Legal Considerations when Starting Your Business

Every business entity faces legal issues. Below are some issues that routinely cause business owners trouble when they have failed to consider the legal aspects of running a business.

• What risk am I, as an owner, exposed to as a result of my choice of business organization type?
  • As a sole proprietor, you assume all business risks personally. Your personal assets could also be jeopardized by your actions or an employees actions that cause harm to another in the normal course of doing business.
  • If you are a partner in a formal partnership, if any partner dies or no longer wants to be a partner the partnership usually is dissolved whether you want it to or not.
  • If you choose to be an LLC - a limited liability company - you can shield yourself from some claims against your personal assets as a result of a business failure. However, obtain competent legal advice before signing contracts as you may inadvertently create a personal obligation. This is also true for corporations as well.
  • Setting up a corporation involves creating a separate entity. Care must be followed in filing the forms with the state in which you are working to incorporate. In most cases, your personal assets are shielded by the "corporate veil". However, this does not mean that you can be negligent as there are ways that attorneys can easily pierce that veil and attach your personal assets in a civil case.

  Business risk is ubiquitous and it is imperative that you should develop a relationship with an attorney early on. It is far less expensive to do it right initially than to try and undo something that "made sense" but was not in your best interest. You will find that many laws and regulations are sometimes in conflict with one another. This is what gives rise to mistakes that can cost you a lot of money.

• Can I insure against these risks?
  • The short answer is of course. Someone will be happy to sell you a policy for just about anything. As long as you have an insurable risk someone will underwrite a policy for it. This can get expensive. The key to insurance is planning for the catastrophic event that can wipe out your business and life savings. Some examples are below that you should consider at the beginning of your venture.
    • General liability/fire insurance coverage. Usually this is a standard business policy that can range from a few hundred dollars per year to several thousand dollars depending on the nature of the business and its location.
    • Key person insurance on people that must be around because they have indispensable knowledge that will be costly to recreate in the event of the persons death or incapacitation.
    • Errors and omissions policies are good for consultants and others who provide professional services to lay people.
    • If you are in a closely held organization with several other owners, now is the time to consider buy/sell agreements. Consider what may happen to your firm if your co-owner dies and his/her shares are left to someone without the passion for the enterprise that the original owners had, or worse the new owner is a meddling shrew that no one can stand to be around. This is extremely important if you are a minority owner.

  Discuss these issues with a competent insurance agent that knows the industry you are in and what is typical with respect to appropriate coverage.

Other issues that can cause you problems:

• Failure to obtain appropriate permits and license.
• Failure to adhere to local zoning requirements.
• Failure to provide a safe working environment for employees

I could go on and on because there are many issues that can create problems for you. We recommend that start-ups invite their professional services providers to serve as a advisory board this can get the young firm some much needed advice and counsel without breaking the bank. Don't be shy about asking to trade services if appropriate.

Just remember: anything that an employee or owner does that can be construed as part of the normal course of business can subject the firm to lawsuits.