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 Formation and Entity Selection
Choosing a business structure is one of the first legal decisions a small business owner must make. The entity selected can affect personal liability, taxes, management responsibilities, financing options, and ongoing filing requirements.
Sole proprietorships and partnerships are generally easier to establish, but the owners may be personally responsible for business debts and lawsuits. LLCs and corporations require additional filings and ongoing compliance, but they can provide greater separation between the business and its owners.
A business formation attorney can compare the available structures, explain the legal and tax considerations, and help establish an entity that supports the company’s current needs and long-term plans.
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.
Business Contracts
Contracts are a routine part of operating a business. Written agreements with customers, employees, contractors, vendors, suppliers, and business partners can clarify each party’s responsibilities and reduce the likelihood of future disputes.
An effective contract should clearly address important terms such as payment, scope of work, deadlines, confidentiality, termination rights, and procedures for resolving disagreements. Using generic or incomplete agreements can leave a business exposed when expectations are not met.
A contract attorney can draft agreements tailored to the business, review contracts before they are signed, and identify provisions that may create unnecessary risk. Having clear agreements in place can help protect the company and make disputes easier to address.
