I love working with entrepreneurs. That much is obvious- clearly, my entire career is built around it! And while my favorite clients are typically those who jumped into business because they followed a passion into business ownership, rather than vice-versa; admittedly, at times there can be a communication breakdown between lawyers and entrepreneurs.
It’s unavoidable, to an extent. The problem is, when you don’t know where to start, you don’t even know what questions to ask. And when that happens, I don’t know what answers to give you.
Lately, when I’ve sensed this happening on client calls, I’ve begun describing the 4 level “framework” I recommend for determining a business’ legality needs, and I wanted to share it with you. So consider this your 30,000 foot view of how to approach your business’ legality: a framework, broken into 4 sections that you need to tackle one-by-one to figure out how you should be approaching business ownership. No matter what stage of business you’re at, examining your business through the lens of this framework semi-annually (at least) is something I recommend to every entrepreneur. This list is intended to help identify the areas of potential liability that could arise for your business- and keep in mind, this is never a stagnant process. As your business grows, you must reevaluate the legal side of your business as well.
Business Formation (Mitigating your personal liability)
Before anything, you have to make sure that your business’ formation is correct. Choosing the proper business formation revolves around one specific question, and one only: what form of liability protection will best serve your business?
In choosing a business formation, you must ask yourself 3 distinct questions:
- Is your business something you do mostly for fun; you don’t make significant income from; or that you don’t anticipate having your business for an indefinite amount of time? You may be in the class of entrepreneurs for whom a sole proprietorship is appropriate.
- Would you want your personal assets separate from your business assets if your business were to get sued? You need an LLC, and should examine the benefits of a SCorp.
- Do you anticipate having shareholders; particularly voting shareholders, in your business? A CCorp will likely be appropriate.
There are 4 primary types of business formations for you to consider: Sole proprietorships, LLCs, SCorps, and CCorps. Keep in mind, the appropriate business formation will change as your business grows, so this is never a stagnant decision. I detail each in my Legal Foundations e-book (available at www.shopcreativelaw.com).
Takeaway: in order to know where your business is going, you must shield it from the potential liability out there with the appropriate formation.
2. Running The Business (Mitigating your business’ liability)
After you’ve laid the proper foundation for your business, it’s up to you to make sure it’s capable of running…legally.
What do I mean by this? Examine and identify the potential touchpoints of liability of your business- in other words, where your business interacts with other people (customers of your goods or clients of your services); and then, make sure you have a contract that actually protects your business.
The other “touchpoint of liability” (aside from the client/customer perspective)? Outsourcing. Make sure that you haven’t opened your business up to liability with your hire. I detail each in my Foundations of Hiring e-book (available at www.shopcreativelaw.com).
3. Marketing & Brand Protection
An incredibly common misconception is that a trademark is a mandatory step in setting up a business. Is it the only way to legally protect your business’ brand identity? Absolutely. Does it mitigate your business’ liability? Not at all. Therefore, unlike steps 1&2, it’s not a requirement.
Keep in mind, mitigating your personal liability is covered in Step 1; Formations. Mitigating your business’ liability is covered in Step 2. Intellectual property (trademarks, copyrights, and patents), on the other hand, have nothing to do with liability. However, because they are the only way you can protect your brand identity or the works you create, I do require that all of my clients asses whether they require any intellectual property protection.
There are three forms of intellectual property to be aware of:
- Copyrights: A form of protection provided by the laws of the United States for “original works of authorship”, including literary, dramatic, musical, architectural, cartographic, choreographic, pantomimic, pictorial, graphic, sculptural, and audiovisual creations. “Copyright” literally means the right to copy but has come to mean that body of exclusive rights granted by law to copyright owners for protection of their work. Copyright protection does not extend to any idea, procedure, process, system, title, principle, or discovery. Similarly, names, titles, short phrases, slogans, familiar symbols, mere variations of typographic ornamentation, lettering, coloring, and listings of contents or ingredients are not subject to copyright.
- Patents: A patent is a legal document which provides protection to the ideas of any individual. Usually issued by the Patent Office of a country, the patent is granted to any firm or individual. Usually, patents constitute of four different classes: Machine (a device or apparatus created by a person for the performance of a specific task, process (a process created by an individual), manufacture (any fabricated or manufactured product) or the composition of matter (any chemical mixture or compound created by a person). Patents can be sued for.
- Trademarks: A trademark is any word, name, symbol, or design, or any combination thereof, used in commerce to identify and distinguish the goods of one manufacturer or seller from those of another and to indicate the source of the goods. See 15 U.S.C. § 1127.
4. Future Planning
Finally, an integral consideration that you must take into account as a business owner is the future. Namely, what provisions have you made to protect your business in case you aren’t there to run it? Have you laid the groundwork in case you need an exit strategy for your business?
The truth of the matter is, you won’t always be able (or willing) to be present for your business. And that’s ok! It’s impossible to predict the future, but it is possible to plan to be flexible for it.
The following is a list of some of the “unpredictable scenarios” that have arisen for my own clients… and only those clients who had invested in planning for the future were able to achieve their goals. Take a look at the topics, and then ask yourself what preparations you’ve made.
- Buy-sell Agreements
- Selling your business- do your operating agreement or corporate bylaws consider how you can sell your business? If you don’t have one of these documents, have you considered how you can sell your business someday?
Questions about any of the above? Schedule a Consultation here, where we will work through this exact framework together.