Entrepreneurs have no shortage of ideas for new products or services that sometimes carry enormous potential. Their enthusiasm, creativity, and careful planning can be integral to successfully outpacing their competition. However, entrepreneurs sometimes overlook the importance of managing the legal aspects of business creation and growth.

Issues involving a startup can seem complicated, intimidating, and even a bit tedious or unnecessary. However, understanding the legal challenges new businesses face and building the confidence to address them directly can help lower risk and remove barriers that may impede launching and growing a business.

Some important aspects of starting and scaling a business include:

Each of the above areas can impact business success. Neglecting to address these important legal aspects can significantly increase the chance a business owner will encounter business regulation concerns, lawsuits, or cash flow challenges.

Columbia Law School’s online certificate program, A Legal Toolkit for Starting and Scaling Your Business, offers business owners a chance to learn about these issues so they can make the right legal choices for their ventures.

Legal Structure of a Business

One of the fundamentals of learning how to start a business is choosing a legal structure. A legal business entity possesses distinct legal rights. It has the power to own assets such as property and equipment, enter business contracts, pay taxes, and file lawsuits (or be sued).

Most businesses fall into one of three categories:

For-profit: An entity that operates for the purpose of making money (for example, Apple and General Motors).

Nonprofit: An entity that is tax-exempt and works to benefit a specific community or society (for example, National Audubon Society and United Way).

Social enterprise:  An entity that seeks to make improvements in environmental, financial, and social wellbeing, and may also seek a profit (for example, Ben and Jerry’s).

After identifying the right category, an owner should choose a corporate structure. Many business owners do not take this step for a variety of reasons—most often because the process seems difficult and costly—but creating a formal corporate structure is not complicated. Completing this step offers valuable legal protection for owners and businesses, and it allows businesses to meet IRS regulations for how and when they pay taxes.

Common business structures include:

Each of these structures offers advantages depending on the business. Business owners will learn about each business structure in the certificate course, A Legal Toolkit for Starting and Scaling Your Business.

Business Contracts: Are They Necessary?

Some business owners, especially small-business owners and those in creative fields, may assume that business contracts are unnecessary based on the scale of their venture; however, almost every type of business can benefit from having formal contracts in place with clients.

Most contracts do not require complex legal jargon. In the simplest terms, they set expectations for business relationships. For example, someone who runs a bakery may need a contractual agreement with local suppliers to lock in a price for a set volume of ingredients each week or month. 

The company may also have contracts with stores that agree to sell their baked goods and with a chef to oversee the kitchen and develop new culinary concoctions.

No matter the situation or size of the business, written and enforceable contracts encourage everyone involved to consistently meet expectations. 

Types of Business Contracts

Business owners can choose from a variety of business contract types, depending on the nature of the business relationship and the industry. Generally, these contracts fall into three areas: general business contracts, employment contracts, and sales contracts.

General Business Contracts

Business partners may sign a general business contract that defines the responsibilities of each party. General contracts also cover such issues as equipment leases, indemnity, and non-disclosure agreements.

Employment Contract

These types of contracts are drawn between a business and its employees, or a business and its contractors. Employment contracts detail the services employees will provide and the payment they will receive for services rendered.

Sales Contracts

A sales contract details the product or service someone will receive in exchange for the amount they will pay. This type of business contract is also used to transfer property ownership from one person or entity to another person or entity, such as the bill of sale for a piece of land. 

Business Rules and Regulations

Rules and regulations vary depending on the industry and location, but every business will be required to follow IRS tax rules based on its business structure. Government agencies at all levels regulate companies, from national chains to mom-and-pop restaurants. This applies not only to for-profit businesses, but also to nonprofits and social enterprises.

Many businesses might be required to be licensed in the state, county, or city in which it operates. Local governments also may regulate restaurants and other food services within its boundaries. ​​Those agencies can cite businesses for violations, so it’s best for owners to research and understand all regulations. Given the number of agencies involved, it’s best to understand all regulations beforehand than to receive notice of a violation later.  

Online-Based Businesses

Owners of small online businesses may not understand that the IRS may require tax payments on business profits, even if the business only operates online. As with a traditional brick-and-mortar business, an online enterprise should create a business structure and follow all rules and regulations. Web-based businesses also need legal protections, including:

Employees vs. Contractors

For a business to hire employees, it must obtain an Employee Identification Number (EIN) from the IRS. Other documents required for employees include:

For contractors, businesses must file a Form 1099 with the IRS that details payments made. The IRS may also require a Form W-9 from the contractor if it is a legal entity.

Raising Money to Start Your Business

The first steps to starting and scaling a business take place before business owners seek funding. They can establish credibility and improve fundraising efforts by establishing that the business owns the intellectual property they are trying to monetize. The business should have a formal structure and a dedicated business bank account.

Businesses also need working capital. Determining the amount needed requires calculating current assets—the resources needed for day-to-day operations, such as cash or cash equivalents, inventory, technology, tools and machinery, and expected revenue in the coming year—and current liabilities—any financial obligations a company faces in the next year or within the normal operating cycle, such as bank loans, lines of credit, work not yet completed, and unpaid but completed work.

Fundraising Methods

Business owners have a variety of options when it comes to fundraising.

Bootstrapping: A business owner provides funding by using savings, credit cards, or income from another job. While bootstrapping requires discipline, business owners can benefit from this type of fundraising as it illustrates a high level of commitment to the new enterprise.

Small-Business Loans: Loans from banks may require collateral that a startup business does not have; however, loans may still become available, often at high interest rates.

Crowdfunding: Some entrepreneurs experience success receiving investments and donations through the internet. It’s also a way to gauge interest in the planned product or service.

This certificate course explores in greater depth how to approach fundraising, including: