Legal Issues Quiz

This is a start, but proper corporate formation involves more than an initial filing. It requires multiple essential steps and records. And, while limited liability companies may technically be formed with a simple filing, they are also vulnerable to veil-piercing, just like corporations. Each state has certain requirements applicable to its corporations and LLCs. Depending on your situation, this single filing without more may not be enough.

OK, but sometimes the well-meaning person who thinks they know, doesn’t.

Some online templates and kits are missing essential legal instruments or protections. Some may not be aligned with your vision and intent. If you cannot tell the difference, this may be a red flag.

Correct. None of the answers above is sufficient to ensure your business was properly formed. Legal corporate formation requires multiple steps with sub-steps, and LLCs, with their flexible legal structures, may leave open many legal questions which are best answered by key organizational instruments in addition to the initial state filing. If your entity is not properly formed or its essential legalities not properly addressed upon set-up, depending on your situation, you and your business may be vulnerable and subject to unintended consequences. For a proper setup, you need to take the right steps to bring to life your particular choice of entity with its ownership, governance, and tax structure, and to have the right records in place.

This is an important part of proper entity maintenance, and may not be all that is required.

Even a one-person business may be required to fulfill certain formalities.

Correct. Any business may have internal maintenance requirements along with its statutory and any regulatory maintenance requirements. The requirements depend on the entity type and other aspects of the business, such as the industry, governing instruments, state of formation and any additional states of registration, and other specific factors unique to the business.

Incorrect. This is not a trick question.

Corporations and LLCs are not only for larger businesses or those with employees. If desired, any business should generally be able to elect to use a corporate or limited liability company vehicle to establish certain protections for the business, its owners and its managers (subject to proper formation and maintenance).

Many service providers and professionally licensed practitioners erroneously believe that the only risk their business carries is the risk of their individual, professional negligence, which they expect is covered by their professional malpractice or E&O insurance. But, while insurance may help to cover the cost of certain risks, if the business is conducted by the service provider, individually, without a limited liability vehicle like a corporation or LLC, the risk still belongs to the service provider. And, anything not covered by insurance will fall on the service provider, personally. Moreover, any business may encounter contractual and other issues and obligations not covered by professional liability insurance. Properly forming and maintaining a limited liability vehicle such as an LLC or corporation helps to shift certain risks and liabilities over to the business and off of the service provider.

Very few businesses, if any, actually have no risk.

Correct. There are many legal and practical questions to be answered before determining what form of business is best under the circumstances. Most entrepreneurs who find themselves doing business without a separate limited liability entity land there without realizing they have unlimited personal liability for all of the business’s debts and obligations; fall into the business without making a conscious choice about business entity; aren’t sure whether to invest in a proper business set-up while they’re testing the market; or think they’re too small or that the available protections are not available to them. Business protections are available to even the tiniest, micro-businesses and may be appropriate and beneficial regardless of business type or industry.

In certain situations, you may be an employee of your business. Your governance and tax status may impact your employment status and what constitutes your proper compensation.

This may be proper, or it may be a red flag. Proper classification of workers is based on numerous, particular facts and circumstances examined on a case-by-case basis, per worker.

Classification is not determined according to preference. The written and practical facts and circumstances applicable to the relationship and situation dictate the worker’s status.

Correct. None of the answers above is sufficient to determine classification. Determining whether workers are employees or independent contractors involves a careful legal examination of the particular facts and circumstances applicable to each, separate hire. The law provides no easy, bright line answers in this area. Failure to properly classify your contractors and employees can be costly for your business. Properly recognizing and managing relationships with others who perform work for your business involves awareness and thoughtful engagement on the part of the business owner.

Incorrect. The work your independent contractors and subcontractors perform for your business may not actually belong to your business. In fact, under copyright laws, by default, unless you have written agreements with certain “magic language” and the work qualifies under law, the contractor is generally the author of original authored work they create for you.

This is a good start, but “magic language” may be required and certain other legal concepts may also need to be explicitly covered.

This is a good start, but if the work does not qualify under the definition of “work made for hire”, you may also need to expressly address other legal concepts in your agreements.

Correct. None of the answers above properly addresses all of the legalities at play here. Whether or not your contractors’ work belongs to your business likely involves an analysis of the application of copyright law to your particular situation, along with an examination of other relevant legalities and the service agreements executed between the parties. Good agreements can be developed by the hiring business or the service provider, and may cover numerous issues applicable to the relationship, including ownership of the work.

This is great news, but not determinative of how the service agreement will fare if an issue arises.

While reviewing another business’s service agreement may help you to develop your awareness of certain issues applicable to your industry, it may not be wise to presume another business’s agreement applies to your business as intended, or at all, or that it includes all of the important protections and considerations it should under the circumstances.

While examining service agreement templates may help you to develop your awareness of certain legal issues relevant to your industry, templates generally involve generic sets of provisions that may not address or account for the particular aspects of your business or transactions.

Correct. None of the options above are determinative of whether your service agreement does what it should. A good service agreement should: a) Help you to design your service relationships and transactions; b) Help to get you and your clients on the same page; c) Help you to manage your client relationships; d) Include spectrum of legal protections; and e) Serve as an important and effective marketing tool for your business. The service agreement is typically the last piece of business material your client considers before signing on the dotted line. Tone, tenor, and substance, along with how you use the agreement in your interactions with your clients, all impact your client relationships, the clients’ expectations, and, ultimately, your transactions and the success of your business. A service agreement is not a throw-away document. Rather, it is an essential tool for business success, worthy of special attention.

If you have been in business for any period of time, at the very least you have likely learned something not to do. Such lessons are often the foundation for developing valuable efficiencies and processes which, if shared, could greatly benefit your business competitors. These efficiencies are examples of proprietary trade secrets, as are your contact database, your formulas, your innovations, and other information that is valuable due to its relative secrecy. Moreover, it is incumbent upon you to protect the private and confidential information of clients, customers, personnel, and others who share it with you with a reasonable expectation of privacy and confidentiality.

If everyone in your business is privy to everything, you may not be doing enough to protect the relative secrecy or confidentiality of certain information. And, if protection is based on an unwritten understanding or set of assumptions, the information may be vulnerable. If that is the case, your business is vulnerable.

Written confidentiality agreements are a good start, and additional security measures may also be necessary under certain circumstances.

Correct. None of the above answers is enough to ensure your business’s proprietary and other confidential information is protected. Trade secret information is generally non-public information that provides your business actual or potential economic value due to its relative secrecy, which you maintain through reasonable measures. Private and confidential information of others held by your business must also be protected through reasonable measures. The steps you take to protect the information, including the written agreements you enter with those who may be exposed to the information, all matter. Identifying what you have is the first step to determining how to protect it.