Business Law Basics for New Businesses
The first thing to know about companies is that they are legal entities and exist in their own right – they continue on even after your death, can own property, sue and be sued, pay taxes, etc. The vast majority of companies share certain features – they are owned by shareholders and controlled by a board of directors. The officers (such as the President, Vice President, Treasurer, CEO, Secretary, etc.) of the company manage the day-to-day business and operations of the company. This is true whether the company is a one-person sole proprietorship or a multinational corporation. In smaller companies, one person may fill multiple roles within a corporation (such as being both the President and Secretary).
Power lies with the board of directors, who are free to act without interference from the shareholders. However, they may be pushed out of their positions if they do not manage the company effectively. The officers carry out the instructions and orders of the board. Shareholders own a piece of the company through their shareholdings and generally reap the benefits of increased share prices and dividends. However, they also run the risk of losing their investment in company shares through bankruptcy or lowered share price due to the company losing money.
Private companies differ from public companies in that public companies stocks are traded on a public exchange, while private companies are ‘closely held’ with significantly fewer shareholders. Public companies have greater reporting burdens, but reap the benefit of raising substantial capital through their share offerings to the public.
There are different kinds of business types, the most common being: Sole Proprietorship, Partnership, Corporation, S Corporation, Limited Liability Company, Non-Profit, and Cooperative. Sole Proprietorships and Partnerships are easy to set up but involve personal liability. Corporations are legal entities created through the laws of their state of incorporation. Individual states have the power to promulgate their own laws relating to the creation, organization and dissolution of corporations (many states follow the Model Business Corporation Act). There are certain tax advantages depending on the type of company set up. Structuring your company a certain way is not permanent – it may be changed to another when desired by filling proper documents with the government and obtaining new business licenses, if necessary.
When naming a company, a proper search needs to be undertaken in order to ensure the name is legally available for use. A fictitious name, such as a trade name or DBA, is a business name that is different from your personal name, the names of your partners or the officially registered name of your corporation or LLC – depending on the state that the company is conducting its business in, the DBA name may or may not be required to be registered with the respective government agency. When you form a business, the legal name defaults to the name of the person or entity that owns the business, unless you choose to rename it and register it as a DBA name. Depending on where your business is located, your DBA may be registered either with your county clerk’s office or with your state government.
Trademarks also serve to protect a business’ name and its brands, and is the most important asset your business will ever own. Enforcement of trademark and copyright violations serve to protect your brand and company reputation. Protecting trademarks and enforcing copyright are ways of securing an exclusive right to intellectual property. Article I Section 8, Clause 8 of The U.S. Constitution (also referred to as the Intellectual Property Clause) states that Congress is empowered: To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries. This clause provides two distinct powers: the power to secure for limited times to authors the exclusive right to their writings (U.S. copyright law) and the power to secure for limited times to inventors the exclusive rights to their discoveries (U.S. patent law). Trademark protection allows individuals or entities to protect words, names, symbols, sounds, or colors that distinguish goods and services from those manufactured or sold by others and to indicate the source of the goods. Trademarks can be renewed forever (unlike patents) as long as they are being used in commerce. For protection throughout the United States, register your trademark with the United States Patent and Trademark Office (easiest done via its Trademark Electronic Application System).
You are required by law to keep adequate accounting and financial documents – make sure you keep orderly records pertaining to your company. Complete and organized records can help identify the sources of income and can prevent most of the problems you might encounter if you are audited by the government. It will also help you to keep track of expenses, the basis of your property, and to prepare and support items on your tax returns. Keep all receipts, invoices, vouchers, records relating to salaries and wages, operating expenses such as rent, advertising and capital expenditures, and miscellaneous records such as charitable donations, etc. Whatever accounting or record-keeping method you use, make sure it contains a systematic account of your income, deductions, credit and other information, and make sure it is stored safely for easy retrieval when needed. Records may be stored electronically and electronic storage systems must index, store, preserve, retrieve and reproduce the electronically stored books and records in a legible and readable format. The IRS website outlines how long records should be kept for: https://www.irs.gov/pub/irs-pdf/p552.pdf – if you file a fraudulent return or do not file a return, you should keep your documents indefinitely.