Small Business Compliance: Legal Basics You Need to Know
Being your own boss means being responsible for things an employer would normally handle for you, and that includes a basic understanding of business law.
Knowing a few things about the legal requirements for starting a small business will help you avoid legal and financial troubles down the road.
Below, we’ll go over a few common legal issues that small business owners should watch out for:
Copyrights, Trademarks, and Patents
To prevent someone else from taking credit for or profiting from your idea, you may want to protect your business’s intellectual property with a copyright, trademark, or patent.
Specifically, you may want to trademark your company’s name and logo; patent any unique process, design, or invention your company creates; and copyright any original work of authorship, such as software you develop.
You can apply for protection through the US Patent and Trademark Office or the Copyright Office of the Library of Congress.
Registering a DBA
In most states, if your business goes by any name other than your personal name, the partners’ names, or the official registered name of your LLC or corporation, you must register a “doing business as” name, also called a fictitious name, assumed name, or trade name.
For example, if your name is Jane Doe and you operate a pet sitting business as a sole proprietor, you can’t legally operate as Jane’s Pet Care without registering that name as a DBA with your local county clerk’s office or state government.
How to Register a Business Name Online
Before you can formally register your business name online, you’ll need to make sure it is not identical to or extremely similar to an existing business name in your state, which you can do at your county clerk or state government’s website.
You may need to do separate searches elsewhere to make sure the name you want to use is not trademarked by another entity.
Registering online involves providing basic information such as your business’s primary address and your name, which will become public record, and paying a registration fee.
Avoiding Bankruptcy
If your business still has positive cash flow, you may be able avoid bankruptcy by refinancing your debt with a low interest loan or making repayment arrangements with creditors outside of court.
A bankruptcy attorney can help by convincing creditors that they will be better off under the workout plan.
Unfortunately, if creditors won’t negotiate, bankruptcy may be your only choice.
Another option is an assignment for benefit of creditors, where you liquidate the business under state law instead of under federal bankruptcy law.
A management change or a turnaround consultant might also help stave off bankruptcy.
It’s worth it to consult your options with a lawyer as bankruptcy can be expensive and burdensome.
RELATED: 5 Truths Your Banker Doesn’t Want You Knowing
How to File for Bankruptcy
In the unfortunate event that your business is seriously struggling to repay its debts, you’ll have to file for bankruptcy protection to get your debts discharged or restructured.
First, you’ll need to choose a bankruptcy type:
Chapter 7: Sell all business assets to repay creditors and close your business.
Chapter 11: Reorganize your business to repay creditors while continuing to operate.
Chapter 13: Available only to sole-proprietorships. Your personal assets are not sold, but you file a plan with the court to repay your creditors. Then, you’ll file a bankruptcy petition with the court and include required financial records. A judge will hear your case and your bankruptcy will be discharged after you comply with your court-approved plan.
Merchant’s Responsibility for Data Security
Regulations for retailers regarding data security are pretty lax, but proactively protecting your customers’ privacy and data security is just good business sense.
If you do experience a data breach, follow your state’s laws for notifying your customers.
It’s also smart to provide them with a year of free identity theft monitoring.
Adopting the same security and privacy standards as financial institutions will help limit your risk.
Follow the Payment Card Industry Data Security Standard (be PCI compliant), require and validate the customer’s full address and phone number before shipping an order, and use firewalls, antivirus software, and encrypted databases.
Never send confidential information through insecure channels such as email.
How to Navigate Sales Tax: Online Domestic and Online International
If your business has a physical presence in a state, called a nexus, you must collect sales tax when a customer in one of those states buys something from you online.
For example, if your headquarters is in California, you have a warehouse in Nevada, and a second location in Arizona, you will have to collect sales taxes on purchases from residents of any of these three states, but not from residents in, say, Utah.
Alaska, Delaware, Montana, Oregon, and New Hampshire do not charge sales tax, so even if you have nexus in these states, you have no sales tax to collect.
International online sales follow different rules:
You don’t have to collect sales tax because these purchases are considered exports.
But you may have to prove to the state that these purchases were in fact exported.
Common Legal Business Structures
Most businesses are legally structured in one of the following ways:
Sole Proprietorship
The business and its owner are one and the same. The owner has full financial responsibility.
Limited Liability Company (LLC)
The business can have one or multiple owners, but their personal liability is limited, as in a corporation.
An LLC can be more flexible and efficient than a corporation.
Corporation
A C corporation is legally owned by its shareholders, who are not personally liable for the business’s activities or finances.
Corporations are taxed as separate entities.
The fees and complexities of a C corp usually do not make sense for small, young businesses.
An S corporation is not taxed directly. It passes its profits and losses through to the shareholders.
The S corp must pay each shareholder reasonable compensation.
Partnership
Two or more people own the business, contribute to it, and share in its profits and losses.
Creating a legal partnership agreement up front can help stave off disagreements.
A partnership, like an S corp, passes through profits to its partners.
Each partner has full personal liability for the business’s actions and for each partner’s actions.
RELATED: Legal Structure Matters – Should You Incorporate Your Business?
Conclusion
Small business owners are busy enough without creating unnecessary legal and financial problems for themselves.
With this basic overview, you should be more familiar with the key aspects of the legal implications of starting a business.
It takes time, but it’s worth it to be your own boss.
DISCLAIMER: While this guide offers a general overview to answer common questions about your small business and the law, we strongly suggest that you consult with a qualified legal professional before making legal decisions that may affect your business.
