Many legal considerations must be taken into account when starting or growing a business. Whether you are starting a new venture or growing a side gig into a thriving business, the decisions you make now determine the future of your business. Business structures, licensing, taxes, and employees are just some of the small business legal considerations you should consider.
Business Structure
Business structure is an important legal consideration for small businesses, and it is possible to change it after you have started your company. To make the right decision among these business structures, it is necessary to have a complete understanding of how each of these will affect your overall income, tax dollars, and liability.
Sole proprietorships and partnerships are the most common business structures for startup small businesses. They require no additional paperwork or filings beyond a business license and sales permit. The operations of corporations and S-Corps are handled through a board, usually made up of the largest shareholders. If you want to publicly offer shares for your company, a corporate business structure is necessary.
The most important small business legal consideration for business structure is a liability. Sole proprietors and partners are personally liable for any lawsuits or if the business fails. The two most common ways to avoid personal liability are an LLC or S-Corp. An LLC is less expensive and easier to set up, but both LLCs and S-Corps protect business owners from liability and offer tax benefits.
Business Licenses and Permits
The business licenses and permits required for starting or operating a small business depend on the industry. All businesses must obtain a business license and the required permits based on location, industry, and activities. Check with your local chamber of commerce for assistance in identifying necessary licenses and permits.
Any business that sells or leases tangible property in California must also apply for a sales and use permit, often called a seller’s permit in California. A resale permit is required if you will be selling used items. Handling alcoholic beverages requires a permit from the California Department of Alcoholic Beverage Control, as well as the federal Bureau of Alcohol, Tobacco, and Firearms (BATF).
There are few other federal licenses or permits required for most small businesses. Common small businesses that could require federal permits depending on volume include the agriculture industry such as urban farms, as well as transportation of goods or passengers. If you’re not sure if federal regulations apply to your business, speak with a knowledgeable small business attorney.
One of the most important small business legal considerations often overlooked is the need for licensing with USDOT. Registration with the US Department of Transportation (USDOT) is required for any commercial vehicle owned and operated by a small business in California. Many people mistakenly believe that only large trucks must be registered, but the Federal Motor Carrier Safety Administration is clear that every commercial vehicle must be licensed and issued a USDOT number to be displayed on the vehicle.
Taxes
Small business legal considerations such as business structure affect other areas of your business, including taxes. Income, losses, credits, and deductions are reported on individual tax returns for sole proprietorships, partnerships, and LLCs. Income taxes for S-corporations are also calculated on individual returns based on that individual’s income tax rate. The income and losses for corporations are filed on a corporate return, with shareholders reporting only their income.
All businesses selling tangible goods in California must also collect and report sales taxes on those items. California does not charge sales tax on services as long as their primary purpose does not involve the transfer of property. For example, charging sales tax is not required for digitally delivering a creative project, but is required when delivering flowers.
Filing taxes for your small business can be complicated, and it is best to leave the matters in the hands of a capable accountant. However, that accountant cannot perform well if small business legal considerations are not met from the outset. This is where the services of an experienced California business attorney are beneficial.
Intellectual Property
There are three main types of intellectual property that are common among small businesses. These are trademarks, copyrights, and patents. Patents are filed for proprietary tangible products from an original design and protect you against knock-offs. Trademarks are symbols, words, phrases, or any combination of these that distinctly describe your proprietary goods or services.
Copyrights mostly apply to artwork and written works. The US deems creative work to be copyrighted by the artist or author from the time of creation until transferred, but there are some benefits to registering a copyright.
Trademark and patent laws are complex, and the research required for trademark and patent applications alone is difficult to navigate. A California attorney specializing in small businesses makes this process easier and more effective in protecting your intellectual assets.
Employment Law
Equal opportunity, anti discrimination, workers’ compensation, insurance, and payroll are just some of the small business legal considerations when starting a small business in California. Employment laws are administered and enforced by the Department of Labor, with most investigations being completed by the Equal Employment Opportunity Commission (EEOC).
The most important small business legal consideration when employing individuals is understanding the difference between an employee and an independent contractor. It is a common error in today’s gig economy for companies to pay individuals as though they are freelancers when in reality they should be an employee. The IRS has strict definitions for these and other types of employees. It is important to understand these distinctions to avoid audits and penalties.
Actual or alleged employment law violations are serious matters. Experienced employment law attorneys in California help you avoid these violations by putting appropriate processes and procedures in place from the beginning. This is just as important as having a small business attorney handle the violations themselves.
Contract Law
Contracts are a natural part of doing business. Even the simplest of contracts should be written to protect both parties and easily resolve disputes. Having valid written contracts for vendors, suppliers, and B2B services ensure your business operates smoothly. Written contracts for services provided to consumers are also important to protect the company from liability.
Contract law might seem straightforward, but many factors affect one’s ability to uphold a contract. You should have an attorney draft or review any contracts before they are signed. Having an experienced small business attorney on retainer is the best way to ensure your contracts are firm.
The legal considerations for small businesses in California are variable, based on current California and federal laws. Some considerations change more often than others. For example, the California minimum wage shifted to $15.50 per hour for all employers as of this year, whereas before this small businesses under a certain threshold were only required to pay $14 per hour. These and other small business legal considerations are best reviewed and handled by an experienced small business attorney from Stone and Sallus.
