I. Rockets and Entrepreneurs

An entrepreneur is like a rocket headed for outer space: all systems are go. Indeed, upon deciding to execute their respective business plan, entrepreneurs are hurtled forward, away from the comforts of “traditional” life, through their unbridled hunger of the unknown.

Unquestionably, launching a new business is exciting and any hindrance on forward movement leads to frustrating discomfort, and, more often than not, leads the entrepreneur to avoid such disquieting situations. Unfortunately, many times the hindrances entrepreneurs try to avoid are important legal issues that require prompt preventive attention to avoid larger, time-consuming issues from manifesting in the future.    

Thus, like a rocket launch, it is vital for an entrepreneur to conduct an initial systems check prior to launching the business and regular systems checks once the business is on its feet. This article will take a cursory approach on important legal issues entrepreneurs must consider as the business takes shape and progresses forward.  

II. Addressing Legal Issues as they Appear

Simply, many an entrepreneur who attempts to temporarily sweep a legal issue under the rug finds themselves facing costly settlement discussion or costly litigation fees in the future.  It is prudent for an entrepreneur to address each legal issue as it manifests to save the business from unnecessary time and financial waste.

III. Choosing the Right Type of Business Entity

Upon deciding to go forward with a business, an entrepreneur needs to decide what type of business entity is best for the entrepreneur’s and the business’s goals. An entrepreneur needs to decide whether to have the business operate as a sole proprietorship, partnership, limited liability company, or corporation.

Each of the aforementioned business entities has unique characteristics that relate to the entrepreneur’s personal liability  (i.e., how much of the entrepreneur’s personal assets are subject to litigation), ownership rights, and tax implications.

Due to the complexities of each entity model, an entrepreneur should speak with an attorney to discuss which model is best suited for the entrepreneur’s goals.

IV. Protecting the Business

The top three things that many entrepreneurs ignore that lead to future problems are Written Contracts, Business and General Liability Insurance, and Employee and Independent Contractor classification.

a. Written Contracts

Upon entering an agreement, an entrepreneur should reduce the agreement to writing. Unfortunately, verbal contracts not only get distorted as time passes, but they are also difficult to uphold in court. It is important for an entrepreneur to have a written contract drafted and reviewed by an attorney prior to entering into an agreement.

b. Business/General Liability Insurance

Anyone who comes in contact with an entrepreneur or his/her employees can file a claim or lawsuit against the business for any number of reasons ranging from a customer injury to a broken contract. Entrepreneurs should take preventative measures and  protect the business from such unforeseen events by obtaining business liability insurance as soon as possible.

c. Properly Classifying Employees and Independent Contractors

Employees are expensive. Aside from wages, an employer must pay the hidden costs of FICA (social security and Medicare taxes), unemployment insurance, and workers compensation insurance.

Employers often improperly classify employees as independent contractors in an attempt to avoid these costs. However, improperly classifying an employee as an independent contractor could place a business in regulatory crosshairs and lead to costly civil fines, criminal charges, and the potential shutdown of the business.

To avoid these potential consequences, Entrepreneur should meet with an attorney to discuss the statutory and case law differences between employees and independent contractors.

V. Securities Laws

Entrepreneurs typically finance their new business with either personal savings or personal credit lines, money from family and friends, and/or small business loans. However, there are times when the aforementioned is not sufficient to get the business off the ground. As a result, entrepreneurs often look to outside investors to provide capital in exchange for future income and/or partial ownership interest. These types of transactions are considered securities transactions and are regulated by the federal government, state governments, and independent regulatory agencies.

Due to the complexity of securities laws and accompanying consequences should these laws be broken, it is imperative that the entrepreneur contacts a securities attorney in a situation where an entrepreneur is accessing capital from outside investors.

VI. Hiring Legal Counsel

It is important for the entrepreneur to choose proper legal counsel.

Here’s a popular joke that illustrates the importance of vetting legal counsel:

  • A lawyer, an engineer and a mathematician were called in for a test.
  • The engineer went in first and was asked, "What is 2+2?"  
  • The engineer thought awhile and finally answered, "4."
  • Then the mathematician was called in and was asked the same question.  
  • With little thought he replied, "4.0"
  • Then the lawyer was called in, and was asked the same question.  
  • The lawyer answered even quicker than the mathematician, "What do you want it to be?"

An entrepreneur should understand that there are many types of attorneys (e.g., tax attorneys, business formation attorneys, securities attorneys, litigation attorneys). In the event an entrepreneur seeks out legal advice, he or she dedicate time to understand what type of law the legal issue falls under and only an attorney that deals with the respective subject matter after thorough vetting.

University of Nevada, Las Vegas has a Small Business & Nonprofit Legal Clinic that provides representation to entrepreneurs. They can assist in reviewing and negotiating contracts as well as other matters. For more information about the clinic and to request legal services visit: https://law.unlv.edu/clinics or https://law.unlv.edu/content/request-legal-services

VII. Conclusion

Wrapping it all together, an entrepreneur should be proactive by researching relevant legal concerns and addressing such concerns as they arise. These small steps will help the entrepreneur keep the momentum generated from the business’s launch and reduce any unnecessary friction that may deter from the business’s success.

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About the Author

Robert Loftus was born and raised in California. Having received his JD from UNLV Boyd School of Law, he is now pursuing his MBA. Prior to attending law school, he worked in wealth management and spent time traveling through South America, Europe, and Asia. He looks forward to applying his business and legal knowledge to his future profession as a business attorney.

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of RVF or UNLV. In addition, thoughts and opinions are subject to change and this article is intended to provide an opinion of the author at the time of writing this article. All data and information is for informational purposes only.