Managing Legal Issues for a Small Business

4 minute read

Whether you run a small, medium
or large business, you will undoubtedly need to handle various legal issues.
Some tasks you can do on your own, while others really require a lawyer. As a general
rule of thumb, the larger your company, the more employees you have, the greater
your need will be to hire an attorney.

When and how to hire a lawyer

The first thing to determine is
if you really need an attorney. They cost hundreds of dollars per hour, so if
you’re anything like me, you’d like to avoid that expense. Of course, while you
can ask an attorney to handle many legal aspects of your business, there are a
number of legal tasks you can handle yourself, with a little research. Some examples

  • Establishing a basic business structure.
  • Applying for an Employer Identification Number (EIN).
  • Submitting IRS forms.
  • Obtaining a domain name for your company.

It goes without saying that anything
involving a lawsuit will probably require a lawyer. Avoid that at all costs by setting
things up properly from the start. It’s a good plan to build a relationship
with a lawyer when you set up a new company, before you’re in desperate need.

Cliff Ennico, attorney and author
of Small Business Survival Guide succinctly and accurately states, “If you’re
being sued, it’s too late.” He goes on to advise that once you’re in the court
system it’s hard and expensive to get out.

When you decide that you need a
lawyer, interview a few to find the right match. Create a list of questions
ahead of time, so you don’t get tongue-tied during the interview.

It’s a good idea to find an
experienced lawyer, who has connections to other lawyers who might help out if
a need arises. Make sure to hire a lawyer who knows your industry well and has
other clients in that arena. Having said that, avoid one that represents any
fierce competitors.

While your list of questions are
important, it’s also good to gauge his or her communication skills. A good
lawyer must be able to explain complex legal issues in an easy to understand
way, helping you to prevent problems before they happen through education.


One key legal decision you’ll
need to make before you start is which business structure is best for your
needs. You can establish an LLC, S or C corporation yourself if you do a little
research. Or you can hire an attorney to help you set it up. They usually
charge a one-time fee.

There are various advantages and
disadvantages to each option, so make sure to do your homework before settling
on a structure. For instance, while a sole proprietorship is inexpensive and
easy to set up, you’ll be personally liable for all debts and lawsuits. On the
flip side, with an LLC, you are protected if someone sues you, but there are
fees involved and the paperwork can be confusing.

When starting up a new company, make
sure to determine permits and licenses you might need. Don’t forget to consider
any zoning regulations that might apply as well.


As a business owner, you will probably
need a variety of contracts. It’s wise to hire a lawyer to help you create these,
so you are well protected. Some common contracts you might need would be:

  • A Non-Disclosure Agreement (NDA)
  • A partnership agreement
  • An independent contractor contract
  • A client contract

The NDA is something you need if
you have any sort of proprietary information that you plan to share with
anyone. Examples might include the content for a book you’re hiring an
independent ghostwriter to pen, or your database of client information you plan
to share with employees. Along those lines, you might consider asking your
employees to sign a non-compete agreement as well, ensuring they can’t try to
steal your clients.

You’ll need a good partnership
agreement if you plan to run your business with someone else, even if that
person is your best friend. Every single aspect of your arrangement needs to be
put in writing. A few examples would be:

  • What each person does and what they each should contribute.
  • Who gets paid what amount of the profits.
  • How decisions are made
  • How disagreements are settled.
  • What happens if the partnership dissolves.

If you plan to outsource to
independent contractors, you’ll need a good Work
for Hire
contract template. You will need to customize one for each job and
contractor, depending on the service required, but having that template will
save time later.

Client contracts need to be
complete and clear, but not overwhelmingly long and complex. It’s a fine line.
Do your best to negate any warranties your client might naturally expect and be
sure to include a section requiring arbitration if a dispute arises.


Hiring your first employee

If you plan to hire full-time
employees, you’ll need to research and comply with state and federal
regulations. Of course, if you only need to hire independent contractors, you
don’t need to go through the following steps. It’s important to know the
difference, so that you handle their employment taxes appropriately.

When hiring employees, you’ll
need to apply for an employment identification number (EIN), so you can file reports
to your state agencies and pay taxes.

Next you’ll need a system for
recording all the employment taxes you withhold. You need to save this data for
at least four years. These records will help you in the future to monitor your
progress and keep track of expenses you can deduct later. You will need to file
the IRS Form 941 quarterly, so each employee is credited with the taxes that
were withheld from their paycheck.

Have each employee fill out an
I-9 form, verifying their eligibility to work legally in the United States,
within three days of their hire. As their employer, you must keep this I-9 form
on file for at least three years after the hire or, if you fire them, for one
year following that event.

You will then need to report your
new employee to your state directory. To get a list of New Hire Reporting
Centers check out this list of state agencies:

And finally, you’ll need to carry
workers’ compensation insurance and place posters in the workplace, informing
the employees of their rights in this area.

As a new business owner, it’s
important to keep on top of all your basic legal concerns from the get-go. It
might be tempting to push them off until later, but you’ll find your company
will run smoother if things are set up correctly from the start.

As Ben Franklin said, “An ounce
of prevention is worth a pound of cure.”