Small Business

10 Legal Myths About Starting A Small Business

Legal myths about small business law abound, ready to confuse, mislead, and even harm if you trust them. Like many myths, there is often an ounce (or more) of truth in the common bits of not quite correct small business legal wisdom that you come across. However, it’s not always easy to distinguish between lies and the good advice these myths convey, and you may need to seek expert advice.

There are some frequently repeated myths that you can use to better understand the legal environment surrounding small business today. Here are 10.

1. You get tax benefits as soon as you call yourself a company

If you have a small business, you can deduct business travel expenses, home office expenses, cost of goods sold, and more. While these tax breaks can be great, they don’t come with strings attached. You have to overcome some specific hurdles to prove that you have a legitimate business to qualify for tax benefits.

Generally, the IRS considers you in business if you engage in an activity with the reasonable expectation of making a profit. In order to prove or determine that you are in business and not just a hobby, there are several factors you need to consider.

  • Effort: Are you spending a lot of time, effort and thought to make your business profitable?
  • Experience: Do you have any training or experience in the type of work or products your business is focusing on?
    History: have you already made a profit in similar fields or activities?
  • Research and Advice: If you don’t know something or need help, do you seek advice from those with experience or knowledge?
    Asset valuation: Is your business acquiring assets that will appreciate?
  • Income Dependence: If your efforts produce income, do you depend on that income to pay for housing, food, utilities, or similar expenses?
  • Startup or Unexpected Losses: If your business is losing money, is it due to start-up expenses or economic factors beyond your control?
  • Profitable Years – If you have been building your business for several years and it is currently not profitable, have you been able to make a profit in the past? Typically, you are in business if you can show a profit for three of the last five tax years, or two of the last seven if you are involved in the breeding, training or show of racehorses. .
  • Progress: Have you adopted any new strategies or business methods to improve your profits or give your research a better chance of making a profit?

You don’t have to meet all of these factors to be considered a business, but you can use them as a guide. If you cannot prove that you are operating a business, you will not be able to use the tax benefits offered by the IRS.

2. You will not be in business until you present official documents.

The idea of ​​starting a business can make images think of having to present any kind of documentation in official government offices. While local, state, or federal laws may require you to submit a variety of documents, failure to do so does not prevent you from going into business or taking responsibility for actions taken by your business.

It is incredibly easy to start a business. In fact, it is even possible to do it without realizing it.

Default company

You can start a business without submitting or registering documents with a government agency. While you may be required to present various documents to comply with any federal, state, or local business or tax laws, you will effectively be in business as soon as you operate or take the steps you would take just to start a business. .

For example, suppose you are making handmade greeting cards. Occasionally, he sells these cards to friends or family, donates them to local charities, or gives them away as holiday gifts. The little money you earn is a nice bonus, but you don’t trust it and you don’t intend to pursue your hobby as a business.

But let’s say you decide to take your hobby and turn it into something bigger – you want to start your own business by selling your cards. You have a few basic business cards printed, register a domain name, and open a checking account with your bank. Congratulations, although you did not submit a single sheet of paper to a government agency, you have now started a business.

Specifically, what you have created is a sole proprietorship. Sole proprietorship is the most common form of business. As the name suggests, this is a business owned and operated by one person. A student who starts a summer dog walking business or a mom who starts selling handmade products on Etsy are Sole Owners.

Likewise, if you and someone else start your business together, you are forming a partnership. Again, you don’t need to submit any documents, receive approval, or do anything other than come to an agreement with someone else to start a for-profit business.

Default businesses (sole proprietorships and partnerships) are the easiest to set up, but offer the fewest benefits. You are personally responsible for everything. For example, you need to track your income and pay all applicable federal and state taxes. If you borrow money for your business, you are personally responsible for paying it back. Your creditors can sue you if you default on your business debts and can take your personal property to comply with a judgment. If you have employees, you have an obligation not to engage in discriminatory practices, to provide safe working environments, and to make appropriate payments.

Permits, licenses and registration

While starting a default business type is straightforward, you may need to take steps to ensure that your business is in compliance with any local, state, or federal laws or regulations. You must also submit documents or register if you wish to take advantage of business forms beyond sole proprietorships and partnerships.

For example, you normally do not need to register your business name with a government entity if your business name includes your personal name (for example, “Marcy Smith Auto Detailing”). On the other hand, if you want to start a business and use a business name that does not include your personal name (eg, “ABC Auto Detailing”), you may need to register your business name with an office. state government.

Filing or filing of documents is required if you want to create a more advanced business structure, such as an LLC or a corporation. In addition, certain types of businesses may require specific permits or licenses. For example, you’ll need a liquor license if you want to sell alcohol, a local business license if you want to open a physical store in your city, and a license from the US Fish and Wildlife Service if you want. import or export animals or animal products.

Failure to file or register your business as required by law does not mean that you are not with the business. Rather, it means that you could face negative consequences. At the very least, not registering or filing a return does not release you from any tax liability you may have, or possible liability for trade debts. For example, you can’t claim that you don’t owe IRS or state income tax on your business because it has never been registered, nor can you avoid d ‘to be sued for commercial debts.

Failure to register or apply exposes you to complications or prevents you from enjoying some of the benefits. For example, if your city requires companies to apply for a business license every year and you never do, you are unlikely to face any negative consequences unless city authorities find out that you operated without a license. If the city finds out, you may have to pay a penalty for any years you didn’t register. Likewise, if you want to create an LLC and not file the proper documents, you will not benefit from the protections offered by an LLC, such as not being held personally liable for trade debts.

Other issues, like owning a restaurant that sells alcohol and not getting a liquor license, could result in hefty fines and even jail time, not to mention shutting down your business. Determining what permits and documents you need, if any, are not always easy and may require you to speak with a lawyer or accountant in your area.

3. You must sign the contracts in writing

A contract is a legally enforceable agreement between two or more persons or groups (parties). This means that, upon request, a court can enforce the terms of the agreement in the event that either party fails to meet its obligations. And contrary to popular belief, as a rule, verbal contracts are just as legal as written contracts.

If you wish to enter into a contractual relationship, several elements must be present in your contract:

  • To offer. The process of creating a contract begins when one party makes an offer to another. An offer can be just about anything, like buying or selling something, like fishing gear, or taking action, like taking a customer on a guided fishing trip.
  • Acceptance. Once one party has made an offer, the other can accept or reject it. Acceptance can be done in several ways. Verbally agreeing to the terms, signing a document listing the terms, or taking action that unequivocally implies that you agree to the terms are all ways to satisfy this element. For example, when you go to a grocery store, remove an item from the shelves and place it on the checkout conveyor, you explicitly agree to the terms of a contract: the store offers the item while keeping it on the shelves. and listing it the sale price, and your actions implicitly show that you agree to the terms (the sale price).
  • Consideration. In contract terms, the consideration is something of value that one party agrees to provide to the other. The consideration usually consists of goods, services or promises to act or refrain from acting. (Money is the most commonly used type of consideration.) For example, let’s say you list furniture online and include the price. Although you can change the price later, the money the buyer has to pay serves as consideration to the buyer, while the transfer of ownership of the furniture to the buyer is your consideration.
  • Capacity. All parties to a contract must have the capacity. In general, anyone is capable of contracting unless the person is a minor or mentally incompetent.

In general, contract law does not require written compliance with these elements. Verbal and written contracts are authorized and enforceable.

Written contracts are sometimes required

In some situations, you may be legally required to have a written contract if you want your agreement to be enforceable. The requirement that certain types of contracts must be in writing does not mean that entering into such an agreement without a written document is illegal or criminal. It can be easy to misinterpret the requirement that certain contracts must be in writing to mean that not entering into a contract in writing is an illegal or criminal act, but this is not true.

On the contrary, when the law requires you to enter into a contract in writing, it means that if you ask a court to apply the terms of such contact, the court will not do so unless it is in writing. (Like all legal matters, the types of contracts that must be made in writing may differ from state to state.)

Some common situations or transactions that typically require written contracts are as follows:

  • Mortgages and real estate: Real estate (real estate) contracts must be in writing. This includes mortgages, mortgage modifications, agreements to buy or sell property, and property rights agreements. For example, if you own real estate and want to lease the rights to gas or minerals, you must make your agreement in writing to be enforceable.
  • Certain rental contracts: If you wish to rent or rent a property for more than a year, you must have a written contract including precise information such as the location of the property, the duration of the rental, the amount of the rent , the rent is due and the method of payment. The contract for rentals of less than one year, such as monthly leases, can be made orally.
  • Contract for property over $ 500: In most states, any agreement to buy or sell a property of $ 500 or more must be in writing. Please note that this requirement only applies to goods and not to services.
  • Contracts in return for marriage: When you promise to do something in return for your marriage, you must make your agreement in writing. Therefore, if you promise to buy your boyfriend a car when you get married, your boyfriend cannot go to court to enforce the promise unless it is in writing.
  • Contracts which cannot be fulfilled in one year: If the terms of a contract cannot be fulfilled in one year, contact must be made in writing. For example, let’s say you are playing music at a friend’s wedding. A couple at the wedding are impressed and want to hire you to play on their 10th wedding anniversary in 14 months. Since it is not possible for you to fulfill your obligation within one year, the contract must be in writing to be enforceable.
  • Agreements to pay someone else’s debt: If you agree to pay someone else’s debt, for example by becoming a co-signer on a loan, you and the creditor must enter into a written contract so that the ‘agreement is enforceable. However, this requirement generally only applies between you and the creditor. If you verbally agree with the debtor to pay your loan, you can create a contract, even if there is no written document.

4. You must provide health insurance to your employees.

The Patient Protection and Affordable Care (ACA) Act, more commonly known as “Obamacare,” requires business owners to provide health insurance to their employees. However, this requirement only applies to companies with 50 or more full-time employees (a full-time employee is one who works an average of 30 hours per week, or at least 130 working hours per month).

If you have a small business with less than 50 full-time employees, you are not required to provide them with health insurance, although you can choose to do so.

5. You must form an LLC or a corporation

Establishing an LLC, corporation, limited partnership, or other advanced business structure is not a legal requirement to start a business. However, even if you don’t have to, choosing a business structure that suits your needs and the needs of your business is one of the best steps you can take, as these entities offer advantages and important protections that others will not receive. .

There are many different types of business structures, each with their own specific sets of benefits, limitations, restrictions, and options. For example, corporations and limited liability companies provide you with liability protection, but limited liability companies have transfer taxes, while corporations do. This means that a corporation has to pay income taxes, just like employees who receive income from the corporation. On the other hand, the owner of an LLC pays income taxes as a single entity, not as two separate entities. Depending on your situation and the type of business you have, one structure may be better suited to your needs than another.

6. Creating an LLC, corporation or other business structure will always protect you

Limited Liability Companies (LLCs) and Corporations are business entities that offer protections to their owners that other entities, such as partnerships or sole proprietorships, do not. In particular, these types of business structures create separate legal entities that can protect you from liability. Therefore, if the business is sued or incurs debts that it cannot pay, only the assets it owns will be at risk, and not the personal assets of the business owner.

But the liability protection benefits provided by LLCs and corporations are not exhaustive and require you to take specific steps to protect yourself. For example, let’s say you are starting a small business and want to organize it as an LLC. To become an LLC, you must comply with the laws of your state regarding the formation of LLC. These differ slightly, but generally require filing an application with a public body and paying an application fee. Unless you meet the requirements imposed by your state, you do not have an LLC and you do not have the protections and benefits that they offer.

Even if you are starting an LLC or a corporation, your personal assets are not always protected from business liabilities. There are many ways to take personal responsibility for business debts. For example, if you do not obey state business laws, act in a negligent or criminal manner, mix business and personal assets, or act personally as a guarantor of a business loan, your personal assets may always be in danger.

7. It’s hard to get copyright, especially online

There are many myths about copyright, especially when it comes to the internet and your business. While copyright protections are a valuable form of intellectual property, and copyrighted works can be valuable assets, many myths about copyright law are dangerous if they are are trustworthy.

For example, some people think that unless an original work is accompanied by a copyright notice, through the family symbol ©, for example, it is not protected by copyright law. copyright and its use is legitimate. This may have been true decades ago, but it is no longer the case. Copyright protections are automatically attached to any original work attached to a medium. In other words, if it’s yours (you haven’t copied someone else’s work) and it’s more than a thought (e.g. you wrote it, drew it or written on the Internet), you own the copyright. The same goes for anything you find, even if it’s on the internet.

The idea of ​​”fair use” complicates the automatic creation of copyright laws. Although it is frequently cited and discussed frequently, few people know how it works. Generally, fair dealing allows you to use someone else’s copyrighted work, but only in limited circumstances. Unfortunately, if you use a copyrighted work for commercial purposes, your chances of invoking fair use as a defense against a copyright infringement claim are slim.

For example, if you are a fan of a TV show or movie and want to create and sell fan art, you are almost certainly violating copyright law because copyright protects “derivative” works. Fan art is generally considered a derivative, even if it was created by someone other than the copyright holder.

As a general rule, unless you have permission or are the original creator of a work, you cannot use it for your business. If you do, the copyright owner can sue you. In some cases, you might even face criminal charges.

8. If your business goes wrong, you can always file for bankruptcy

Bankruptcy is a legal process that protects you from creditors. If your business cannot pay your bills, or if you have personal or business debts, filing for bankruptcy can protect you from liens, liens, and other remedies that your creditors might exercise against you. Although there are several types of bankruptcy, all of them offer the possibility of eliminating debt while protecting you from adverse actions of creditors.

But bankruptcy is not a panacea for all financial or debt problems. For example, if you have secured creditors, these creditors can take possession of the secured property (collateral) even if you file for bankruptcy. Moreover, if you have fallen behind on your tax bill, it is very difficult to get those debts paid off by bankruptcy.

Beyond that, each type of bankruptcy offers specific protections and limitations, and with the eligibility standards that you must meet. For example, if you want to file for Chapter 7 (liquidation) bankruptcy, you must pass the “means test,” a financial assessment that examines your income and your ability to repay unpaid debts. If you do not pass the test, you cannot file for Chapter 7 bankruptcy, although you may still have other forms (such as Chapter 13).

9. You need to create a business plan

A business plan can be a valuable tool for any small business owner. While having a business plan does not guarantee that you will be successful, it can offer a variety of benefits: it can help convince creditors or investors of the value of your business, give your business a plan for growth. , allow you to set measurable goals, and more. . .

But a business plan is not a legal obligation. You are under no legal obligation to have a business plan at all times. Although it is not a good idea, you can start your business without making any plans, doing any research or taking preparatory steps.

10. You don’t need a lawyer or a CPA, or professional advice

This is not so much a legal myth as it is mistaken wisdom. While it’s true that you don’t have to hire or consult a lawyer, accountant, or anyone else when starting or running a small business, not doing so can be a big mistake.

Take, for example, a situation where you run a business and want to create or use a contract, financial power of attorney, or confidentiality agreement. Each of these documents must contain specific parts to be effective, to do what you want them to do, or to give you as much protection and ability as possible. While each may seem straightforward, the details of creating the right document for your particular needs and circumstances can be crucial. If you are using a generic document that you find online, you have no way of being sure that the document is legally effective, nor can you be sure that you are using it correctly.

Likewise, a good accountant can be vital. An accountant can make sure you keep your financial information in order and also help shape your business and take advantage of opportunities you may not be realizing.

Last word

Starting a small business to earn extra income or explore your entrepreneurial dreams can be exciting, challenging, frustrating and rewarding. It can be successful or it can fail. There is no way of knowing what the future holds.

But before you start your journey, you need to take the time to build a good foundation. Having a basic understanding of your legal skills, obligations, and opportunities doesn’t guarantee success, but it can save you from serious problems down the road. If you are starting a business (or considering starting a business) or are a business owner facing a legal issue, speaking to a lawyer who specializes in small business legal matters is your best option.

What legal issues have you encountered as a small business owner?

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