Business Basics and Law - An Introduction

by John Bandler

This article introduces some important legal considerations that apply to business. This can help small business owners or startup creators move forward, and help students understand important concepts.

This is not intended to be exhaustive so you can conduct additional research and should seek expertise as needed. We all lack infinite resources, so the key is building our own knowledge and understanding basic principles, and then knowing when expert professional assistance is required, then effectively hiring and communicating with that expert, and finally making a business decision.

I will cover these areas:

  1. Value provided: goods, services, partnerships
  2. Organization entity type and location
  3. Governance (management), including risk management, protection, and legal compliance
  4. People
  5. Ownership and financing
  6. Accounting and taxes
  7. Assets (including intellectual property)
  8. Starting your own business?
  9. When to hire an attorney
  10. Conclusion
  11. Additional resources

1. Value provided: goods, services, partnerships

This would be part of your business plan, and I don't like to leave important things out. So here we recognize that providing value is a business' first priority. To create or continue a business, it needs to provide something of value. Often this value is in the form of goods (products) or services, provided to customers or clients (individuals or organizations). But in general the concept is providing value to individuals, organizations, or even society.

While creating or providing this value, one may need to enter into contracts (which I cover in another article). There are many ways that businesses can increase the efficiency, quantity, or the reach of the value they provide. This is going to involve partnering with others in some form. A business that produces a product needs materials, and that means obtaining materials from somewhere. A business that provides a service may need others to properly deliver it. Companies need to reach customers, and may partner to make this happen.

2. Organization entity type (and location)

Entity formation and consideration of entity type and location is an important business consideration. An entity is often desirable and gets "personhood" within the legal system. An entity can enter into contracts, open bank accounts, receive payments, and pay taxes. Creating an entity also reduces personal legal liability (of owners and managers) for acts done by the organization, facilitates investment or financing, and has other benefits.

a. For-profit or nonprofit? The first consideration is whether it will be a for-profit or nonprofit (not for profit) organization.

  • A for-profit organization is (not surprisingly) designed to earn a profit for the owners. The company and owners will pay their taxes on that profit (as a general principle).
  • A non-profit organization is designed to do something for a greater public good, and not to enrich individuals. Thus, a non-profit may be exempt from taxes, might be allowed to receive charitable donations (for which donors could get a tax deduction). In exchange for these benefits, the organization may need to file financial documents with the government which may be made public (e.g. IRS 990 or NYS Char 500), and also comply with other rules.

The next two considerations a for-profit business faces is (b) location of formation and (c) type of entity. Business formation is pursuant to state law, so founders would first decide what state to create their entity in. Each state has their own laws and categories of entities. These decisions are made after considering taxation requirements, potential legal liabilities, and more.

b. State of formation

Business founders need to consider what state to create their entity in. The logical choice of formation is where the business will be located. Thus, a business headquartered and operating in New York would first consider New York, and the government entity that administers entity formation is the New York State Department of State.

Many organizations chose states other than their "home" state to incorporate, such as Delaware. That is because Delaware has laws, fees, privacy protections, and legal protections for organizations that make it attractive for businesses. Thus, many businesses headquartered outside of Delaware choose that state to incorporate. In exchange, the state of Delaware gets fees and taxes from businesses, consumers (who have to pay for company information), lawyers, and other litigants.

c. Entity type

Founders need to choose an entity type, here's a quick list:

  • Sole proprietorship (actually this is not an entity type, but reflects a choice not to create any type of entity, and just do business as an individual)
  • Nonprofit
  • C-corporation (incorporated, Inc.)
  • S-corporation (an election of a small business c-corporation to be taxed a certain way which might be beneficial for some small business owners)
  • Limited Liability Corporation (LLC)
  • Professional Limited Liability Corporation (PLLC) (for example, in NY "professionals" like lawyers and doctors can form a PLLC, but not an LLC)
  • Partnership
  • Limited Liability Partnership

d. Entity name and DBA

When forming, the founders need to decide upon an entity name, which needs to meet certain requirements, as laid out by the state law and perhaps also trademark law. Generally, that name needs to be unique within that state (but someone might have used that name in another state).

Businesses may "do business as" (DBA) another name. That DBA may need to be registered with the state or local government.

e. State(s) of operation

Once the business forms in a particular state, they need to evaluate what states they are operating in. They may need to register with those states.

3. Governance (management) (including risk management, protection, and legal compliance)

The organization needs to be governed (managed). In a sole proprietorship this is simple, the individual decides what to do and then does it.

In larger organizations increasing levels of formality are required. The organization is subject to many legal requirements and needs to comply with them. It needs to fulfill its mission (providing value somewhere), but also pay taxes and file financial documents with the government, comply with a large array of legal requirements, and enter into contracts. There needs to be processes to ensure the organization does this properly.

Ultimately, people make decisions, but often there needs to be a process and mechanism to specify who contributes to the decision making and how it is done.

To govern an organization, people need to be appointed to governance roles, and documents may need to be created (see my other articles relating to organization documents such as policies and procedures.

Consider these documents which may indicate how an organization can operate and govern itself:

  • Bylaws
  • Articles of Incorporation
  • Charters
  • Policies
  • Standards
  • Procedures
  • Guidelines
  • Manuals

Consider these people or groups of people who play a role in managing and running an organization:

  • Owners
  • Board of Directors (Board of Trustees, Trustees, etc.)
  • Chief Executive Officer, Executive Director
  • Other officers of the corporation and senior management
  • Middle management
  • Lower level management
  • Employees, contractors, interns, etc.

Also consider that management of an organization is going to include decisions about:

  • How to best fulfill the organization's mission (for profits need to generate revenue)
  • Protection of the organization and risk management, to include cybersecurity and cybercrime prevention
  • Legal compliance, to include registration, licensing, taxation, consumer protection, employee protection, cybersecurity, and privacy.
    • Do you need a cybersecurity policy for your startup and you can't afford expert assistance? See my free cybersecurity policy.

4. People

People work in organizations, manage organizations, and are subject to being managed. As we think about laws and issues relating to people, we should consider compensation, contract, employment law, anti-discrimination laws, and privacy.

Generally, employment in the U.S. is "at-will", meaning there is no guarantee of permanent work for the employee, and the employer does not need to demonstrate good cause to terminate the employee.

Employment contracts may address important areas of lasting importance, to include compensation and benefits, and contingencies for during and after employment. It may include grounds for termination, non disclosure and non compete requirements and more.

5. Ownership and financing

An organization may need money (capital or financing) to start, grow, or continue its operations.

An organization can also obtain a loan (financing) to support it's operation, and the loan would need to be paid back, typically with interest. The person making the loan needs to be satisfied that the business will actually repay the loan, or has assets (collateral) that are of value to be seized if the loan is not repaid.

An organization is owned by a person, people, or other organizations. Organizations can sell equity in the company (a portion of the ownership of the company) in exchange for money (raising capital), and this can happen in a number of ways.

In sum, here are some ways the organization can raise capital. An important question is whether the money needs to be paid back (a loan) and the terms of that loan, or if it is in exchange for a share of ownership in the organization.

  • Personal or organizational loans or financing
  • Pre-seed financing
  • Seed financing
  • Crowdfunding
  • Angel investors
  • Venture capital and private equity
  • Series A round (then, B, C, etc.)
  • Initial public offerings (IPOs) (offering public shares in the company, and subject to securities laws)

6. Accounting and taxes

Lets just say that accounting and taxes are really important.

  • Tracking funds helps with making good business decisions.
  • Organizations need to protect from internal and external theft and fraud. Good accounting helps.
  • When more than one person or organization is involved, all parties want to ensure they are getting their fair share of the profits, and that the accounting is transparent and accurate.
  • The government is always involved, and they want to be sure taxes and filings are being made, and are accurate.

7. Assets (including intellectual property)

Businesses need to consider their assets, which will include:

  • The ability to provide value
  • People (To be clear, people are not "owned" assets of an organization. But the right people -- treated properly -- are essential for organizations)
  • Physical assets (buildings, equipment, vehicles, inventory, goods, etc.)
  • Intellectual property (copyright, trademark, patent, trade secrets -- see my articles on those topics)

8. Starting your own business?

If you are considering starting your own business, do some risk analysis. What input is needed (money and time), what are the chances of success (and failure), and what happens if your new business does not succeed (fails).

It is good to dream and to try. It is amazing to think of what certain people have built and accomplished in their business ventures, including their vast (arguably obscene) wealth. Think of people like Steve Jobs, Elon Musk, Jeff Bezos, Mark Zuckerberg, Bill Gates, and more.

It is also important to be realistic about chances of success. Many startups fail. We may want to emulate that startup which is now a billion dollar company. Well, that company now dominates that market and plays hardball against competitors. They may crush your startup without much thought.

Have you heard the saying "Fake it till you make it"? I don't recommend that as a philosophy or practice for life or business. Some people will call it fraud. "Fake it till you make it" only worked for Elizabeth Holmes (of Theranos) for a limited period of time, Bernie Madoff pulled it off for longer. In the end truth and justice caught up to them.

9. When to hire an attorney

Unfortunately, hindsight is often the best judge of whether you needed to consult an attorney, find the right attorney, or listen to the attorney's advice.

Ideally, every person and business can obtain good legal counsel for any business decision that affects law. But attorneys are expensive, not every attorney is always right, and even after consulting with a great attorney, business decisions still need to be made.

As in all areas of business and life, it comes down to risk management, and some basic questions.

  • What decision am I making that affects law and the future of my business?
  • What are the risks?
    • What are the potential threats (negative events)?
    • What are the potential harms from those threats? How costly might they be?
    • What legal actions or results might occur?
  • What (if anything) should we do to manage those risks? Try to change the terms? Walk away from the deal? Find another way?
  • What are the costs for managing that risk? Cost vs. benefit analysis.

It takes a good and ethical attorney to properly advise on legal risks and put them in the context of business risks. Such an attorney will advise you on the relative risks, and whether it is worth investing further. Hindsight is always 20-20, predicting the future is harder!

Often, it is a business decision after weighing the legal risks.

10. Conclusion

Understanding business law basics is important for anyone running, creating, or thinking about creating a business. Law never operates in a vacuum, so I try to put everything within the perspective and priorities of what businesses need to think about.

This is a brief summary with many simplifications, bringing complex subject matter to all readers in an understandable and accessible manner. This article is for myself and students, and anyone else in need of introductory information. It is not legal advice nor consulting advice, and is not tailored to your circumstances. Nor do I profess to be an expert in all things mentioned above, the point is for you to know when to consult an expert, be able to find the right expert and then intelligently communicate with them.

11. Additional resources

My articles on relevant areas of law and business protection

Outside resources for business

Small Business Development Centers (SBDC), a partnership with the Small Business Administration (SBA)

Local bar associations sometimes offer free information, webinars, or even services for small businesses.

This article is hosted at https://johnbandler.com/business-basics-and-law, Copyright John Bandler, all rights reserved.

This article is also available on Medium.com at NOT YET (though not updated as frequently, without the references, and probably not formatted as well).

Originally posted 5/1/2022. Last updated 5/2/2022.