OPERATING AGREEMENT: WHAT IS IT & WHY EVERY BUSINESS OWNER NEEDS ONE! Starting a business is exciting, but it also involves important decisions and legal considerations. One crucial document that
What Are Some Common Legal Issues in Business?
Common Business Legal Issues
Whether you have a long-standing business or you’re one of the 627,000 new businesses created in the US each year, you’ve likely encountered a few legal troubles. Every business, regardless of its size or industry, is subject to facing legal issues that could threaten the business.
What are legal issues that commonly arise? Are certain legal issues more difficult to solve than others?
Below we provide an overview of frequently occurring issues and how to deal with them.
Undefined Business Structure
Your company structure will be the foundation of your business. It will determine all of your future policies, taxes, and personal liability. Companies often do not know the different types of business structures and may make the wrong choice for the way they choose to operate their business.
In a sole proprietorship, a business owner will run a company on their own without creating a legal entity. While they retain complete control over the company, they are also responsible for all liabilities and taxes.
In a partnership, two or more individuals will share the profits and the liabilities. Partners should create partnership agreements that outline the details of the partnership, as well as their obligations and limitations.
In a C-Corp, the company is independent of its owners. The stakeholders are only responsible for their investments in the company.
In an S-Corp, shareholders will include income and losses on their individual tax returns.
In an LLC (limited liability company), owners will have specific liabilities for the company’s debts and the regulations it has to follow. Each state has its own protocols for LLCs.
When you hire an employee, you need to create a legally binding contract to define their status and pay. Many companies often fail to do this properly, leaving room for confusion and potential problems.
Keep in mind the differences between different kinds of employees.
The difference between a part-time and full-time employee usually depends on the number of work hours. Typically, a full-time employee works 35 to 40 hours a week in the United States. Under the Affordable Care Act, full-time employees work an average of 30 hours or more a week or 130 hours each month.
Another difference to keep in mind is the independent contractor. An independent contractor is either a self-employed person or entity who has been contracted to perform work for another entity. They do this as a non-employee.
Independent contractors do not receive benefits from the company, as they are not listed as employees. They must pay their own Social Security and Medicare taxes. Entities that employ independent contracts are not responsible for paying health insurance and retirement accounts.
Make sure to define the status of all employees in their contracts. For each employee, consider whether it is better to hire them as an independent contractor or as an employee of the company.
Termination of Employment
Termination of employment can be another tricky subject for business owners. If you hire employees without just cause, you may face legal issues. Employees who mishandle the situation could result in a wrongful termination lawsuit or administrative hearing.
Reasons for rightful employment contract termination include underperformance, misconduct, and retrenchment.
Employers much draft a Notice of Termination and give employees adequate notice. Adequate notice depends on the amount of time that the employee has worked within the company.
You may dismiss an employee immediately if the employee has conducted theft, fraud, or assault.
Discrimination is another legal issue that could arise. Former, current, and even prospective employees can sue on the grounds of discrimination. Discrimination situations can include firing, hiring, or working in a hostile environment.
Allegations can be made on the basis of gender, ethnicity, and age. Two types of discrimination exist: direct and indirect.
Direct discrimination course when a person receives lesser treatment. Reasons could include age, race, descent, color, ethnicity, marital status, disabilities, immigrant status, or family responsibilities.
Indirect discrimination involves showing a lack of fairness to one of the above groups. It typically involves applying a certain practice to everyone, but not showing the same application of this practice to members of a particular group.
Employers must do their best to create a positive work culture that accepts everyone. The company should create an Equal Opportunities and Anti-Harassment policy for all employees. This holds employees accountable for this behavior and ensures that the business can take action if someone acts in a discriminatory manner.
You will often have discussions with business partners, contractors, and employees that will share private information. You may be discussing confidential trade secrets that pertain to your business.
These individuals are then free to share this information with others, which could cost you your competitive edge. Since you haven’t held them accountable, they are free to do what they would like with your information.
Mitigate this issue by making them sign a confidentiality agreement (or NDA). Doing so will protect your business secrets.
An NDA is a legally binding contract. All parties who signed it cannot share information referred to under the contract and enlisted as confidential.
When your hire an employee or independent contractor, you can add a confidentiality clause in their contract or consultancy agreement.
Business Health and Safety
Opening a business will require regulation with both federal and local laws. Failing to comply with both sets of laws could result in your business failing before it even has the chance to open its doors.
Keep in mind that certain businesses face stricter regulations than others. For instance, if you plan on selling food items or food-related services, you’ll be held to a different degree of cleanliness than a store that sells other retail products.
Before opening your business, make sure you know what the rules are. Look into regulatory laws that will dictate how you can operate your business and stay in compliance.
If you’re not sure what you need to do or what regulations apply to you, it’s best to speak with a business attorney.
To ensure that health and safety requirements are being met, you should draft a health and safety policy for the company. This policy will explain how the company will work to prevent injuries and illnesses. It should outline the company’s responsibility to keep the work environment safe.
Many businesses choose to hire foreign workers, but they often do so without following the appropriate laws. The Immigration Reform and Control Act (IRCA) of 1986 requires that all US employers have to complete a Form I-9 to work in the US.
The IRCA prohibits an employer from hiring an alien who is not authorized to work and hiring someone without verifying identity and work authorization. If an employer discovers that the employee is an alien, they must terminate the employee immediately or face legal action.
Businesses often avoid this law because they choose to hire workers who are not allowed to work in the US. However, US Immigrations and Customs Enforcement takes the IRCA quite seriously.
If they suspect that you are engaging in suspicious hiring practices, they will conduct a Form I-9 inspection. You may face serious repercussions if there is proof of you violating the law.
Make sure to only hire employees who provide proper documentation. Avoid the temptation to hire someone who may be a good fit without ensuring that they can legally work for you.
Businesses often provide devices for employees to use. While this can boost team culture and streamline operations, it can also open the door to legal problems if you do not establish clear rules.
You’ll need to establish clear rules on the expected use of devices. Will employees be able to take them home or use them for other purposes outside of company time? Outline what repairs that employees may be responsible for and the restrictions on device use during work.
You may also want to consider the use of a BYOD (bring your own device) policy. This may raise productivity among workers who are more comfortable using their own devices. You’ll also spend less on company equipment.
If you do allow employees to use their own devices for work, create policies that explain how they should use confidential work information. They should be required to create a separate profile on their device for accessing and sharing company-based information.
Business taxes can present some of the largest challenges for business owners. Aside from following federal regulations, you’ll also have to follow your state’s laws. In some states, businesses may pay taxes even when they’re not earning an income.
The chances of an IRS conducting an audit on your business are fairly low. But if your tax filings look suspicious, these chances skyrocket.
One of the most common mistakes that businesses make is failing to report their deductions and expenses accurately. The IRS has a proprietary method that it uses to determine if a business’s reported deductions seem suspicious based on its earnings.
Businesses may often underestimate and underreport their income. If the IRS suspects that you were “unreasonably careless” in reporting your income, you may pay a 20% penalty. And if they see that you intentionally tried to defraud it, the fine can be up to 75%.
Foreign Work Policies
You may want to outsource part of your operations to another company. Other locations may have more available labor or ample resources. Should you choose to do this you should get the help of a legal professional.
Despite all of the research that you may have conducted, you will not be truly prepared to expand your operations to another country. Each country will have its nuances and customs that will be missed by someone who is not familiar with local life.
Hiring a legal expert will not only keep you compliant in foreign countries but may also expand your network. Many legal service providers working on a global level will know people in your desired area.
Protection of Intellectual Property
Intellectual property defines creations that are protected by law, including patents, trademarks, and copyright. You must go about the steps to protect the intellectual property that your company produces.
If you do not work in compliance with intellectual property laws, you may lose the creation that you have worked so hard to make to another business.
Along those same lines, you will need to conduct due diligence to ensure that you’re not violating copyright rules or trademarks laws. Infringing on another entity’s intellectual property could result in serious legal consequences.
Legal disputes may take years to resolve. A new small business faces especially high risks of going out of business from an IP legal dispute – larger corporations will use their greater resources and larger legal team to impart the worst outcome possible.
A steady cash flow is necessary to keep a business operating. But when clients pay their invoices late, businesses suffer to operate smoothly and make payments of their own.
Late payments have become especially problematic in light of the Covid-19 pandemic. Research shows that 57% of payments in 2020 were collected late.
Make sure that your business keeps track of all payments and collects records of late or missed payments. In some cases, you may need to file a collection lawsuit.
Official documentation should include the following:
First, establish clear payment terms during your initial contract. Have the customer sign these terms.
When the client is late, sent out a first payment reminder letter. Send a second as a follow-up if the first goes ignored. After you send a third and final payment reminder letter, the next step may be to pursue legal action.
If you’d like, you can create contracts with your clients that allow for financial flexibility. As long as there is open communication between you and a client, this model could be effective.
Avoiding Legal Issues
Opening and operating a business involves countless moving parts. It’s crucial to stay vigilant so you can avoid some of the most common business legal issues.
You don’t have to do it alone. The Venerable Law team is here to help you before any problems arise. Contact us to learn how we can help.
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