North Carolina Cooperative Extension Service

Legal Issues

There are many legal issues to consider when developing your own business. Such issues are: finding a lawyer, selecting an appropriate form for your business, selecting a name and protecting it, employer and employee relations, labor laws, rental leases for property or equipment, as well as required permits and licenses. This handout highlights different forms of business, the process involved in selecting a business name and important labor issues.

Forms of Business

Type of Business Sole Proprietor General
Partnership Limited Partnership C Corporation S Corporation
Definition A business owned and operated by one person for profit. Two or more people who jointly own or operate a business for profit. One or more partners have limited liability and no rights of management. An organization formed under state or federal law. An artificial entity separate from owners. An organization structured like a corporation, but taxed like a partnership.
Ease of Formation 1. Informal
2. Must acquire all necessary state, federal and local licenses and permits.
3. Name registration.
4. Taxpayer identification number. 1. Informal
2. Must acquire all necessary state, federal and local licenses and permits.
3. Name registration.
4. Taxpayer identification number.
5. Partnership Agreement 2-5 Same
6. Must file a certificate of limited partnership with the Secretary of State.
7. Name must contain words 'limited partnership'
8. Certain records must be kept 1. Formal
2. File articles of incorporation with Secretary of State.
3. Pay filing license fees.
4. Obtain corporate seal, stock certificates, etc.
5. Prepare bylaws. 1-5 Same
6. Must meet S corporation criteria.
7. Must file timely election with IRS.
Period of Existence Terminates at will or upon death of owner. Terminates by agreement or by death or withdrawal of a partner. Terminates by agreement or by death or withdrawal of a partner. Continues until formal dissolution. Not affected by death. Continues until formal dissolution. Not affected by death.
Taxes Profit and loss are reported on owner's state and federal income tax returns. Each partner reports his/her share of profit and loss on his/her state and federal tax returns. Partnership files an information return. Each partner reports his/her share of profit and loss on his/her state and federal tax returns. Partnership files an information return. Profits are subject to taxation at the corporate level and again at the shareholder level. Profits are taxed once. Each shareholder reports his/her profit and loss on individual income tax returns.
Liability The owner's personal assets are at risk. Each partner's personal assets are at risk. Limited partner is liable only to the extent of his/her investment. Limited to corporate assets with few exceptions. Limited to corporate assets with few exceptions.
Dissolution Pay all debts, taxes and claim against business. Close business. Pay all debts, taxes and claim against business. Settle accounts among partners. Close business. Pay all debts, taxes and claim against business. Settle accounts among partners. Close business. File cancellation certificate with Secretary of State. Obtain shareholder approval to dissolve. File statement with Secretary of State. Pay taxes, debts, and claims. Distribute assets to shareholders. Obtain shareholder approval to dissolve. File statement with Secretary of State. Pay taxes, debts, and claims. Distribute assets to shareholders.

*Many entrepreneurs start as sole proprietors. As their business expands, some expand into partnerships and corporations.

*The main disadvantage of a sole proprietorship and partnership is that the owners face unlimited personal liability.

*The main advantage to forming a corporation is limited personal liability.

Selecting the Right Name for Your Business

Legally, there are only a few guidelines to abide by when creating the name of your business. These guidelines are listed below:

*Many state laws require corporations to include the terms 'corporation,' or 'incorporated' in their company name.

*Unless there are obvious, legitimate reasons, businesses cannot use such terms as 'insurance,' 'trust,' 'medical,' or 'bank' in their names.

*Most states will also reject a business name that closely resembles a business name already on file.

*If you use your full legal name to identify your business, you do not have to officially file your business name. However, if you use only part of your legal name or adopt a completely different name for your business, you must register your business name. This filing procedure serves to identify the owners of the business.

*Filing your business name does not protect your business name against usage by others.

Although there are only a few legal guidelines regarding your business name, remember your business name is a critical element to marketing your business. It should be catchy, easy to remember and convey essential attributes about your business. Choose your business name wisely.

Where to File Your Business Name

State laws dictate the process involved in filing your business name. Consult with your attorney to determine the requirements of your state. The general process requires you to complete a "Certificate of Assumed Name" form from the office of the Secretary of State. Sign this form and have it notarized. Publish the certificate in the legal section of the newspaper in two successive issues. Send the completed certificate to the Secretary of State and pay the filing fee. In most states, your filing remains valid for 10 years.

Labor Laws

There are numerous federal, state and local laws that govern employer and employee relations. Before starting your business, familiarize yourself with these various laws. Some well known federal laws are:

The Civil Rights Act of 1964

The Age Discrimination in Employment Act

The American with Disabilities Act

Equal Pay Act

The Family Leave Act

The Fair Labor Standards Act

The Federal Unemployment Tax Act

Workers Compensation Laws

Social Security Tax Laws

Federal, state and local laws all have limitations, however, most laws compliment each other insuring most businesses and employees are covered.

Who to Contact

Business License Information Office
N.C. Department of the Secretary of State
301 West Jones Street
Raleigh, NC 27603
1-800-228-8443

N.C. Department of Revenue (business tax information)
P.O. Box 25000
Raleigh, NC 27640
(919) 733-3661

Conclusion

The information available in this handout is a sampling of some legal issues that face small business owners. For more information, consult with the Small Business Center, the Small Business Technology and Development Center and the local library.

References:

Folleck, Max, How to Set Up Your Own Small Business, The American Institute of Small Business, Volume II, 1989.

To return to The Small Business Information Source click here.

Type of Business	Sole Proprietor	General Partnership	Limited Partnership	C Corporation	S Corporation
Definition	A business owned and operated by one person for profit.	Two or more people who jointly own or operate a business for profit.	One or more partners have limited liability and no rights of management.	An organization formed under state or federal law. An artificial entity separate from owners.	An organization structured like a corporation, but taxed like a partnership.
Ease of Formation	1. Informal 2. Must acquire all necessary state, federal and local licenses and permits. 3. Name registration. 4. Taxpayer identification number.	1. Informal 2. Must acquire all necessary state, federal and local licenses and permits. 3. Name registration. 4. Taxpayer identification number. 5. Partnership Agreement	2-5 Same 6. Must file a certificate of limited partnership with the Secretary of State. 7. Name must contain words 'limited partnership' 8. Certain records must be kept	1. Formal 2. File articles of incorporation with Secretary of State. 3. Pay filing license fees. 4. Obtain corporate seal, stock certificates, etc. 5. Prepare bylaws.	1-5 Same 6. Must meet S corporation criteria. 7. Must file timely election with IRS.
Period of Existence	Terminates at will or upon death of owner.	Terminates by agreement or by death or withdrawal of a partner.	Terminates by agreement or by death or withdrawal of a partner.	Continues until formal dissolution. Not affected by death.	Continues until formal dissolution. Not affected by death.
Taxes	Profit and loss are reported on owner's state and federal income tax returns.	Each partner reports his/her share of profit and loss on his/her state and federal tax returns. Partnership files an information return.	Each partner reports his/her share of profit and loss on his/her state and federal tax returns. Partnership files an information return.	Profits are subject to taxation at the corporate level and again at the shareholder level.	Profits are taxed once. Each shareholder reports his/her profit and loss on individual income tax returns.
Liability	The owner's personal assets are at risk.	Each partner's personal assets are at risk.	Limited partner is liable only to the extent of his/her investment.	Limited to corporate assets with few exceptions.	Limited to corporate assets with few exceptions.
Dissolution	Pay all debts, taxes and claim against business. Close business.	Pay all debts, taxes and claim against business. Settle accounts among partners. Close business.	Pay all debts, taxes and claim against business. Settle accounts among partners. Close business. File cancellation certificate with Secretary of State.	Obtain shareholder approval to dissolve. File statement with Secretary of State. Pay taxes, debts, and claims. Distribute assets to shareholders.	Obtain shareholder approval to dissolve. File statement with Secretary of State. Pay taxes, debts, and claims. Distribute assets to shareholders.