The majority of businesses do not last past a decade. After the first five years, only about 50 percent of businesses still survive.
One of the major factors affecting small businesses is staying legally compliant.
From selecting the right company structure to understanding local laws, legal compliance will prevent tax issues, problems with information privacy, and an inability to protect your company’s intellectual property to name a few.
As a business owner, you need to be aware of the common legal issues that you will likely face throughout the course of operating your business.
Are you Interested in learning what those issues are? Here are 11 common legal, tax and business issues facing Small business and what you need to look out for.
- 1 1. Business Formation
- 2 2. Licensing
- 3 3. Employee Classification
- 4 4. Cases Of Discrimination
- 5 5. Tax Compliance
- 6 6. Information Sharing
- 7 7. Health Compliance
- 8 8. Protection Of Intellectual Property
- 9 9. Late Payments
- 10 10. Termination Of Employment
- 11 11. Hiring Foreign Workers
- 12 Avoiding Tax Issues & Staying Compliant
- 13 Learn More
1. Business Formation
Your business structure plays the most important role in how your business operates. It will determine everything from your taxes to your personal liability. Companies often run into legal trouble when they don’t choose a business structure that fits their goals.
Common business structures include a sole proprietorship, a partnership, a C-Corp, an S-Corp, and an LLC. Each type of structure has its own benefits and potential drawbacks.
For instance, a sole proprietorship gives a business owner full control of their business without having to create a legal entity. However, they are also responsible for all liabilities and taxes.
A popular choice for business structure is an LLC. In a limited liability company, owners do not have all liabilities for the company’s debts. Should the company default on its loans, the owner will not be personally responsible.
Licensing is another area that could result in legal complications if not done properly. Each state has different business licensing requirements.
Every business will be issued a license when it first starts. Many businesses licenses need to be renewed annually for a business to stay compliant. If you do not pay these licenses each year, you may face penalties or even lose your business.
3. Employee Classification
When you hire an employee, you need to outline exactly what their relationship is with the company. Failing to do so could result in legal problems down the road. Keep in mind some of the following differences between employees.
In the US, we often consider a full-time employee to work at least 35-40 hours a week. Part-time employees work fewer hours each week.
But according to the Affordable Care Act in the US, a full-time employee is one who works an average of 30 hours or more a week, or 130 or more hours each month.
Also, make sure you know the distinction between an independent contractor and an employee of the company. An independent contractor is a self-employed person or entity who has been contracted for performing work for another entity as a non-employee.
Because they are contracted, they will not receive benefits from the company. The hiring company has no obligation to pay for health insurance, retirement accounts, or take Social Security deductions.
In each employee’s contract, it’s key to define how the employee is classified with your business.
4. Cases Of Discrimination
Alleged discrimination can happen at any time, whether it relates to hiring, firing, or creating a hostile work environment. Discrimination cases can be made based on age, race, color, ethnicity, marital status, disabilities, family responsibilities, or immigrant status.
There are two types of discrimination that could occur: indirect and direct. Direct discrimination occurs when certain people are mistreated based on one of the factors listed above.
Indirect discrimination happens when the application of policies or benefits does not apply to everyone. While a rule may apply to everyone in theory, in practice, it impacts certain groups of people differently.
5. Tax Compliance
Staying tax compliant is one of the most difficult tasks for businesses. From making mistakes when filing to purposely underreporting earnings, it’s easy to run into legal trouble with imperfectly filed taxes.
When filing taxes, be as accurate as possible with your reported income. Underestimating or underreporting your income can get you into serious trouble.
Along those lines, make sure that your deductions and expenses match the income of your business. If they seem too high, you may be audited by the IRS. The IRS has methods to analyze claims based on business income to determine what numbers seem suspicious.
If you do catch a mistake, you will be able to remedy it by filing a new form with the IRS. When in doubt, always go to a tax planner or CPA with help for your taxes.
6. Information Sharing
When you meet with clients and employees, there will often be times that involve discussing sensitive company information. This could include sharing information about finances or trade secrets.
Some companies have not established a way of protecting this information, and then find themselves in a tough situation when personal information is shared. Without any agreements between the party, the company can not hold any parties liable
To prevent this from happening, companies should require employees and clients to sign confidentially agreements. Contract law holds that NDAs are binding once signed. This will allow you to share relevant information without fear that it will be made public.
Now you have read the first 6 Common Legal Tax and Business Issues, continue reading to learn the remaining 5 challenger that can make or break your business.
7. Health Compliance
When you operate a business, it’s your duty to keep all of your team members safe. If employees get sick or injured on the job and you have no policies in place, you’re in trouble.
You should create a health and safety policy for the company. It will outline the dangers of working with the company and how the company strives to make the environment as safe as possible.
Employees should also sign a document acknowledging the risks and agreeing that the company will not be held liable if they don’t follow health and safety requirements.
Keep in mind that certain industries will be stricter than others. Opening a restaurant will look much different than operating a car repair garage.
8. Protection Of Intellectual Property
When you consider intellectual property, you have to think about two entities: both your business and other businesses. Intellectual property refers to creations that are protected by law. These creations include patents, trademarks, and copyrights.
If you create any of these items, you must go about the proper steps with the law to protect them. Otherwise, they are free for other businesses and entities to use without your permission.
The same goes for using other entities’ trademarks or symbols. Before creating your official logo or brand, ensure that no other organization is using the same trademark or proprietary trading that you wish to use.
Trademark and copyright infringement can result in serious penalties if you’re not careful, especially if you’re a smaller company. Larger companies will use their ample resources to try to wipe you off the map if they perceive you as a threat.
9. Late Payments
An unhappy customer or a client who is struggling with their own finances may not make payments to you on time. This in turn affects your business’s cash flow. When clients pay their invoices late, your business cannot operate as smoothly.
Late payments become an issue for companies when they don’t have proper documentation outlining the agreement for their services. There needs to be a signed contract outlining the client’s agreement to pay for services with a certain amount by a certain date.
If the client fails to pay, send out a first payment reminder letter. This will further establish documentation of the agreement. Send up to three payment reminders before considering the perusal of legal action.
10. Termination Of Employment
In the US, one of the most common legal problems for businesses is wrongful termination claims. Employees allege that the business fired them for unlawful purposes.
You can legally fire your employee for underperformance, misconduct, and retrenchment. In order to stay legally compliant, you should create a notice of termination to give your employees notice when firing them.
11. Hiring Foreign Workers
It’s a standard practice for US businesses to hire workers who are not native to the US. Usually, this does not pose a problem. However, if you do so without following the appropriate laws, you could get into trouble.
The Immigration Reform and Control Act says that all US employers have to complete a Form I-9 to hire a foreign worker in the US.
The IRCA prohibits US employers from hiring an alien without this form or failing to request the form. If they discover that an alien is working for them, they must terminate said individual.
Failing to follow these laws may lead your business to come under close surveillance by the US Immigration & Customs Enforcement. A Form I-9 inspection could result in serious penalties for your business.
Avoiding Tax Issues & Staying Compliant
Owning and operating a business is one of the most rewarding feelings you can have. But with all of the benefits of owning a business comes the responsibility to be aware of potential legal problems.
Now that you read our articles, “11 Common Legal Tax and Business Issues”, For more resources on running a successful business, visit our other blog posts. We cover everything from managing tax issues to learning how to build your company culture.