What legal acts apply to your business? It all depends on your payroll.
New business is good news for New Orleans, and it’s beginning to boom in the Crescent City. With startups springing up seemingly on a daily basis, the “Silicon Bayou” is living up to its namesake.
But as a burgeoning entrepreneur takes that next step to develop his/her great idea into a small business, there are a few legal matters that need to be addressed. Failure to cover all the bases can be costly further down the road.
“Don’t be afraid to talk to a lawyer,” warns E. Howell Crosby, partner at Chaffe McCall, L.L.P. “Look at it like your doctor. You need a lawyer – even if it’s just a general practitioner – who you trust, who you know that if you have an issue, he or she is going to help you or refer you to the right person.”
Tips for New Entrepreneurs
Amanda Bourgeois, associate at Kean Miller L.L.P., advises that budding business owners spend the time to perfect their legal documents as early as possible.
“It’s important, on all aspects, to spend the time, and sometimes a little more money, to think about things and deal with them before they become issues,” Bourgeois says. “It will save a lot of headaches and money down the road in legal fees.”
First and foremost, an entrepreneur needs to decide on the right legal structure. Will the company be a corporation, a limited liability corporation, a sole proprietorship? In addition to deciding on the entity, it’s important to think about who’s going to be a shareholder and what their rights are.
Help on this front can be found online at the Louisiana Secretary of State’s office (sos.la.gov) which is also the place to register a trademark. Bourgeois says this latter step is a prudent one that is commonly overlooked.
“Are you going to have any intellectual property needs that you need to have protected? Is the nature of your business something that you’re going to need to register a trademark or a service mark or a trade name?” she asks.
Both Bourgeois and Crosby agree that having clear human resource guidelines for employees is of the utmost importance, as an unaware employee can become a huge liability, costing the business money and possibly a leak of information to competitors.
“You need to make sure your employees know what you expect from them,” Crosby says, “and that can be anything from personal use of Internet at work, to holidays, to how they can be fired or quit if it doesn’t work out, etc.”
Both also emphasize that clear organizational documents can be a saving grace, especially if a company has more than one owner. This, they say, should be done when the company is formed.
“This is where I see most issues arise,” Bourgeois says. “In those organizational documents you can spell out everything to where if one of you dies, does your stock go to your kids or does the other owner have the option to buy you out? If one of you wants to sell, does the other owner get the option to buy your shares so you don’t have a third party come in? It can be a little uncomfortable talking about these issues, but if you spend a little more time on the front end you’re dealing with it before the issue arises, so usually people are more levelheaded.”
Company size is also an important variable in these discussions. There are legal distinctions that are created as the size of a company changes. Businesses that have fewer than 15 employees have to comply with fewer employment laws than those that have more than 50.
For example, whether acts like Title VII of the Civil Rights Act, the Age Discrimination Employment Act, American with Disabilities Act, The Family and Medical Leave Act and Affordable Care Act apply to a company depends upon how many people are on the payroll.
“It’s important, on all aspects, to spend the time, and sometimes a little more money, to think about things and deal with them before they become issues.”
-Amanda Bourgeois, associate at Kean Miller L.L.P.
Fewer than 15 employees
If a business has fewer than 15 employees, there are three important employment laws that need to be considered: The Fair Labor Standards Act, worker compensation laws and employee payroll tax laws.
Of the three, worker’s compensation is the simplest; all it really requires is that you buy the insurance.
Payroll taxes – which include unemployment compensation, Social Security and income taxes – are next in line. Payroll taxes can be taken care of by a business owner, but Ed Harold, partner at Fisher & Phillips L.L.P., warns that small businesses might want to consider getting a little help.
“You can learn how to do it and do it yourself,” he says, “but often, particularly for small businesses, it is more efficient and cost effective to have a payroll service that calculates all of those taxes for you.”
Of the three most important employment laws to keep in mind, Harold warns to pay particular attention to the Fair Labor Standards Act – an act that applies to businesses that make at least $500,000 a year.
Some businesses get in trouble, he says, when they don’t understand the differences between nonexempt status, which is what most people think of as hourly employees, and exempt status, or salaried employees.
“Many people start businesses and think, ‘I’m going to pay everybody a salary and I’m not going to have to pay anyone overtime,’” Harold says. “And that’s not how the law works. A small business needs to be aware that a salary is only half the equation. To have somebody that you don’t have to pay overtime to, they have to fit into a certain level of duties: management duties, administrative duties, basically people that exercise discretion and judgment in the operation of the business. For small businesses, that’s a very limited set of people.”
15 to 50 employees
Businesses with more than 15 employees have the same legal liabilities as their smaller counterparts, as well as a few additional laws – including most employment discrimination laws.
Title VII, which prohibits discrimination based on race, color, religion, sex, or national origin, applies, as well as the Age Discrimination Employment Act and the Americans with Disabilities Act, both prohibit discrimination because of age, physical or mental disabilities.
“Now two things become significantly important,” Harold says. “The first is very practical, and that is you might want to consider purchasing Employment Practices Liability Insurance to help cover the cost of the defense if you do get sued. The second is you have to start documenting personnel actions and keep records of promotions, raises and discipline notices. Because once you’re in an environment where you’re subject to litigation, if someone says you were being discriminatory you’re going to have to produce the evidence that shows you’re not.”
More than 50 employees
With 50 employees, all the aforementioned laws apply and two more are triggered – the Family and Medical Leave Act and the Affordable Care Act.
FMLA provides employees with certain rights relative to taking time off from work, which can be tough for some businesses. If a business just hits the 50-employee mark, for example, losing a key employee for 12 weeks can be difficult.
“There’s a lot of paperwork with the FMLA,” Harold says. “You have to fill out forms, you have to give the employee particular forms, and it becomes a very timeconsuming process.”
Finally, the Affordable Care Act – a new legal obligation that requires employers to provide affordable healthcare coverage to their employees – is definitely a factor for businesses that hit the 50 employee mark. Unlike smaller businesses, they can be fined for not providing health insurance to their employees. There are many different plans on the market, and a legal professional can be of great help in this situation.
For all companies, there are also state laws to be aware of, and it is important to check in with the Secretary of State’s office in order to ensure compliance and keep abreast of new laws.
Crosby also recommends getting legal documents reviewed annually; they might require updating as a business grows or changes. He warns not to be lulled into a false sense of security. Good business and legal coverage requires vigilance.
“Once you do get your documents in place,” he says, “it’s like going to the doctor. You want to get them checked out every year or so to make sure that as you grow, the sophistication of your documents and the coverage that it is providing for you is adjusted to take that into account. It’s not just something you do at the startup phase and then put it on the shelf and don’t worry about it.”
“Many people start businesses and think, ‘I’m going to pay everybody a salary and I’m not going to have to pay anyone overtime. And that’s not how the law works”
-Ed Harold, partner at Fisher & Phillips L.L.P.
Required Compliance by Size
15 or fewer employees
•Fair Labor Standards Act
•Workers compensation laws
•Payroll tax laws
•Age Discrimination Equality Act
•Americans with Disabilities Act
50 or more employees
•Family and Medical Leave Act
•Affordable Care Act
Legal Advice Checklist
•Decide on legal structure
•Create clear human resource guidelines
•Obtain business licenses and permits
•Protect any website databases
•Refrain from speaking ill of competitors
•When taking on investors, create investor and shareholder agreements
•Prepare clear organizational documents in case company dissolves