Turner Padget Insights

Key Legal Issues for Entrepreneurs

Posted On Aug 13, 2015

If you're thinking of starting a business, you likely are focused on how to sell the product or service you plan to offer. But don't neglect to set up a legal framework that will protect your business and allow it to thrive. In our litigious society, a working knowledge of business law and a relationship with a law firm has to be part of your entrepreneurial toolkit. 

Here are six areas where we recommend that first-time entrepreneurs protect themselves by getting good legal counsel at the outset to reduce the possibility of problems down the road. 

How will you organize the business? 

Most small businesses these days organize as a limited liability corporation, or LLC. The South Carolina Legislature has made it easy to form an LLC, and has given this form of business entity many advantages. Chief among them are insulation from personal liability and pass-through taxation. The latter allows the business' profits to be taxed as personal income, rather than the higher corporate rate, and usually results in a lower overall tax obligation. 

Corporate organization is still appropriate for some situations, particularly if you expect to go public in the short term.  

With either form of organization, the critical step that many entrepreneurs don't pay attention to is succession planning. What happens if you or one of your partners wants to cash out of the business? How will a debilitating illness or death affect the business? Are there plans in place that provide for an orderly transition in management or to allow family members to sell their interests? How will you determine the price of the business if one of the partners wants to sell to the other partners? 

All of these questions can be addressed in either an LLC operating agreement or a corporation shareholder agreement. The Legislature has given business owners great latitude in how they write these agreements, and don't fail to take advantage of this tool that can reduce uncertainty about what will happen in various "what if" scenarios

Get it in writing

With a properly written contract, disputes over payments or other issues often are solved by a short phone call or one page letter from your lawyer that reminds the other party of its obligations. 

I'm always amazed at how many deals are done with a handshake or with a contract downloaded from the Internet. There are so many ways that "do-it-yourself" contracts can leave you exposed. A lawyer familiar with your industry can write a contract that addresses the issues most likely to emerge in your business and ensure that it aligns with South Carolina law. In most cases, contracts with suppliers or customers can be used on a recurring basis, so the one-time investment in writing or reviewing a contract will protect your business for years. 

Understand the basics of employment law

There are so many ways you can get in to trouble when you don't understand employment law. For example, one of the areas where small businesses are vulnerable is in the use of independent contractors. The  U.S. Department of Labor and Internal Revenue Service have made employee misclassification investigations a priority in recent years, and businesses caught in their web can face major fines.

The criteria for determining whether a worker is an independent contractor is not intuitive, and businesses are sometimes surprised to find that someone who works 20 hours a week from a home office or who makes service calls using his or her own truck and equipment is an employee in the eyes of the government. If you expect to use contract workers, ask legal counsel for advice on best practices. 

Although South Carolina is an "at-will" employment state – meaning that employees can be fired for any reason that doesn't violate laws against discrimination – actually terminating someone without attracting a lawsuit can be tricky. If you don't document employee performance problems on an ongoing basis, you’re asking for problems.

Take advantage of seminars and lunch-and-learn opportunities on these topics. Remember, “I didn't know” is not a defense in court. 

Don't neglect insurance

Make your lawyer a partner in choosing the right insurance coverage. While your insurance agent can explain the tradeoffs in coverage limits versus policy costs, your lawyer is attuned to litigation trends, new laws and court decisions that will affect your risk profile. 

Insurance policies typically are many pages, full of legalese and dotted with exclusions, exceptions and limitations to coverage. Policies are written by lawyers for insurance carriers, and you should have your lawyer read a policy before you buy it. 

Protect your intellectual property

Manufacturing processes, inventions, trade dress and trademarks and most anything you create that has value for your business may need protection as intellectual property. It’s a simple process for your lawyer to register trademarks, which may add considerably to the value of your business if you sell it. 

IP also is subject to misappropriation by employees, who sometimes don’t even realize they can’t take software code, marketing materials and other confidential information with them to when they join a new employer or start their own business. Employment agreements that identify IP and outline the business’ ownership rights over information will go a long way to discourage employees from walking out the door with IP and boost your legal positon if you have to resort to litigation. 

Stay current with the law 

Whatever we know about the law today will change tomorrow. Legislatures constantly tweak statutes and court rulings add layers of interpretation and precedence to the laws already on the books. Health care, employment issues and taxes, especially, are always in flux. It’s your lawyer’s job to keep up with this changing landscape. Develop an ongoing relationship with a law firm that caters to the needs of small businesses, understands your industry and will look out for your interests.