How to Navigate the Legal Issues of Your Small Business: Accounting, Taxation and More
You’ve spent years dreaming of your own business, perfecting your product or service, and establishing a loyal customer base. Now it’s time to take the final leap into the world of independent ownership. But before you sign on that dotted line, it’s essential to understand the legal implications of going independent. In this blog post, we'll go over some of the most important legal implications when operating a small business. If you’re preparing to launch or grow your small business venture, it’s useful to have an overview of the most common legal issues in business ownership. Whether you’re thinking about incorporating, contracting with independent contractors rather than employees, setting up trusts for estate planning or another type of entity for tax purposes, these considerations will help you make informed decisions and tackle potential pitfalls before they become problems.
Accounting and Taxes
Accounting and tax issues often go hand in hand — and can be tricky for small business owners to navigate. There are many strategies for managing the finances of your business, but a few key areas to be aware of include: The type of business structure you choose can impact the degree of tax liability you incur. Sole proprietorship, partnerships, S corporations and C corporations are all taxable entities. Individuals can sometimes mitigate the risk of large tax payments by using deductions — such as the home office deduction, travel and meal expenses, and more. Trusts and other estate planning tools can help to reduce the amount of inheritance taxes payable when you pass away and leave your business to your spouse, family members or other heirs.
Employee vs. Independent Contractor Determination
One of the most common questions small business owners face is whether to hire employees or work with independent contractors. It can be a tricky decision, and the IRS offers only a general “right-wrong” test to assess it. While there are no universally applicable rules, there are a few things to keep in mind as you make this determination:
Employees:
You must withhold federal and state income taxes from their paychecks, pay Social Security and Medicare taxes (FICA), and pay federal unemployment tax on their wages. You’re also responsible for providing workers’ compensation coverage for your employees, and you may be held liable for their on-the-job injuries or other damages. You must withhold federal and state income taxes from their paychecks, pay Social Security and Medicare taxes (FICA), and pay federal unemployment tax on their wages. You’re also responsible for providing workers’ compensation coverage for your employees, and you may be held liable for their on-the-job injuries or other damages.
Independent Contractors:
You don’t have to withhold federal or state income taxes from their pay, don’t need to pay FICA or federal unemployment taxes on their wages, and don’t need to provide workers’ compensation coverage. But you do need to make sure you don’t cross the line into misclassifying workers as contractors.
Intellectual Property Protection
According to legal experts such as lawyers, IP protection is critical for many businesses. You can register a trademark for your brand name, slogan or logo. Patents are available for inventions, such as new processes or products. And copyrights can safeguard your original written and recorded content — including software programs such as antivirus software, VPN software and more, photographs and more. The most important step in protecting your IP is to document it. Keep written records of when and how you created your products and materials, and note any discussions or agreements with others in regard to their use. Keep your business communications, agreements and contracts in written form as well. And make sure to register your IP with the appropriate government agency — such as the U.S. Patent and Trademark Office — to help protect it against theft and misuse.
Company Organizational Structures
What type of legal structure is right for your business? You have various organizational options, including sole proprietorship, S corporation, limited liability company (LLC), partnership and more.
Sole Proprietorship:
This type of business is easy to create and maintain — there’s no need to file special paperwork with any state or federal agency. However, it’s not protected against lawsuits or debts. The business owner’s name and assets are on the line if something goes wrong. This type of business is easy to create and maintain — there’s no need to file special paperwork with any state or federal agency. However, it’s not protected against lawsuits or debts. The business owner’s name and assets are on the line if something goes wrong.
S Corporation:
This corporation offers the same protection against lawsuits and debts as other corporations, but has a few more restrictions. The S corp is beneficial for small businesses that want to reduce their federal income tax liability. This corporation offers the same protection against lawsuits and debts as other corporations, but has a few more restrictions. The S corp is beneficial for small businesses that want to reduce their federal income tax liability. Partnership: A partnership business is formed when two or more individuals or entities band together to conduct a trade or business. All partners are equally liable for any debts and legal issues involving the partnership. A partnership business is formed when two or more individuals or entities band together to conduct a trade or business. All partners are equally liable for any debts and legal issues involving the partnership.
Limited Liability Company (LLC):
This is a hybrid between a partnership and a corporation. An LLC protects the personal assets of the business owners from being used to pay business debts and lawsuits.
Conclusion
Make sure to close the books on your old job as well as open them for your new one. Make sure your employer follows all necessary (and some perhaps unnecessary) procedures when you’re transitioning from a W-2 employee to a 1099 contractor. These are just a few of the legal implications of going independent. Navigating the world of business ownership is challenging, with pitfalls around every corner. But if you keep these issues in mind as you plan your new business, you’ll be well-equipped to steer clear of trouble.