your records.
2. Defining a Business Structure
The structure you choose for your business plays a big role in many of the other legal aspects of your operations, including taxes and liability. Your main choices are sole proprietorship, partnership and corporation. Sole proprietorships and partnerships work similarly, in that the business is run under the name or names of the owner or owners. The owners have complete control over business operations, collect all the profits and are personally responsible for liabilities and taxes. In the case of a partnership, there is usually a Partnership Agreement between the partners that determines the share of profits and liabilities that go to each. This is the simplest business structure to form, but carries the greatest personal risk because there is no protection for your personal assets should the business go belly up or get into legal trouble.
Corporations come in three types. A C Corporation is an independent legal entity. With a C Corporation, the corporation receives all of the profits and liabilities and the owner’s personal assets are protected.
An S corporation is similar to a C corporation, but the income and losses are distributed through shareholders and reflected on their individual tax returns. S Corporations have some tax advantages over C Corporations.
Finally, there is the Limited Liability Corporation, which functions more like a partnership, but shields the partners from personal liability. This form requires the partners to sign an LLC agreement.
3. Employee Classification
Properly classifying employees is a hot button legal issue in many states. Employees must be classified as either full-time, part-time or independent contractors. The reason this is controversial is that most states have rules that govern employer obligations to employees, such as paid time off and healthcare coverage, that depend upon this status. As a result, some employers have been accused of improperly classifying full-time employees as part-time or independent contractors to avoid these obligations.
Whether an employee is considered full-time or part-time primarily depends upon the number of hours worked per week. In the United States, an employee is considered full-time if the employee works more than 30 hours per week.
Independent contractors are not considered employees at all. They are considered to be a third party that operates their own business. Independent contractors usually negotiate a set of fees and working conditions with the client and usually can work for more than one client at a time. However, businesses must be careful not to cross legal boundaries that could create an employer-employee relationship with a person they have classified as an independent contractor. Employers can face severe penalties for misclassifying employees as independent contractors to avoid paying benefits, overtime wages or providing health insurance.
Because business law can be complex and the penalties for non-compliance severe, it is generally a good idea to employ the services of an attorney to ensure your business remains compliant. However, it is also a good idea to familiarize yourself with common business laws.