Business Legal Essentials
A solid understanding of basic business law concepts can be invaluable for business owners and entrepreneurs. Familiarity with general legal principles related to corporate structure, intellectual property concerns, contracts, and compliance issues can help business owners to better navigate the practicalities of their new business. Most startups and small businesses are created as domestic limited liability companies (LLCs) or corporations (Inc.) under state law, which complete formal registration paperwork with the Secretary of State where the business will be based. Corporations require more formalities than LLCs, such as directors, shareholders and officers, regular meetings, and extensive record-keeping. Corporations can elect S Corporation tax status (with some restrictions) in order to be federally taxed as a pass-through entity. LLCs are generally created and taxed as pass-through entities, although they may elect to be treated as corporations and be taxed accordingly. Intellectual property (IP) issues require careful planning and should be a primary concern for startup and small business owners. Every business needs to consider IP issues that can become a nightmare if not dealt with before any assets are created. IP issues include copyrights, trademarks, trade secrets, patents, licensing, chain of title, and assignment provisions in employment agreements. Copyrights protect original works of any type that are fixed in a tangible form, such as books, computer programs, websites, films, or other digital content. Make sure to obtain copyright ownership and all rights to use a copyrighted work in writing before accepting any content from others. Copyrights are automatically created when a work is originally created and fixed on an appropriate medium, but registration with the U.S. Copyright Office provides benefits such as the ability to commence a civil lawsuit for infringement. Registration is also a prerequisite to recover statutory damages and attorney’s fees . Trademarks protect words, logos, names, sounds and other branding identifiers. Trademarks are also automatically protected, and registration with the United States Patent & Trademark Office (USPTO) provides additional benefits. Trademarks identify the source of goods and services and are likely to be the most important IP for any business. Search the USPTO database of federally registered trademarks for potential conflicts before adopting a new mark. Patents protect inventions and are typically only relevant to early stage companies or those in a highly technical field. Many startups incorporating software do not develop patentable technology. But it is important to keep in mind the ability to patent your technology until you have decided not to develop it further. Given the large number of regulations governing businesses today, it is crucial for a business to follow all applicable laws and comply with government regulations. Compliance is one of the top five litigation risks for new businesses, and while the risks of regulatory non-compliance are higher for regulated industries, government agencies have increased civil and criminal enforcement activity in many industries. Compliance can be a moving target because laws keep changing, and new regulations are issued. Substantial penalties can be assessed for non-compliance. For example, the Internal Revenue Service (IRS), U.S. Securities and Exchange Commission (SEC), Consumer Product Safety Commission (CPSC), Equal Employment Opportunity Commission (EEOC), Federal Trade Commission (FTC), Occupational Safety and Health Administration (OSHA), and the Federal Communications Commission (FCC), just to name a few, are all actively enforcing regulations that impact how you run your business. Contracts are essential to any business. From purchasing office supplies to making deals with suppliers, contractors, and subcontractors, contracts govern everyday activities. Legally binding agreements are fundamental to any business and must be carefully drafted to protect the business interests of the company.
The Intersection of Legal Affairs and Business Development
The journey towards business expansion is a complex maze that requires more than just visionary leadership and sound management; it also calls for a finely-tuned legal strategy that contributes to the very backbone of business growth: sustainability. From entity formation and intellectual property rights, to international trade agreements and labor compliance, legal affairs not only underpin the infrastructure of a budding business, but also serve as the compass that steers the entrepreneurial ship through rough waters. The art of legal planning creates a roadmap that marks critical milestones, such as obtaining key contracts, securing investment, or transitioning to a publicly-traded company. Legal planning informs every decision of the emerging business, from acquiring and managing the necessary licenses for operating and exporting, to structuring itself for growth, designing an efficient and affordable contract system, and formulating an exit strategy. Legal affairs play a key role in any scenario where there is a major change in the company’s structure.
Key components of legal affairs include: The lawyers who are guiding your company through this process should be involved at this stage, to help your business anticipate hurdles and shape solid footing for the months and years ahead.
Legal Pitfalls and How to Avoid Them
Employing personnel in accordance with all applicable laws is a top concern for business managers. They must ensure that they are compliant with unemployment tax laws, overtime requirements, workplace safety and health, employee healthcare, etc. Failure to comply can lead to liability and class action suits. Being organized in these aspects of the practice of the business, and resourcing expertise on these issues, is one way that a business can avoid the pitfalls. They should consult with counsel so that there are no necessary personnel related taxes missed.
Owners and shareholders make the mistake of assuming that they have limited exposure due to the corporate entity and shareholder roles. This misconception opens owners and shareholders up to making decisions based on a limited perspective of liability. The owner and shareholders roles can certainly limit the liability and risks in certain areas. However, owners and shareholders should understand the potential liability pitfalls if they make bad decisions or even good business decisions that are not made correctly. Liability can lead to loss of assets, income, reputation, and credit. There can be lapse in the ability to do business in certain territories and limits on what may be able to be done for clients. Business owners and shareholders should, therefore, increase their perspective on liability and see how that interacts with their business.
The interface of business and legal affairs requires expertise and a partner to help navigate through the issues. Businesses should seek out a person who understands the technicalities of specific areas of law and how those areas impact the business. Businesses would benefit from consulting with someone who has real-world experience and expertise to help devise a path for the business to follow. This allows owners and shareholders to anticipate what dangers may be lurking ahead and to have a plan in place to address those dangers.
Essential Documents: Drafting and Negotiation
Contract Negotiation and Drafting for Businesses
When parties do business together, a contract guides the performance of the deal. Contracts are legal documents which list specific terms setting forth the conditions of the arrangement. Contract negotiation processes establish the terms and conditions of the contract. In business law, negotiation and contract drafting require tremendous skill, expertise and legal knowledge.
The parties to a contract need to be cognizant of the potential terms and conditions and how they may impact a business transaction. The agreements need to be carefully drafted to protect the interests of the parties and impose enforceable legal obligations. Importantly, failing to document agreements in writing can result in litigation to enforce or defend against the contractual terms.
Business-to-business contracts have critical elements. The scope of the contract must be clearly defined to satisfy the expectations of the parties and adequately protect the rights of the agreement. The terms for consideration, consultation, manufacturer, compensation, exclusive representation, guarantees and warranties also help to define the agreement. Each party has obligations to the other. Failure by one or both to perform the contractual terms can result in legal liability.
Contracts can become complex and lengthy documents which are not easy to interpret if not carefully drafted and reviewed by an experienced attorney. Disputes between parties can arise due to miscommunication and misunderstandings. Legal counsel are experienced in assessing complex circumstances that require specific performance by the parties. The attorney will identify the issues and offer mediation to resolve the dispute. Legal counsel can also provide solutions through litigation in the courts when the dispute is not resolved with the opposing party. Attorneys who are skilled negotiators understand the law and the potential outcomes to the matter may be able to save the costs associated with legal action through dispute resolution.
Safeguarding Intellectual Property Assets
Now more than ever, producers need to protect their intellectual property as much as possible. There have been one too many instances of well-known and successful producers departing for greener pastures without their former employer’s knowledge. Are they leaving with your directories, your Rolodexes and your clients?
There are many forms of intellectual property protection available to producers and formatted for the different areas of the industry. It is important that producers take every action possible to protect their intellectual property.
Copyright – Copyrights cover creative works such as original songs, music compositions and other types of original works of art. If you have a new creation, don’t just send it out into the world without affixing a "C" on the first page and registering with the U.S. Copyright Office. Trademarks – All producers know that a trademark protects brand names like those originally used by Rafe all the way to Britney Spears. But did you know that trademarks also protect visual images, including corporate and record label logos, sounds, slogans, colors (famous pink Panter color for example), and even smells? You don’t want some competing producer to think that "Half Pint Productions" is his or her brand of choice, when you have trademarked it . Patents – If you have a new device, tool or technology that you wish to market giving a strategic advantage, you may be able to protect your invention with a patent issued by the Patent and Trademark Office. A patent will give you an exclusive right to market your invention for a period of 20 years. Trade Secrets – If you want to keep your information confidential, simply maintaining secret documents is not enough. You must treat the information as confidential. That means limiting access to your secret information to only those individuals with a specific need to know the information. Confidential relationships can be established in two ways – through non-disclosure contracts, or by maintaining a standard practice of handling business affairs in such a way as to keep the secrets from outsiders. A thorough confidentiality program complete with non-disclosure contracts, confidentiality agreements, and a rigorous selection process for employees and independent contractors can be an effective method of protecting your trade secrets.
Legal Matters in International Business
An area of a business’ legal affairs that requires significant attention and planning is expansion into international markets. A company may choose to expand into other countries to diversify its offerings, reach new customers and be exposed to new growth opportunities. The expansion can take the form of a foreign branch, subsidiary or representative office, or a joint venture or merger with an international company. However, these types of models bring their own unique legal considerations and issues that must be addressed.
To begin with, companies should be aware that in many international jurisdictions, foreign companies are prohibited from carrying on business within that country. As a result, when looking to expand into an international market, it is important to consider the structure of the potential international business. Associated with this issue is the concept of doing business through an agent or third party. If the agent is deemed by the local laws to be the foreign company’s representative, the foreign company may be regarded by those laws as carrying on business and subject to legal and tax requirements applicable to local businesses. Additionally, the local laws of a jurisdiction may prohibit foreign companies from owning shares in a local company or may require that any local ownership be by local citizens only or registered companies. These issues must be taken into account when structuring a foreign investment in a business.
Companies running a business in multiple jurisdictions should also be aware that a single commercial agreement may have international implications. The laws governing the contract, as well as the language important to the contract, can be the subject of dispute in four or five different countries or jurisdictions when a company is dealing with a foreign supplier or manufacturer. Companies should consider these issues when negotiating and closing a deal before choosing an international partner.
Culture change is another important issue tied to international expansion. Beyond language barriers, an important aspect of expanding into an international market is understanding the cultural norms of the new market and the legal environment. These cultural norms are reflected in the local laws and can impact your relationship with your foreign investment, supplier or manufacturer. For example, in some countries, there are generous rules concerning the termination of employment, while in others there are very strict limits and control over an employer’s ability to terminate employees. Understanding these cultural and legal differences is key to ensuring a successful expansion into a foreign market.
One final area for Canadian companies to consider when expanding a business into an international market is whether to operate in the new market through a joint venture with an existing company. Beyond ownership and profit sharing, joint ventures can take on a number of forms, including being limited to particular projects or activities, or being for a fixed term. Joint ventures are generally two or more companies agreeing to cooperate and share resources for mutual economic now, later to be followed by establishing a single business model. As these types of business relationships are inherently risky, the agreements entered into must allocate risk appropriately and define the general obligations and goals of the parties.
The Evolving Nature of Business Legal Affairs
One of the most promising areas for the future in business legal affairs is the emergence and application of artificial intelligence to help streamline the process of identifying and managing legal issues. While recent years have seen the development of practices in which law firm practices have been absorbed into the corporate legal departments, the future may see this dynamic shift based on AI solutions. This approach would make it possible for a corporation to significantly reduce the scheduling, infrastructure and staffing costs associated with maintaining a large internal business legal affairs department. Instead, a small internal legal services department could manage a larger number of issues using AI-enabled business and legal research tools and case management systems. Ironically, one of the challenges in achieving this goal will likely be the law firm’s business model. Many law firms benefit from maintaining large practice groups on which to consult when needed—their ability to profit from smaller client companies may decline as they face competition from other business legal affairs departments that utilize technology to cover a wider range of work.
This solution naturally leads to one of the possible future scenarios being the development of a software industry servicing the interests of corporations directly as investigations covering in-house legal services indicate that a significant proportion of corporations are looking to outsource all legal work that can be done internally. In this environment, the demand for highly knowledgeable business and legal affairs software at the enterprise level is likely to increase, but fundamentally, this area is an active subset of the current business legal affairs model, particularly in the media sector where internalization is driven by mergers and acquisitions.
Once the immediate future requirements are dealt with , a fundamental challenge to the business and legal affairs sector will be where the competence of the large enterprises ends and that of smaller firms, particularly start-ups and rapidly growing businesses, begins. There is a limit to the degree of specification they can achieve, on the one hand, and a limit to the extent that start-ups and the corresponding small firms can offer highly repetitive repeatable processes and solutions on the other. The tendency of law firms to specialize with respect to the provision of business and legal affairs has already resulted in the creation of specialists, such as providers of contract management software or document management expertise. While they may currently appear as niche providers, they begin to move up from that position as they build additional competencies. In the business and legal affairs sector, this means the emergence of multiple specialist providers who specialize in particular areas. Lawyers may still be required to oversee the entire process, but pre-established components will enable both the lawyers and the clients to significantly reduce costs. In return, they may need to be prepared to share a percentage of the savings.
Overall, the business and legal affairs sector is entering a new phase driven by technological forces that are beginning to change the corporate legal landscape. For many large consumers of business and legal affairs services, the prospect of such change will present them with the opportunity to review and upgrade their business and legal affairs processes and thereby improve their business results. As this occurs, it will be the leading companies and law firms who will set the pace for others. It is too early for the business and legal affairs sector to predict a general direction, but the available evidence suggests the potential for a radical alteration in the environment.