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You and the Law

Business and law are inseparable. For B-Money, the two predictably merged when he was negotiat- ing a deal for his tracks. At other times, the merger is unpredictable, like when your business faces an unexpected auto accident, product recall, or government regulation change. In either type of situation, when business owners know the law, they can better protect themselves and sometimes even avoid the problems completely. This chapter will help you spot important legal issues for small businesses and provide guidance for dealing effectively with those issues.

The United States is one of the most litigious (from the word litigate, meaning to sue) societies in the world, along with countries such as Germany, Sweden, Israel, and Austria.2 On the other hand, in a 2002 National Federation of Independent Business poll of small businesses, less than 1 business in 10 had been sued in the prior five years. No matter what the perception, the law affects everything about business. Despite all the negative comments about attorneys, attorney jokes, and general re- sentment of the legal profession, the fact remains that if you are going to start a small business, you are going to be stuck with the legal system—virtues and faults both.

Because of that, it is important for you as a prospective small business owner to understand our legal system. Understanding the legal system will help you be less intimidated by attorneys and the law. And that knowledge can help move you from being a passive victim of the legal system, merely reacting to legal threats, to an empowered owner able to use the law to your advantage in a proactive way. Starting a business is risky enough. With the right knowledge about the law and the use of legal counsel, many of those risks can be significantly reduced or eliminated altogether.

It is easy to underestimate the number of laws that apply to a new small business because it is hard to believe how many laws apply—federal laws, state laws, even county and city laws. Let us take a moment and get an overview of the laws most likely to apply.

Table 18.1 provides an overview of some major federal laws in the areas of taxation and envi- ronmental health and safety. Intellectual property laws are considered later in this chapter, and labor and employment laws will be considered in Chapter 19. Even so, what Table 18.1 does not consider are state laws. There are some areas which only states legislate, for example, workers’ compensation and employment security, which we will cover in Chapter 19. There can also be areas where there are overlapping state and federal laws, most typically in civil rights, and in such cases, the more demanding law is the one you should obey.

While the scope can be overwhelming, the good news is that not all laws apply to your business on the day you open. Many laws only start to apply as you reach certain thresholds. For example, tax laws tend to focus on financial thresholds, while environmental laws look at how much waste you produce.

Meanwhile, the state laws applicable to a small business are extraordinarily varied. It is truly a case where one size does not fit all. In Chapter 19 you will see the additional state laws that apply to labor and employment. For any category of laws, it is important to check what is applicable in your state. The Online Learning Center shows how to begin your check on the Internet. State laws can vary dramatically, so one state’s laws are unlikely to be of much use anywhere else.

There is no central online starting point for finding the relevant state laws. One of the best ways to get a complete rundown of the relevant laws is to contact your closest state Small Business Development Center (to find it, type your zip code into the “Get Local Assistance” search box at the SBA website, www.sba. gov). Also, your local SCORE chapter (www.score.org) should be able to help, or at least point you to the right resources. Obviously, you can also work with an attorney to get expert help personalized for your business.

In the next portion of this chapter we start with your key legal expert—your attorney. We talk about how to select and work with an attorney. We also cover how to make some key legal deci- sions, such as choosing a legal form for your business, how to negotiate, liability issues, and con- tracts (in person and online), that come up in business. We conclude the chapter with a discussion of the latest hot topic in law—intellectual property.

You Need a Good Attorney

Setting up a business requires some familiarity with several areas of law—forms of organization, contracts, and licensing, for example. Usually with legal issues, as with health issues, it is best to confront potential problems before they have a chance to get serious. Timely decisions and action may avoid a problem altogether or may make solving the problem much easier and cheaper. Think of legal knowledge as a form of insurance. The key is finding the right lawyer.

First, look for an attorney who is experienced in forming new business entities and handling the needs of small businesses.3 Where can you find such a person? If you do not have someone in mind, get suggestions from small business owners you know and respect. Bankers involved in commercial financing on a regular basis often know which attorneys handle small businesses well. In addition, a trade association for your industry may have suggestions.

These days, it is typical to be involved with more than one attorney. As with doctors, where you might work with one generalist and several specialists, today most businesses need to depend on one general purpose lawyer and several specialists. The law is so complex that no one can be an expert in all areas. Beware of the attorney who tells you he or she can handle all your legal needs. However, if the attorney is in a group practice, there may well be others in the firm who specialize in the other areas where you need specialized help. Ask about the legal specialties covered within the firm when you call to make an appointment. You may make several calls and visits. If one attorney does not meet your needs in terms of qualifications, work ethic, or pricing, there are many others who would like to have your business.

Again, like with physicians, once you have chosen an attorney, having an ongoing relationship helps him or her to know you and your situation when something comes up and you need legal advice on short notice.

Clients and attorneys start with a natural conflict of interest. The attorney wants to make money for the services, and you would like the services for as little cost as possible. In reality, all entrepreneurs know they will have to pay, so the key issues are how and how much you will be charged for legal services.

Typically you and the attorney will discuss and decide on the type and rate of charges up-front, before you engage his or her professional services. The attorney-client agreement should definitely be in writing and signed by both parties.4 Take the time to read the agreement before signing. Ask for it to be sent to you to review. If the agreement is hard to understand, think about what other work from the attorney will look like, and consider whether that attorney is right for you. There are four ways attorneys typically charge:

1.         Hourly fees:    Hourly fees can vary greatly from one part of the country to another, as well as from firm to firm and even within a firm. Attorneys with more experience often charge more than new law school graduates. Prestigious law firms often charge more than smaller, less recognized firms.

2.         Flat fees: Flat fees are a fixed amount paid for a certain task. For example, an attorney may have a flat fee for handling all the paperwork to establish a corporation.

3.         Retainers: When using a retainer, the attorney will be paid a specified amount every month regardless of the workload for that month. Usually there is a retainer agreement which specifies what types of work that monthly fee covers and when and how much additional fees are when circumstances change.

4.         Contingency fees: You have seen the attorney ads on television announcing, “I don’t get paid unless you get paid.” That ad is describing a contingency fee. Contingency fees are typical in accident (especially personal injury) situations, but are not usually used in everyday contract and business-related matters. With a contingency fee, the attorney will take a percentage of your recovery (if your side wins) as his or her fee.

Just like anything else, pricing of legal services is based on supply and demand, especially your negotiating demands. Do not be intimidated by having to negotiate price with an attorney. Regardless of what the attorney says, the attorney’s fee schedule in all four types of pricing of services may be negotiable, particularly if the attorney is a more senior member of the firm with the authority to nego- tiate. Diplomacy is recommended in these negotiations because once the original issue of pricing is resolved, it is in your best interest for you and your attorney to have a positive working relationship.

Trade associations are another source of information for business start-ups. Many trade associa- tions compile legal information for their members, including laws particularly applicable to certain types of businesses in various jurisdictions and proposals for changing the laws that affect your industry. As you may be aware, these organizations also hire lobbyists to push the agenda of an industry or trade group within the various branches of government, both federal and state. Because of the limited resources of small businesses, membership in one of these organizations can be par- ticularly valuable in informing the business owners and giving them more power as a group to influence legislation that affects them. In addition, through these trade associations it is possible to meet others in your industry and make noncompetitive connections that help you network and keep up with industry trends. Remember that you learned how to find your relevant trade, industry, or professional association in Skill Module 3.1 in Chapter 3.

Be wary of legal information on matters such as statutes or agency regulations offered by indi- viduals who seek to profit from doing business with you. For instance, if you are looking for space to locate your business, be wary of what real estate agents tell you regarding the law. Never forget, these folks make their money when you buy something or if they arrange some lease agreement for you. It may not be in your best interest to buy property, but real estate agents are not likely to tell you that because they will make money by getting a percentage when you buy.

For example, in the issue of zoning, go to your local governmental unit and check on the zon- ing of the property before you seriously consider it.5 Do not take the real estate agent’s word on the zoning. Be sure that the business you plan may be legally operated in that location. If the building will need any remodeling to suit your purposes, be sure to contact the local government regarding safety standards, exits, entrances, and so on so that the property will pass inspection once the remodeling is done. In the contract with your remodeler, it is best to insert a provision that the remodeling has to be done according to applicable building codes before the contractor is fully paid.

In the contract to purchase or lease the property, insert a provision that the property has to be zoned such that your business can be legally operated in that location. By contacting the local gov- ernment, you should be able to get guidelines on zoning, placement, and size of signage, parking, property tax, and other matters related to the lo-cation.6 Also, be sure to inquire about future plans regarding street repairs, expansions, and closures in the area, which could affect your ability to do business. Do not rely on the real estate agent for any of this information.

As noted at the start of this section, there are three elements to the law—finding the right information, negotiating the specific outcome you want, and then taking care of the paperwork associated with it. Often as businesspeople become familiar with the legal specifics of their business, they take on more of the responsibilities. Most often they do the negoti- ating themselves (you will see how later in this chapter), and where the paperwork is standardized (as we see below with standard contracts) even handle aspects of the paperwork themselves. Even some legal research can be done, especially when the business owner is made aware of new legal concerns by the trade or professional association. But for all of these things you can eventually do for yourself, when learning the business or when facing a new or unusual situation, it makes sense to go with the pro. When in doubt, call your lawyer.

Small-Claims Court

There is also a legal option available to entrepreneurs that does not involve an attorney. It is typically called small-claims court. Despite the name, many of these courts will accept cases where the stakes are as large as $10,000. Most are designed so that ordinary citizens can bring their cases in. Yes, this is the sort of court you see on afternoon television—Judge Judy, The People’s Court, Judge Joe Brown, and the like include a lot of small-claims court cases.

Believe it or not, you can learn something about preparing yourself for small-claims court by watching the television shows: (1) evidence helps, (2) have everything ready and with you when you go to court, (3) practice your explanation, (4) be on time, (5) stay calm, and (6) above all, stay respectful to the judge and court.

Small-claims courts work only when you are owed money, can prove it (proof you did the work, and that your customer did not pay—think of purchase orders, contracts, invoices, past-due letters, etc.), and have exhausted other procedures like calls and letters to the customer. If there is a reason the other party did not pay—for example, they said your work was late, shoddy, or not as promised— you need to prove you are in the right, otherwise you will have a tough day in court.

The typical next step starts with finding the right court—either where your business is located or where the person (or business) you want to sue lives or works. Realize this means small-claims court is not really useful for problems in other states, unless it is a short drive for you. To find the right court for your state, look at nolo.com lists of small-claims courts on their website. Go to nolo .com, select “Rights & Disputes,” and then select “Go to court or mediate.” Look for “Small Claims Court” to find the listing and help by state on the process. Most state bar associations also have pamphlets on small-claims courts. There is a video showing this on the Online Learn- ing Center.

Contact the court to find out the specifics and costs of filing. These fees are typically less than $50, and are something you can charge the customer for if you win. You will probably have to fill out a form and give a written explanation of the problem. Make copies of your evidence to include in the packet. If you have potential witnesses, list them and get their testimony written down. Take the packet and the originals of your evidence to court to file the complaint with the clerk.

When you get to court, the TV lessons apply. Look the judge in the eye as you talk. Speak up and sound confident. Stick to what you wrote. Answer questions directly, briefly, and politely. Don’t get angry at the other party, especially if they get angry or they insult you or the court. If you have a court date, be there no matter what. In case of emergency, it might be possible to get one postpone- ment (called a continuance)—if the other party agrees. Otherwise, the case will be thrown out and you cannot refile it.

If you win, the court will give you official support to get your money; however, it remains mostly up to you to collect payment. The customer will have a fixed amount of time to pay up. If they don’t, you can get the clerk to serve the losing party with a certified letter reminding them of the court order. A personal delivery can often be arranged for an additional fee. If that doesn’t get the job done, the court can help garnish the loser’s income or attach assets of the losing party, making them yours until you get the payment the court ordered. But realize that a defendant with little income and few assets will be difficult to collect from, regardless of the decision, so it only makes sense to go to small-claims court if you think you will be able to collect, should you win.

Choosing a Business Name

As we saw in Chapter 4, some entrepreneurs start out with the goal to start a business, others with an idea they want to commercialize. The legal issue for either approach is protecting the business’s name or idea from copycats. Both of these are issues of intellectual property. At this point, we will consider the ways you can protect the identity of your business, while later in the chapter we will consider the other forms of intellectual property that can protect your idea.

The name of your business is called its trade name. It can also be called an assumed name or a doing business as (dba) name. If you use something other than your own name (e.g., The Jerome Katz Company), then the trade name must be registered in the states in which your firm does business. The filing is typically called an assumed name filing or a fictitious name filing. In most states, this filing is made with the Secretary of State’s office. You can find these at the SBA website (www .sba.gov/content/register-your-fictitious-or-doing-business-dba-name). The same office usually offers a public database to see the names of the people behind other businesses using trade names.

There may be more than one business using the same name within a state. Most states allow sev- eral firms to use the same trade name, as long as the firms are in different parts of the state, or are in different lines of business (e.g., Courtesy Cleaners, Courtesy Pharmacy, etc.) in the same town, and as long as none of the firms have received a trademark or service mark in that name. You can check this using the Secretary of State database mentioned above, as well as the trademark search at the U.S. Patent Office (www.uspto.gov).

When selecting a trade name, you want to find one that is memorable and descriptive. “Social Networking Experts, LLC” tells customers who you are, better than “Darlene Jones, LLC” does. If you have plans to grow, factor that in too. Since St. Louis is known for baseball and beer, but not bread, the founders of the St. Louis Bread Company had to create a new name when they left their home market. Now the country knows them as Panera Bread. Given how Panera’s menu has grown, it is possible that “Bread” may someday get dropped from the title, too.

In the end, the other key element in picking a trade name is your own goals. It can be very satisfy- ing to have your name on a successful business—think of Donald Trump! But also realize that it can make it hard to sell the business. Imagine the Trump Companies without Trump. On the other hand, for a family-owned business, having the family name visible can be a benefit. Part of what makes Ford a bit more personal brand compared to General Motors is that there are members of the Ford family who own stock, sit on the board, and occasionally even run the place. The Ford family stands behind the Ford line, even today.

Choosing a Business Form

Most often choosing the form of your business is the next legal decision you need to make. Except for sole proprietorships, business forms are types of separate, legal entities. A legal entity is a unit recognized as having rights and duties apart from the owners of the company. Legal entities can own property, sue, and be sued.

The original type of legal entity recognized in England, the source of United States law, was the individual. An individual may hold property ownership and be a plaintiff (the party who files a law- suit) or a defendant (the party who is sued) in a lawsuit. As time passed, the law recognized other legal entities that were not human beings. For example, about 1600 the corporation was recognized as a separate entity in England. In other words, a corporation itself, without its shareholders (or owners), could hold title to property and could sue or be sued in its own name, without its owners being sued.

Today there are seven general types of business form—sole proprietorships, general partner- ships, limited partnerships, C corporations (commonly known as just “Corporations”), S corpora- tions (also known as Subchapter S corporations), professional corporations, and limited liability companies (commonly known as LLCs). Each general form has advantages and disadvantages, which are outlined in Tables 18.2, 18.3 and 18.4. For start-ups, the most popular form is the sole proprietorship, although the approach is not always optimal for a small start-up, as we see below. General partnerships are the second most popular, and C corporations are third. These results are shown in         Figure 18.1 .

Unless you are going to see a lawyer for advice on what legal form of business makes sense in your situation, or you are using an interactive guide (like the “Formation Assistant” at www .bizfilings.com/wizard.aspx) to get a general idea about the best type of business form to use, the best choice for a new small business is a limited liability company (LLC). This is because LLCs are simple to set up and relatively easy to maintain once started. They can be used for an individual or a group of partners. If you have partners, it makes sense to create an agreement specifying ownership,

profit splitting, buyouts, and the like, called articles of organization. When properly structured, an LLC offers legal protection to owners for assets they personally hold outside the LLC. It also gives the owners the benefits of single taxation, if they choose to go that route. (See Table 18.5.)

The major advantage of the sole proprietorship is that it is extremely easy to set up. There are no forms to file; you just start doing business. The problem is one mentioned in Chapter 17 when discussing risk. In a sole proprietorship, the owner and the firm are one and the same. If an employee has an accident while at work, the business is liable for the damages—and the owner is personally responsible too. This means the sole proprietor’s home, stocks, savings, and even personal property could be taken to pay damages. (See Table 18.3.)7

Partnerships can vary dramatically. They can be set up quickly with nothing more than with a handshake or with a formal legal agreement called articles of partnership (the latter is usually safer). They can be set up so all partners are equally and fully responsible for the business’s obli- gations (called a general partnership) or where most partners are liable only for the amount they invested in the partnership (called a limited partnership—but every limited partnership has at least one general partner). The total liability issue in general partnerships is like that of sole proprietor- ships, so although easy to start, partnerships are something to avoid. Maybe you are not sure that an LLC is right for your situation, or your lawyer has suggested another form. How do you go about thinking through the issues? There are six major factors at play in the decision on the form of a business organization to set up:

1.         Personal liability of the business owner—how much the owner can lose if there are problems arising from the business.

2.         Taxation of both the entity and its owners—do owners get taxed as well as the business? 3.     Complexity and organizational costs in setting up the business and maintaining that entity—

how difficult and costly is it for the owner to maintain the legal form of the business? 4.            Control of the business—who runs the business and how is decision making split among vari-

ous people? 5. Continuity of the business—how long that particular form of business can continue and under

what conditions the business could end. 6.    Ability of the business to raise capital—can the business borrow money, issue stock, or issue

bonds?

Table 18.5 provides a simple summary of how the forms of legal organization differ on the six issues. After going through the characteristics of these various entities, you can easily see how some of the newer and nontraditional business forms, such as S corporations and LLCs, can offer the best of both worlds, that is, limited liability of owners as well as single taxation. Of these newer forms, the easiest to form and the most user-friendly is the LLC or limited liability company. As a result, LLCs should be viewed as a default of sorts, so select an LLC unless there is a compelling reason to choose another form.

If you choose any of the forms other than the sole proprietorship, please be careful to treat your legal form of business as if it were a being separate from the owner(s). When you keep the business separate from you personally, that business entity can have liability apart from its owners. If you fail to keep them separate, such as using personal funds for business purposes or using the busi- ness’s car or equipment for personal purposes, there is a chance that a court may hold that there is no distinction between the entity and its owners in practice. If this happens, called piercing the veil, the court may hold that the owners have some personal liability for debts of that business entity. A good place to start in this area is to keep the finances of the business entity and those of its owners entirely separate. Company bills should never be paid from the owners’ personal accounts using an owner’s personal check. An asset of the business, such as a car, should not be used for personal use without accounting for that nonbusiness use.

Another essential caution comes from recognizing that no form of LLC or corporation will make the owner(s) bulletproof. No matter what form of business a person owns, if he or she causes a traffic accident or accidentally hurts another person in some way (causes a tort), that person may be found “personally liable” in a lawsuit. That person may have to sell his or her car, home, or other assets (including the business) to pay the judgment. On the other hand, if the owner’s employee causes the loss, as mentioned before, the business may be held liable. This is when it makes a huge difference what the structure of the business is in terms of what the owner can lose. If the business is a sole proprietorship or a partnership, the owner may lose personal assets as well as business interests. If the business is a corporation or an LLC, the owner can “only” lose what he or she has in that business.

Similarly, for a newly created LLC or C corporation going to the bank for a loan, it is unlikely that the new corporation will have the collateral base, asset base, or cash flow to convince a banker to issue a loan to the corporation. Regardless of your efforts to shield yourself from liability, the likelihood is that a bank giving a loan to your new corporation will require that you personally sign for the loan, in addition to the corporation’s signing for it. From a banker’s view, a corporation is only as strong as its balance sheet.

Taxation Issues

As you can see in Table 18.5 (and saw in Table 15.2 earlier), the legal form of organization you choose can have an impact on the taxes you pay. For every type of legal form except the C corpora- tion and limited liability company, the taxes are paid by the owner on the basis of the income received from the business. This income can consist of a salary you pay yourself and any profits made by the firm. In these cases, you are being taxed at the applicable personal rate, shown in Table 18.6.

For C corporations, as a shareholder, you get taxed on the income you receive from the firm. This income can be in the form of dividends and profits. The good news is that tax rates for these are lower than for individuals. The bad news is that those profits face double taxation. The C cor- poration files taxes as an entity, and pays taxes on its profits and dividends. When the remaining posttax profits are paid to you as the owner or shareholder, you personally pay taxes again on the income, again at your individual rate. In 2011, dividends had have a rate fixed at 15 percent. But for dividends or profits you are looking at the double taxation mentioned in Table 18.5.

For the other forms of organization (except the LLC), the money you take out of the business is taxed at your individual rate. The firm itself does not pay taxes. This is the idea of single taxation. The good news here is when your business is unprofitable, these losses can also be applied to your personal taxes. So if you are employed somewhere else full time, and run your own business part time, the loss you have from your small business can be used to reduce your overall taxable income for the year.

One thing to watch for is the issue of paying yourself a salary. In a C corporation and S corpora- tion, the IRS expects you to pay yourself a salary that is roughly at market rates. Why would you pay yourself less in salary? Because salary has the added costs of Social Security and Medicare taxes. But paying no salary is one of the red flags that draws IRS auditor attention.

The LLC has been curiously absent in this discussion, but it can operate using either of the ap- proaches described here. To use the C corporation taxation approach, you need to file a Form 8832 with the IRS. Otherwise, a one-person LLC is taxed as a sole proprietorship and a multiperson LLC like a general partnership. Once a Form 8832 is filed, you can’t change it for 60 months, unless the business changes ownership and the IRS agrees.

Because the legal form of organization can make a difference in the taxes you (and the firm) pay, it makes sense to think about which legal form can make the most difference in your annual income. For many small businesses in their first years, losses are typical and profits are not, so it helps to have a form that provides for single taxation. As the firm becomes profitable, the advantages of the C corporation or LLC organized with Form 8832 as a check-the-box corporation can make a lot of sense.

Everything Is Negotiable, and Negotiation Is Everything

Some people argue that business is all about negotiation. While customers go into stores, find price tags, and pay the amount all the time, deals between businesses and even deals between businesses and consumers are often handled through a negotiation. Negotiations are discussions aimed at com- ing to an agreement about a particular outcome.

The ideal goal in a business negotiation is for each side to feel it got what it wanted. Leaving one side feeling a loss, particularly if someone thinks he or she lost and the other side won, only paves the way for future bad feelings, bad reputations, and bad negotiations. Often small businesses entering into negotiations worry that their youth, lack of experience, lack of track record, or lack of resources mean that there is no way they can win. Experience has shown that small businesses, even new small businesses, can do well in negotiations.

Use these four steps to structure a negotiation to achieve a winning solution for you and the other party: prepare, position, propose, and pounce. ?    Prepare what you need to achieve, what you are ready to give up, and what it takes to close rapidly once agreement is reached. Learn as much as you can about the other side, its track record, current situation, and possible needs.

?          Position by putting your best foot forward, show confidence in yourself, your firm, and your prospects. Don’t lie or mislead, but do not apologize. All businesses started small. With the right deals some small businesses grow large and bring their trading partners along with them. Talk about where you see your business in a couple of months or years. Position your firm as a good partner with which the other firm can ally.

?          Propose solutions that provide value and balance for both you and the other party. This is often the hardest part of the negotiating process, but it is also the aspect which has received the most attention. Consider using these techniques for finding mutually winning propositions:

? Seek to create value: Listen to what drives the other side’s needs and seek alternative ways to solve the problem. For example, it says it needs money, but it may be able to work with more time, more flexibility, or a preferred treatment later. Adding new acceptable factors enlarges the negotiated pie.

?          Seek long-term solutions: Today you are small, but tomorrow you may be bigger, so think longer term.

?          Seek balance: Ideally, each side’s contributions should closely balance. Where close bal- ance is not easily achieved initially, structure contingent contracts to ensure balance later. For example, pay a small amount now to get started, but agree to pay a larger amount (e.g., a balloon payment) or a percentage of sales when sales reach a higher level.

?          Seek mutual safety: Where risk is faced, consider sharing risks and rewards so each party is providing some of the safety net for the other, and each shows commitment to the deal working out.

?          Seek outcomes commensurate with investment: Scale returns or considerations accord- ing to the size of the contribution of the party to your success. Aim to satisfy people or organizations that are major factors in your business, and realize you cannot accommodate every small contributors’ every need.

?          Pounce when agreement on any part of the negotiation appears at hand; move to close the deal on that issue. When you have an agreement, even on small issues, pounce on it as a positive outcome, an indicator of future deals to be made. Then get the deal down in writing. When stalled, ask the other party how to move forward.

One fear some people have is being dealt a dirty trick by the other side. Preparation and a long- term view help here. A dirty trick only works when the other party can be confident you will not be able to retaliate or tell others about the dirty trick, since publicizing it will ruin negotiations with others. One-time deals are more prone to dirty tricks; long-term arrangements make them harder to sustain. Also, knowing if the other party has done dirty tricks in the past can help you prepare for them. Being well networked (and letting the other party know you are) can also help since if you are tricked, you can let others know, making the chance of the other party playing dirty tricks on others much less.

What makes all negotiations work is honesty. No one expects you to give up your secrets, but to build trust, you need to offer some information that helps the other side determine where to start negotiating. The optimal strategy is called tit-tit-tat.9 Give up one piece of information on what you need or are willing to offer. Wait for an equal response. If you get one, your negotiation is off to a good start. If you do not get a response, offer one more piece of information. Wait for a response. If you do not get one, bring up the point that so far in the negotiation you have made all the overtures. If the other side is serious about coming to a fair deal, it needs to step up to the table and start talking seriously. If not, then it is clear it is not interested in striking a fair deal, and the negotiation must obviously be over.10

Along these lines, another negotiating tactic that lets you be open about your goals without giv- ing away your secrets involves prioritizing your goals. Let us say you know three key goals you hope to achieve. Go into the negotiations asking for 5 or even 10 goals. In the bargaining process, you can “give up” some of your demands to show the other side you are willing to compromise. As long as you gain some or all of the three key goals you wanted, you are ahead of the game by negotiating.11

Always keep issues of legality in the back of your mind when negotiating without a lawyer pres- ent. Let’s say you negotiate a trade of services with another business—you print its ad brochure, it waterproofs your parking lot. Legal? Yes, but in barter arrangements, you are trading something of value. That means you need to count it when tax time rolls around. If you fail to account for it, you have done something illegal. Twists like that are a good reason to get lawyerly advice until you know enough to go solo.

Legal Liabilities

A huge concern for business owners is liability arising from the business. The simplest form of li- ability is direct liability. Simply put this means the business entity is responsible for something the entity has done. For example, when a customer goes into a fast-food restaurant and places an order, the restaurant employee is there representing the restaurant. The contract formed is between the cus- tomer and the restaurant, not between the customer and the employee. The employee is an agent of the entity, in this case the restaurant. The employee represents the entity. Through that employee’s actions, the restaurant is now bound in contract to provide certain food at a certain price. Failure of the restaurant to honor its contractual obligations will bring direct liability upon the restaurant. The liability could apply through contract or tort law, each of which is described below.

Questions.

1. Which of the forms of organization mentioned in this chapter have unlimited personal liability of the owners?

2. Which of the forms of organization mentioned in this chapter (table 18.5) have double taxation – once at the level of the business entity and next at the level of the owners?

3. According to this chapter, which form of organization is usually the best choice for a new business unless advised otherwise by the business’ attorney?

4. According to this chapter, what are the 6 major factors at play in the decision on the form of business organization to set up for a new business?

5. What are the three most common approaches to settling legal disputes and what are the comparisons relative to cost, speed of resolution and friendliness relative to small businesses?

6. What three ways to take the fear out of contracting are mentioned in this chapter?

7. A patent is a grant by the government to an inventor for what type item for what purpose?

8. What are the three types of patents and what is the duration of each?

9. What are the five steps to protecting trade secrets?

10. What is the reason for registering or filing an application to have copyright protection?

11. Why investigate prior to using and advertising a trademark?

Answer 1

1. Which of the forms of organization mentioned in this chapter have unlimited personal liability of the owners?

A. Sole Propreitors B. General Partnerships

2. Which of the forms of organization mentioned in this chapter (table 18.5) have double taxation – once at the level of the business entity and next at the level of the owners?

A. Corporations

3. According to this chapter, which form of organization is usually the best choice for a new business unless advised otherwise by the business’ attorney?

A. LLC

4. According to this chapter, what are the 6 major factors at play in the decision on the form of business organization to set up for a new business?

1. Personal liability of the business owner—how much the owner can lose if there are problems arising from the business.
2. Taxation of both the entity and its owners—do owners get taxed as well as the business.
3. Complexity and organizational costs in setting up the business and maintaining that entity, how difficult and costly is it for the owner to maintain the legal form of the business.
4. Control of the business—who runs the business and how is decision making split among various people
5. Continuity of the business—how long that particular form of business can continue and under what conditions the business could end.
6. Ability of the business to raise capital—can the business borrow money, issue stock, or issue bonds

5. What are the three most common approaches to settling legal disputes and what are the comparisons relative to cost, speed of resolution and friendliness relative to small businesses?

Three most common approaches - Negotiation, Mediation, Litigation

Comparisons to cost and speed :

Negotiation - Cost - Free and if all the parties agree, the solution is almost instant.

Mediation - Involves attorneys and how they charge ( Hourly fee or flat fee )

Litigation - in case of small businesses, small courts charge $50 which can be claimed from the other party involved in the legal suit, once the case is drawn in favor of the applicant.

6. What three ways to take the fear out of contracting are mentioned in this chapter?

1. finding the right information,
2. negotiating the specific outcome you want
3. taking care of the paperwork associated with it.

7. A patent is a grant by the government to an inventor for what type item for what purpose?

Utility patent as this covers machine, process, method any anything that has a useful function.

8. What are the three types of patents and what is the duration of each?

Utility Patent - 20 Years

Design Patent - 14 Years

Plant Patent - 18 Years

9. What are the five steps to protecting trade secrets?

1. Seek to create value: Listen to what drives the other side’s needs and seek alternative ways to solve the problem. For example, it says it needs money, but it may be able to work with more time, more flexibility, or a preferred treatment later. Adding new acceptable factors enlarges the negotiated pie.
2. Seek balance: Ideally, each side’s contributions should closely balance. Where close bal- ance is not easily achieved initially, structure contingent contracts to ensure balance later. For example, pay a small amount now to get started, but agree to pay a larger amount (e.g., a balloon payment) or a percentage of sales when sales reach a higher level.
3. Seek mutual safety: Where risk is faced, consider sharing risks and rewards so each party is providing some of the safety net for the other, and each shows commitment to the deal working out.
4. Seek outcomes commensurate with investment: Scale returns or considerations accord- ing to the size of the contribution of the party to your success. Aim to satisfy people or organizations that are major factors in your business, and realize you cannot accommodate every small contributors’ every need.
5. Pounce when agreement on any part of the negotiation appears at hand; move to close the deal on that issue. When you have an agreement, even on small issues, pounce on it as a positive outcome, an indicator of future deals to be made. Then get the deal down in writing. When stalled, ask the other party how to move forward.

10. What is the reason for registering or filing an application to have copyright protection?

Copy right makes sure that the rights of the creators are safeguarded, by protecting the creator’s creativity.

This kind of protection is provided to shield the efforts of writers, artists, designers, musicians, architects and many more to create an atomosphere to create more and inspire others to create.

It is for this reason, registering an application for a copyright protection is important.

11. Why investigate prior to using and advertising a trademark?

To help business aim at finding if anyone is using a part or all of trademark and how it is being used. This also helps in finding the responsible party for such violation, or to look out for the parties that violate their own trademarks.

Trademark investigation helps a business to find if a trademark is already in use, or if there is any infringement or if there is any counterfeiting.

Though finding evidence of trademark violations is difficult, most common way to find out is online by using search engine optimization and other relevant web searches.