Having a basic understanding of business law is essential to ensuring that a startup will operate smoothly. This knowledge will also assist in the avoidance of many commonly accidental legal mistakes made by small businesses. Here are three situations where some legal knowledge can come in handy:
Choosing A Company Structure
It is important to do a risk assessment and determine if it is best to incorporate, become an LLC (limited liability company), or remain a sole proprietor. Different legal structures give companies different legal protections.
A sole proprietorship is a company that may have a different name than its owner, but it is not considered a separate legal entity. Many entrepreneurs choose this formation because it is the simplest to set up; however, if any taxes are owed or lawsuits held against the company, the owner is considered to be just as responsible as the startup.
Corporations are their own entities and raise capital by selling shares of stock. These stockholders in turn are then partial owners. Incorporating, however, can have tax consequences that can be avoided by forming an LLC instead. LLCs do not sell stock, so they must raise their own capital; however, they pay less than comparable corporations do in overall taxes. Having some business law background can help you determine which structure best suits your needs, as well as the needs of the company.
Drafting A Founder’s Agreement
It is crucial to draft a legal agreement that benefits all parties when there are multiple co-founders involved. There are many business law topics that should be addressed, including, but not limited to, a breakdown of the percentages of ownership, everyday responsibilities in the organization, and how shares or ownership stakes will be broken down if any of the founders were to leave or be removed (and what would constitute such removal). If your business is a corporation, the price per share should also be addressed.
Tax law is an important facet of business law. Having a keen knowledge of your tax obligations will save you some headaches when planning throughout the fiscal year. Taxes are unavoidable, and since every company has to pay them in some form to the nation, state, and to social entities, it is important to know which obligations apply to your company. That is why it is a good idea to have a basic understanding of your state’s requirements as they apply to your legal business structure. Understanding what you are responsible for can be immeasurably helpful.
Entrepreneurs must be mindful of all the associated risks that come with launching a new company. A knowledge of business law goes a long way towards ensuring that all appropriate, legal obligations are being met. Many times, startup owners think that they will learn the legalities as the company progresses, but once things become hectic, many legal issues may be overlooked or forgotten. Remember, knowledge is power. If you are not sure of something, it is always best to consult with an attorney.
To learn more about their options for business law, Sacramento residents should visit http://www.bpelaw.com/business/.