Laws you need to know to start a business

Government agencies, which were intended to support business activities on local levels and assist in issues with state and federal regulations, have already noted the drastic personal bankruptcy in the recent years and the rise of bankruptcy filings. In order to prevent the collapse of the US economy, Congress considers the reforms in personal bankruptcy laws and their impacts on demands for consumer credits and supply of small business funding. Undoubtedly, the potential growth of small businesses will affect the growth of the American economy.

Still, what about local, state and federal regulations and laws that may affect the start up of any kind of business? Truly, it is hard to make the complete list of laws and pitfalls that may affect the start and operation of your own business, but let us examine the most common laws, which may be applied to business and prevent from liabilities and painful monetary payments.

Business Formation Laws

The first step you need to take for proper formation and operation of business is to choose the business entity – either it will be a sole proprietorship, limited liability company, partnership, or corporation – the number of state laws that will govern your future business will determine the personal liability, taxes and, certainly, paperwork. Depending on the business entity, state laws will request and control the legal aspects of your business – what kind of legal documents and contracts must be written and enforced.

Small Business Job Protection Act of 1996, Small Business Paperwork Relief Act of 2002, Small Business Regulatory Enforcement Fairness Act of 1996, Title 37 of the Code of Federal Regulations (Patents, Trademarks, and Copyrights) – are just a part of almost 30 common state and federal laws, not even taking into account regulations on local level.

After considering business entity and the involved laws, you must analyze every perspective of formed business. Do you need business license, permission, hire employees?

“Laws you need to know to start a business”

What kind of goods you are going to sell? What laws can be applicable to your given business

 (e.g. hazardous waste is not related to service business) and what loopholes you may find, starting the business (common practice is not always legal), so that you would not find yourself in the situation of law violation.

Hiring Laws

Until you need to hire new employees and are in business for yourself, you do not need to be familiar with these laws. But it is rather uncommon practice and sooner or later you will need more staffers. You need to pay great attention to laws that control and regulate hiring process, terms and conditions of employment, particularly to those that forbid discrimination, which is based on race, sex, religion, age and others. In order to avoid discrimination during the hiring process, you should better make a list of required skills, experience and background of every applicant for the given standards of job position.

The following are the laws that regulate employment terms and conditions: Title VII of the Civil Rights Acts (prohibits employment discrimination), the Occupational Safety and Health Act (regulates labor and health security), the Family and Medical Leave Act (unpaid leave up to 12 weeks/year), the Age Discrimination in Employment Act, ERISA (The Employee Retirement Income Security Act), the Immigration Reform and Control Act (prohibits aliens to work without documentation that proves the right to work in the USA).

Besides, business owner must take into account such labor standards as minimum wage, or child labor that are included in the Fair Labor Standards Act; equal wage to male or female employees (the Equal Pay Act) and two significant acts as to Americans with disabilities and pregnancy discrimination – in both cases owner will be amenable to law for discriminating people, who are mentally or physically disable (if he/she has 15+ staffers), and women, who are pregnant, having a child or need corresponding medical care.

“Laws you need to know to start a business”

Employment Laws

Such labor laws are aimed at the bargaining power between owner and staffers, employer and labor unions. They give certain power to employees (such as lockouts, strikes, picketing, etc.), so that the employer could satisfy their demands. The employment laws are governed on the federal and state level, by administrative agencies, as well as by judicial decisions. The National Labor Relations Act (NLRA) was given an authority of governing the relationship between employer and his/her employees and union, and of interstate commerce’s regulation. Any business that is involved in interstate commerce is affected by this act and its amendments (Taft-Hartley and Landrum-Griffin Acts).

In the case of employer’s act of violation, he/she will be obliged to give an account before the independent General Council, established by NLRA or before the National Labor Relations Board (NLRB). Even, if your business is not subjected to the NLRA, you will have to satisfy other federal and state regulations that may dictate employer’s behavior, employees’ workplace, healthcare conditions, the terms of retirement and discharge. Among them are: Age Discrimination in Employment Act of 1967, Equal Pay Act of 1963, Family and Medical Leave Act of 1993, Occupational Safety and Health Act of 1970, Small Business Job Protection Act of 1996, etc.

Consumer Protection Laws

The Department of Consumer Affairs that deals with consumer affairs at state level regulates given industries and protects clients, who consume the produced goods and services from these industries. Some of the laws that protect consumers at federal and state levels and are regulated by Federal Trade Commission and the US Department of Justice include: Fair Credit Billing Act, The Fair Credit Reporting Act, Fair Debt Collection Practices Act, Unfair of Deceptive Practices Act, Home Ownership and Equity Protection Act, Federal Trade Commission Act, Gramm-Leach-Bliley Act and Truth in Lending Act.

“Laws you need to know to start a business”

As a business owner, you must be aware of these acts, especially in the state of California, which has the strongest consumer protection laws, because any kind of fraud, unjust business or advertising practices, defective production will make you legally liable to the laws that pertain and regulate business activities in your city, county or state; even setting aside that fact that credit rules and mandatory disclosures are also regulated by consumer protection laws. Besides, regulatory entities on state and local levels, may encourage consumers, who use services and goods of certain industries, to act privately as a law agents, according to the Civil Code, sect. 1750

Contract Laws

Preparing the contract and negotiations are the key issues in starting up any business, so the owner must be aware of the laws that affect the contract’s content and further negotiating process. The contract law that will enforce your contract (promise) is a double-edged weapon and you must recognize its usage. On the one hand, if you breach a contract – the law gives you legal remedy; on the other hand, if you perform a contract – it will be recognized as a duty enjoined by law. One of the parties, who makes a promise, must receive a detriment, or adequate consideration, and since that time the contract will be legally binding promise that will be governed by common or private laws and state statutory.

The basic principles of the contract’s common laws can be found in the Restatement of the Law Second, Contracts. Private laws are not subjected to state laws, whose basic rules may be disregarded, and include agreement terms between the parties, who have exchanged promises. Statutory laws have a governing body in almost every state, the Uniform Commercial Code, and deal with the formal execution of contracts and its categories (e.g. signing of a written document). The key articles of the Code include general provisions (Article 1), sales (Article 2), and secured transactions (Article 9).

“Laws you need to know to start a business”

The business owner must keep in mind that both federal and state laws regulate all categories of contracts, disregarding business activities and sector, and that contract laws will not only beneficially affect your business. The real world of business, where each party may shark another side, hides the unforeseen situations, and first one of them is a breach of contract.

It is a threefold concept that occurs if the side has failed to perform the promise on time, performed it not according to agreement terms, or has not performed it entirely. In order to solve the contract dispute, the parties may use: the informal method, the court system or lawsuit, small claim (when the case is estimated under $3,000 – $7,500), mediator, binding arbitration. In any of the mentioned types of dispute resolution, the breaching party will be subject to the remedies:

–         Damages – compensatory, punitive, nominal, or liquidated (payments in any form);

–         Cancellation and restitution – cancellation dispenses from agreement obligations both sides and cancels the contract; restitution puts the non-breaching side to the initial position, as it was before the breach of contract;

–         Specific performance – occurs in the extraordinary cases, when damages are not considered as sufficient legal remedy.

Covenant not to complete is a rather advantageous agreement for the employer, for when an employer hires new staffers, he/she is investing efforts, time and training to raise a professional and the brain-drain may create potential competition in the same area. The usage of this gained knowledge totally depends on the employee and without formal written document, after leaving the employer, this very staffer will not be prevented or restrained from starting the like business or company. Therefore, the covenant not to complete covers the area and time frame for the employee not to perform legal business activities, and, besides, prevents from new employees’ hiring and training. Since this agreement is not welcomed in courts, the employer must make it clear, defined and specific.

“Laws you need to know to start a business”

Indemnity agreement may sound strict for some companies, for it deals with financial responsibility, for example, medical insurance contracts, landlord-tenant agreements. Especially those business owners, who operate amusing and leisure activities, are putting their company at risk, because of sudden damages and harms that may occur, while skydiving or riding at the amusement park. Some other parts of contracts laws include lease, licensing and underwriting agreements, oral evidence, power of attorney, restrictive covenants and statute of frauds. Each one of them will protect you, as the business owner, from fraudulent conduct, clear and defined promises and make them valid in regulatory agencies and satisfy the contract’s requirements.

Tax and other laws

The truth of taxes that are in every sphere of our lives has already become a reality, as well as the variety of taxes that affect your business: income, estate, gift, sales, employment, excise and generation skipping transfer taxes cover all business entities and individuals. All these laws are structured in regulations, statements, codes and sections of states, cities, etc.

Federal taxes law are found in: Title 26 of the Code of Federal Regulations, federal tax court decisions, Title 26 of the US Code – the Internal Revenue Code, proposed and temporary regulations, revenue ruling and procedures, private letter rulings, which are issued by the Internal Revenue Service. Other laws that may affect your business are: environmental, trademark and patent, and zoning laws.

The US torts

Negligence, trespass, fraud, products liability, intentional misconduct, strict liability, etc. – are the subdivisions of the tort law, or torts, of the United States. The most part of clients, who address the lawyers are well informed of compensations (medical costs, pain and earnings recompense) they can obtain for the sustained stress and losses. According to the tort

“Laws you need to know to start a business”   “Page #7”

law the person, who has caused you pain, suffering, damage, harm, must pay you. Since assault, fraud and others are no longer accepted in state criminal laws, tort laws may vary from state to state. Gillin, Jacobson, Ellis and Larsen, California’s personal injury law firm, cite as an example some case results and the outcomes of reckless misconduct: for intellectual property/business litigation were recovered $90 million; violation of Trade Secret cost $19.5 million;

lawsuit against Newark, California issued $780,000 to plaintiff employees; two plaintiff employees were recovered $600,000 in a case involving their employer San Jose, California; lawsuit against a pharmaceutical company has recovered $375,000 for a Bay Area woman (data obtained from Verdicts and Settlements section).

These selected case results prove that starting a business is simply the tiniest issue that may arise in the ocean of the US laws and the pitfalls it is hiding.

But let us look closer at each of the torts’ categories:

Negligence – is the duty to take reasonable (depending on situation) care and is the most commonly used law, when persons, who obtained actual and proximate causes of damages may be given liability insurance that exceeds the list of contract and employment laws. Incurred losses are based on the tortfeasor’s delicts, probable, yet not prevented, employees’ damages, NIED (negligent infliction of emotional distress) – though this practice in not recognized nationwide, intentional misconduct, product liability (business owner’s liability for unreasonably hazardous production) and professional negligence, which is a malpractice.

Plaintiff employee may be awarded additional punitive damages for reckless, offensive and careless misconduct and in certain cases may cause substantial losses to the business owner.

Products liability – makes business owner liable when the defective production turned to be dangerous to the consumer. The defects of the production that cause harms to the user can be subdivided into three categories: design, manufacturing, and warning defects.

“Laws you need to know to start a business”

Strict liability – is incurred when business owner is involved in extremely dangerous activities and does not depend on the measures and efforts the owner makes and the absence of negligence. He can be made liable for claims for given product liability, trademark claims, copyright violation, or even the transportation of explosive substances. “Strict” is based on the owner’s misconduct and the results, disregarding his/her intentions or unintended standards’ infringement.

Intentional torts – include any intentional and offensive act that causes fear or harm to the plaintiff. The definitions and standards of these torts vary from state to state and in some state criminal laws are prohibited. The basic intentional torts include: assault, battery, trespass (to land, chattels, and conversion), fraud, false imprisonment, IIED (Intentional Infliction of Emotional Distress), nuisance, invasion of privacy, and defamation (slander, libel, offence of a public figure).

In some kinds of torts, owner may be required to describe intent of certain harmful actions; on the other hand, the plaintiff’s violation of the statute can lead to revision of liability. The ‘but-for’ causation, when the danger would not have happened, can be limited by proximate cause, except foreseeable danger or harm. Still, the owner will be liable for harm in any degree, disregarding the harm itself, if this harm was intentional or actual. The owner may also face vicarious liability, if his/her employee made an injurious act, while being employed.

In the case of contributory negligence, the plaintiff may recover part of the amount, or even get nothing, because of his/her own negligence within the scope of his/her employment at a work place. After any tort claim, the business owner can get either monetary payments (the amount depends on the degree of harm) or court order to discontinue harmful or hazardous activities.

So, one thing is clear – before starting a business, consult with lawyer, take time and get familiar with all laws that pertain to your business to avoid pitfalls and liabilities.


Jacobson, R. (2007). Verdicts and Settlements. Retrieved March, 18, 2008, from