In This Chapter

The best preamble to all that follows is: hire a good lawyer first.

That’s because no book can replace a qualified attorney who knows your enterprise well. When it comes to safeguarding your business, its assets, and all its various stakeholders, you really do need a personal legal resource. We’re not saying you should keep an attorney on retainer—though many small businesses do—but you will want to have access to a lawyer who knows you, your products, your services, and your customers, so that when you need help you have someone to talk to.

We won’t even pretend to cover everything you need to know about the law in this chapter, but we will cover enough to get you started and, perhaps, inspire you to begin a professional relationship with your own attorney if you haven’t already done so. You don’t want to have to start your search for an attorney at the moment you most desperately need one!

Attorneys can help you …

Ask your accountant or people who operate similar businesses for names of attorneys they recommend.

It’s best to meet with an attorney in person before making the final selection. Look for someone who …

You want to know that you are selecting an attorney with whom you can work easily and who will help you to protect both your business assets and your personal assets.

The old saying holds true when it comes to reviewing contracts and agreements: an ounce of prevention really is worth a pound of cure. Too often, small business owners don’t think about the need for an attorney; they figure they can handle many matters on their own. Certainly it seems easy enough to handle some legal issues without the aid of an attorney, in part because there are so many resources out on the Internet, and so many templates and forms for contracts and agreements that can be downloaded for free.

Of course, small business owners want to control their costs, and attorneys cost money. Even so, we recommend that you utilize the services of an attorney for developing contracts, reviewing agreements, and other (seemingly minor) legal matters. It’s cheaper to seek out an attorney’s help up front than to have to call them in later on when you find yourself in hot water.

Seeking legal advice when you’re beyond the scope of your experience base is extremely important, especially with something as important as contracts.

Attorneys can help you create numerous agreements and contracts for your business, including nondisclosure agreements, employee agreements, customer contracts, purchase orders, supplier/vendor agreements, lease agreements, purchase agreements, and partner agreements.

In some cases, your attorney may be able to help you create a template that you can adjust for future use. For example, your attorney can create an initial customer contract that you can use for all your customers. You can then edit that base contract for use with other customers by changing certain variables.

Certainly you should ask your attorney to review contracts you receive for signature. You’ll find that when you have used an attorney for a while, you begin to know what to look for in the contract and may be able to review some contracts yourself—or at least be able to ask your attorney pointed questions based on your review.

Based on conversations with our own attorneys and other small business owners, the most common reasons small business owners have legal problems are as follows:

It is worth the investment of a few hours’ time and the legal fees to sit with your attorney to educate yourself about the laws that pertain to your business. It may seem expensive upfront, and you may think it is not necessary, but the cost of defending yourself from lawsuits is much higher.

Tax law is the Internal Revenue Code and other state and federal statutes, rules, and regulations that apply to taxation of businesses and individuals. As a business owner, you need to know your tax responsibilities, particularly in the following areas:

Employee taxes: You must withhold taxes from salaries paid to all employees, including Social Security, Medicare, and state and federal taxes. You must also pay Social Security and Medicare taxes for each employee you have (in addition to what the employee has to pay), and you must pay unemployment taxes. Additionally, you’ll need to be sure each employee completes a W-4 so you know what taxes to withhold from their paychecks. At the end of a calendar year, you’ll need to provide a W-2 for all full-time or part-time permanent employees and a W-9 for all temporary contract employees.

Sales taxes for products sold: If you sell a product, you must register with the states in which you sell that product to pay sales tax to the state. It is your responsibility to track all sales for reporting purposes.

You also need to be aware of the due dates for various taxes, such as estimated taxes (due four times a year) and corporate taxes. Pay particular attention to quarterly estimated taxes, which can be a troublesome area for many businesses, especially smaller, home-based businesses. Your accountant will be able to provide information on taxes you must pay for your particular business and when those taxes are due.

As a best practice, seek legal counsel about employment laws that affect your business.

The following list is hardly an all-inclusive list of employment laws that you must abide by, but it does cover some of the major laws:

Additionally, there are laws regarding the retention of employee records, immigration policies, military leave, jury duty, age discrimination, and even appropriate interview questions.

Some of these laws apply only to businesses with a minimum number of employees; others are for all businesses regardless of the size. See the Department of Labor site (www.dol.gov) or the Equal Employment Opportunity Commission site (www.eeoc.gov) for detailed information on all employment laws and to find out whether they apply to your business.

In an ideal world, you’ll never have to make a decision to sue someone. But let’s be honest, you may eventually have to sue. There are a variety of reasons why you may have to initiate a lawsuit, including the following:

All of these are valid reasons to initiate a lawsuit; however, you may want to look at other possible solutions, when it makes sense to do so, prior to suing. For example, do you really want to sue a customer who hasn’t paid his invoice? You may win in court, but that’s one customer who won’t be using your business anymore, and he will also tell others about his negative experience with your company—even if he is at fault.

Many contracts and agreements allow for mediation to resolve disputes between the parties.

Mediation enables the parties to come to resolution themselves, through the assistance of a mediator, without having a court make the decision for the parties. Additionally, both parties can agree to keep the terms of the mediation private, whereas going to court makes the matter one of public record.

One of the benefits of mediation over going to court is that you have a better chance of keeping the relationship with the other party cordial and even continuing the business relationship in the future. The mediator can help each party understand the other’s point of view.

If you can’t come to agreement at mediation, you can always initiate a lawsuit against the other party.

At some point you may find yourself in court on the other end of a lawsuit. Businesses often find themselves in court simply because they didn’t do their legal homework before starting their business. For example, if you are using a business name that is incorporated by another business or is trademark protected, you may find yourself in court to stop your use of that name. Businesses may also end up in court for terminating employees unfairly or discriminating against them in the hiring process, promotions, or pay.

Similarly, you could end up in court if your product causes harm to someone, or the service you provide interrupts his or her business in some way. For example, suppose you own a computer networking company that begins work on a customer’s server—only to find that something you did caused the server to crash and make it impossible for the customer to do business for an entire day!

If you or your business is ever served notice of a suit filed against you, you should immediately seek your attorney’s advice on how to proceed. Don’t try to handle these matters yourself! This is when you’ll thank yourself for having an established relationship with an attorney who knows you and your business.

Errors and omissions insurance for your business is kind of like a “get out of jail (relatively) free” card. Suppose you develop software for companies to run an e-commerce website that accepts credit card information. If somehow the website gets hacked and credit card information gets comprised, certain liability may fall on you as the developer of the software that ran the e-commerce site. If you do not have errors and omissions insurance, you could find your company out of business and owing a lot of money due to the liability of a potential error in the coding of the website that caused the problem. Errors and omissions insurance protects you from such issues.

Intellectual property (IP) encompasses your ideas, inventions, processes, content, and other materials you have developed. Here’s a rundown of the major legal protections available for IP:

Copyrights: Copyrights are exclusive rights granted to the creator of an original work—such as a book, document, or photograph—and provides individuals the right to copy, distribute, and adapt the works for their own purposes. Copyrights actually are automatic when you have completed a work (such as an article or book, a training course, or a photograph); however, in many cases, if you need to fight a breach of copyright, it must have been registered with the U.S. Copyright Office (www.copyright.gov).

Trademarks: Trademarks protect logos and names when use of that logo or name by others might be confusing for the originator. For example, Xerox is a registered trademarked name, and no other company could use that name for their product or service. Trademarks are protected under both state and federal protections. You can learn more about how to trademark logos and names at the U.S. Patent and Trademark Office website (www.uspto.gov).

Patents: Patents are exclusive rights to the inventor of a product or process to prevent others from duplicating the product or using the process without permission. Among Microsoft’s 5,000 patents is the technology used in its Xbox 360 games. U.S. patents are protected only in the United States; however, you can apply for patents in other countries.

Trade secrets: Trade secrets can apply to manufacturing processes, information, or ideas that are not publicly known and, if released to the public, could damage the originator. Customer lists can be considered a trade secret, provided the owner of the information has taken steps to prevent the information from being known in the public. This may include requiring a password to access a database of customer information and ensuring all employees with access to the information sign a nondisclosure agreement.

Every business has some IP to protect. For example, if you are a consultant who has developed training programs, those training programs are your IP. If you have a customer database that includes all of your customer data and information, that information is protected under the law. An employee who takes that information with them to a competitor would be considered to be selling trade secrets.

Protecting your ideas is crucial to the long-term viability of your business. Depending on what you need to protect, the process ranges from simple things you can do yourself (such as filing for copyright protection for a training course you have developed) to very complex (such as filing for a patent for an invention). Sometimes you can take steps to protect your IP in multiple ways. An attorney can help you decide the best approach.

You should strive to protect your ideas before there is an opportunity for an employee, client, or competitor to walk away with the knowledge and use it themselves. You should make sure everyone involved in the idea you want to protect—even if you are just in the beginning stages of discussion—signs nondisclosure agreements developed with the help of your attorney.

Let’s look at an example. Let’s assume that you are developing a new manufacturing process that will enable you to produce products more quickly and efficiently. Because you need to finance the process using outside sources, you will be talking to potential investors. You need to make sure those potential investors sign a nondisclosure agreement that prohibits them from disclosing information about the process or stealing the idea. Additionally, all employees working on the project should also sign nondisclosure agreements.

Licensing your IP can bring significant revenue into your business. However, it must be done carefully to ensure that you are protected.

Consider the following issues:

It is essential that you work with an attorney to develop licensing agreements that protect you, your business, and your property.