By Renee Petro
Ira Dansky is an experienced lawyer who has been a SCORE Westchester business mentor for the past five years. He warns that entrepreneurs must get their legal affairs in order before they have customers, employees, suppliers, partners, or investors.
Dansky advises start-ups to choose a business structure that gives them the right balance of legal protections and benefits. The business structure affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your liability.
The four most common business structures are:
- sole proprietorship
- limited liability company (LLC)
A sole proprietorship is a business started in your name as the one owner (a partnership is started by two or more owners). In both cases, there is no legal separation between you and your business. You can therefore be held personally liable for the debts and obligations of the business, including the results of employee actions.
A limited liability company (LLC) and a corporation are both business entities that protect a business owner’s assets should they face any legal issues. For example, with an LLC, if your business loses a lawsuit and your business can’t afford to pay the judgment, as the owner you will not be forced to pay the money yourself.
Dansky also recommends that business owners open a business bank account and use it for all deposits and spending. “No matter which business structure you choose, it is important to separate your business money from your finances,” he counsels. By establishing an Employer ID Number (EIN) and a separate bank account for your business, you can better protect your personal life from legal and tax-related problems.
Business liability and casualty insurance protects the financial interests of companies and their owners from claims arising from business operations, including
- property damage
- physical injury
- formal lawsuits
- third-party claims
Employee practices insurance (EPLI) covers businesses against claims by workers that their legal rights as employees of the company have been violated (for example, by discrimination based on sex, race, age, or disability). Workers’ compensation insurance covers medical expenses and a portion of lost wages for employees who have an injury or illness related to the scope of their employment or job duties.
Protecting Products and Services
A trademark can protect your rights in the name of your business, logo, products, and services. You can check prospective names against the official trademark database maintained by the United States Patent and Trademark Office. This is in addition to registering your “Doing Business As” (DBA) name with the county your business is located in.
Patents keep others from being able to sell a particular invention for a specific period. They are granted by the patent office after the owner has disclosed the details of the invention.
A non-disclosure agreement (NDA) is a legal document used to safeguard your business’s proprietary information. It is a written contract between two people or organizations that governs the sharing of confidential information that has been revealed to them. For example, one of Dansky’s SCORE mentoring clients started a candy business, and once it moved production from her home kitchen to a commercial bakery, her recipe needed to be legally protected in writing before they started working with the vendor.
The Importance of Contracts
Contracts state the terms and conditions related to the sale of your products and services. They limit liability, set specific terms for payment, and terms and conditions are needed for websites and e-commerce communications. Written contracts are also needed when you have business partners, collaborate with others, hire employees, get funding for the business, or work with consultants. “A written legal contract states responsibilities, the nature of the relationship, protects against claims to the business, and adds specific protections for the business owner,” explains Dansky.
NOTE: Ira Danksy worked for 20 years as general counsel for a very large diversified multinational fashion company. He is an active SCORE Westchester business mentor who has expertise in legal issues, intellectual property protection, general business management, and finance. To request Ira as a mentor for your start-up or existing business, click here.