You probably started your business because you’re passionate about the products you make or the services you provide. The last thing you want to think about is the law and how it impacts your business. But the law does affect your business, so you should be informed.
Here are a few legal questions that you should ask yourself.
Should I Incorporate?
Every business’s operations create the potential for legal liability. Like it or not, it’s a part of interacting with the public and offering products or services to them. Do you have a retail store? Someone could fall and become injured while shopping in your store. Do you manufacture a product? Using the product might hurt someone or damage property. This sort of potential liability could cost you and your business a lot of money if it’s your fault.
One of the ways to protect yourself against the liability risks generated by your business is to incorporate. When you incorporate, you create a new entity that owns and operates the business. You own the company, but the company owns and operates the business. In this way, you are legally separated from your business and the liabilities it generates. If someone slips and falls in a store operated by your corporation or limited liability company (LLC), then your company would be held responsible instead of you. This creates a barrier between your business operations and your personal assets.
There are limits to this protection, however. For example, you are always responsible for your own actions, so if you’re the one who mopped the floor and forgot to post a wet floor warning sign, both you and your company could be held liable when someone slips and falls. Also, you are responsible for obligations you personally guarantee, and in certain circumstances courts will disregard the company entity and hold the business owner responsible in what is known as “piercing the corporate veil.”
There are very few circumstances where it is advisable to operate a business without the protection of a corporation or LLC. Since every business creates the potential for liability, your personal assets will be at risk unless you can mitigate all of the risks created by your business through some other means, such as insurance. Sometimes business owners decide that the potential liabilities created by their businesses are very small or they conclude that they have adequate protection from insurance. But it’s rare that a business shouldn’t be incorporated.
Could I Be Held Personally Liable for My Company’s Contracts?
If you haven’t incorporated, then yes, you are personally on the hook for your business’s contracts. If you have incorporated, you shouldn’t be personally liable in most cases as long as you sign the contracts correctly.
When you do business through a corporation or an LLC, you should think of yourself and your company as separate persons. You don’t own or operate the business—your company does. You own the company, and you do things on behalf of the company such as sign its contracts, but you don’t directly own the business assets and you don’t enter into contracts on your own behalf.
When you sign your company’s contracts, you are acting as an agent of the company—on its behalf. You have to make that very clear. This is usually done by listing the company as a party to the contract in the first paragraph and also in the place where the contract is signed, which are known as the signature blocks. You should also list your title (such as president) next to your name in your company’s signature block.
If someone presents a contract to you that has your name instead of the company’s name in the first paragraph or in the signature blocks, you should have the document corrected before you sign it. Otherwise you may be responsible for the contract instead of the company.
Do I Own My Website?
So far we’ve been dealing with legal issues relating to liabilities, but there’s a quirky part of the law involving ownership of written materials that every business owner should be aware of. This involves copyright law.
When you hire someone to create work product for your company, such as marketing materials or the code behind a website, rights to those materials—known as copyright—are automatically created. What you might not know is the copyright vests in the person creating the materials—and not your company—even if you’re paying the creator specifically to create the materials for you.
This is the default situation under copyright law, which is the opposite of what you might expect. Most people intuitively believe that they automatically own materials that they pay for, but that’s not the case.
Although the default under copyright law vests copyright ownership in the creator of materials, this default can easily be overcome through your contract with the person you’re engaging to create your marketing materials or your website. Your contract should contain a clause by which the creator assigns the materials to your company. It’s that simple.
Consider a Corporation
Although you probably don’t want to spend a ton of time thinking about legal issues, you should consider whether or not to incorporate. You should be careful when signing contracts, and you should make sure that you own materials that you pay to create, such as your marketing materials and your company website. If you keep these questions in mind, you’ll be able to focus on running your business.
Guest Author Bio:
Brian Rogers is the founder of Blue Maven Law, LLC, a law firm that focuses on small business mergers and acquisitions as well as advising small businesses on legal issues. A contracts aficionado, Brian publishes theContractsGuy blog, edits the contracts section of the Missouri Courts Bulletin, and frequently writes about mergers and acquisitions, contracts, and other business and legal topics.
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