Becoming a small business owner means taking on some serious legal responsibilities.
However, you don’t need to moonlight as a law student to keep your company secure and compliant. You just need a grasp of the basics and a little expert help.
In this article, you’ll learn about the critical aspects of small business law and how understanding them helps to protect your hard work and investments. You’ll also learn how to choose the right law firm.
What is business law?
Business law refers to the set of rules and regulations that govern your business’s operations, conduct and structure. It aims to protect you, your team and your customers by ensuring your company operates fairly and transparently.
Business laws impact many areas of small business ownership, from how you form and run your organization to how you handle contracts, hiring and customer data.
For example, American business law requires you to follow proper employment procedures, like paying a minimum wage (which varies by state) and providing a safe working environment.
Other key areas that business law covers are:
Business formation. The legal steps for starting a business, such as choosing the right structure (like an LLC or corporation).
Data protection. Rules about how a business collects, stores and uses customer and employee data. It includes compliance with privacy laws.
Contracts. Ensuring that agreements and transactions between parties (such as suppliers, customers and partners) are legally binding and enforceable.
Intellectual property. Protecting your business’s creations, like branding, inventions and content, from unauthorized use by others.
We cover the key aspects of business law in more detail below.
Note: Business laws vary between countries and states, so your exact legal obligations depend on your location. This article examines American business law, focusing on the aspects that impact small businesses nationwide.
Business law vs. corporate law: what’s the difference?
Business and corporate law both deal with the legal aspects of running a company but focus on different areas.
Business law covers legal issues and requirements that impact all business organizations, from small startups to large enterprises.
Corporate law focuses on corporations (legal business entities distinct from their owners) and their structure, governance and shareholder rights.
For example, while business law might determine how a small business owner drafts a vendor contract, corporate law governs how a corporation handles mergers.
Here are the key differences between business law and corporate law:
| Business law | Corporate law |
| Applies to: sole proprietorships, partnerships, limited liability companies (LLCs) and corporations | Applies to: corporations |
| Scope: all aspects of starting, running and closing a business, including contracts, taxes and employment | Scope: the formation and governance of corporations (including corporate finance) |
| Areas covered: business formation, contracts, employment law, tax compliance, data protection and intellectual property | Areas covered: corporate structure, shareholders’ rights, mergers, acquisitions and board governance |
Knowing the differences between corporate and business law will ensure that you find the correct legal information and support for your small business.
5 key areas of small business law to understand
Business law, by definition, is a broad term that covers various legal aspects of company ownership.
Understanding the following key areas will help you navigate potential risks, ensure compliance and protect your business.
1. Business formation
Choosing the right legal structure is one of the most important decisions you’ll make as a small business owner as it impacts your taxes and personal liability.
The options for US business owners are as follows:
Sole proprietorship. You and your business are legally the same entity. You’re personally liable for any debts or lawsuits and you pay taxes at standard personal income tax rates rather than corporate tax rates.
Partnership. Multiple people share ownership and responsibilities. In general partnerships, all partners share liability and management. In limited partnerships, some partners contribute financially but have limited liability and no direct involvement in operations.
LLC (limited liability company). An LLC provides limited liability protection, protecting your assets from business debts or lawsuits. The business doesn’t pay taxes but you’ll report profits and losses on your personal tax returns.
Corporation. A more sophisticated structure that offers the most protection from personal liability. Corporations are taxed separately from their owners and subject to tighter regulatory controls, like being expected to have annual meetings and keep detailed records.
The right structure depends on your business’s size, industry and long-term goals.
For example, freelancing suits sole proprietorship because it’s easy to set up and manage, with minimal paperwork. An LLC or corporation will offer better protection and credibility if you’re forming a larger business with multiple partners or outside investors.
2. Employment law
Hiring employees comes with significant legal responsibilities. Taking those responsibilities seriously helps prevent costly lawsuits and keeps your business compliant.
Employment laws cover various aspects of building a team. Here are the most critical:
Hiring practices. Anti-discrimination regulations, such as the Equal Employment Opportunity (EEO) laws, prevent discrimination based on race, gender, religion and other factors.
Employee rights. Employers must respect worker rights, including wage laws, overtime pay and workplace safety, as required by the Occupational Safety and Health Administration (OSHA).
Employee benefits. Employers are often required to provide certain benefits, like health insurance, family and medical leave and retirement plans, depending on their size and jurisdiction.
As your team grows, managing legal responsibilities as an employer will inevitably become more complex. The help of a professional who knows how to navigate the legal system is invaluable.
Download your guide to managing teams and scaling sales
3. Contract law
Contracts lay the groundwork for strong client, vendor and partner relationships.
A critical component of business law, these documents minimize misunderstandings and provide legal protection if anything goes wrong.
Standard contracts you’ll deal with as an issuer or signatory include service agreements (e.g., with suppliers), sales contracts, partnership agreements and nondisclosure agreements (NDAs). NDAs guarantee the confidentiality of sensitive information, like trade secrets and product plans.
Whatever the purpose, contracts must typically meet several essential criteria for them to be legally binding:
Offer and acceptance. One party makes an offer and the other accepts it under clear and specific terms.
Consideration. Both parties must exchange something of value, whether it’s goods, services, money or a promise to act (or refrain from acting).
Mutual consent. Both parties must understand and agree to the contract’s terms without being forced or misled into the agreement.
Legal capacity. All parties involved must have the legal capacity to enter a contract, meaning they are of legal age and mentally competent.
Legality. The contract’s purpose must be lawful. Contracts for illegal activities are not enforceable.
Some contracts can be oral, but others (like real estate agreements or sales deals over a certain amount) may need to be in writing to be enforceable.
Note: You can use document management tools, such as Pipedrive’s Smart Docs, to track your contracts’ key dates, obligations and amendments.
4. Intellectual property law
Intellectual property (IP) law protects your brand, products and creative ideas from unauthorized use.
It typically involves securing trademarks, copyrights and patents and then managing these rights to ensure long-term protection.
Trademarks stop competitors from using your business name, logo and brand identity.
Copyright protects original works such as written content, designs and software.
Patents safeguard inventions or innovations that are unique to your business.
Securing your intellectual property is vital to maintaining a competitive edge. If you don’t, other companies might take advantage of and profit from your hard work, investment and creativity.
5. Data protection
Data protection laws govern how your business collects, stores and uses personal information – especially customer data.
More than many other legal requirements, data protection laws vary in detail based on company location.
Take the California Consumer Privacy Act (CCPA), which outlines strict guidelines for handling personal data in California. It includes giving consumers the right to stop a company from sharing their information and the power to delete their data from companies’ systems.
Most other states have laws offering similar protections.
For instance, depending on where you’re based, you might be subject to the Virginia Consumer Data Protection Act (VCDPA), Colorado Privacy Act (CPA) or Utah Consumer Privacy Act (UCPA).
Similar data protection laws exist outside of the US and may impact your small business if it operates internationally. For example, the General Data Protection Regulation (GDPR) applies in the European Union (EU).
Why it pays to understand small business law
There will be no substitute for professional legal advice in some scenarios, like lawsuits and contract breaches.
However, a general understanding of business law will help ensure you take the right precautions, know when to call a lawyer and explain what you need.
Here are three advantages of being legally savvy as a small business owner.
You’ll prevent legal disputes
Drafting clear, legally sound contracts helps prevent misunderstandings and costly lawsuits. Knowing how to interpret them as a signatory also stops you from overpromising or underselling.
By avoiding misunderstandings, you can focus on running your small business instead of processing complex paperwork and corresponding with lawyers.
For example, a well-drafted service agreement with a client will clearly outline project deliverables, timelines and payment terms. Everyone knows what to expect, minimizing the risk of disputes.
It also ensures both parties get what they want from the relationship, making it more valuable.
You’ll avoid financial penalties
Keeping up with federal and state laws helps you avoid significant penalties and, in some severe cases, forced closure.
Compliance matters because fines of any size can hurt your business’s profitability.
For example, you can be fined up to $7,500 for violating the CCPA we described earlier or as much as $161,323 for breaking OSHA rules.
Meanwhile, the U.S. Department of Labor states that employers who repeatedly or knowingly violate the minimum wage requirements face penalties of up to $1,000 for each violation.
Avoiding expenses like these keeps you financially healthy and frees you to invest in your company’s growth.
You’ll protect your revenue and reputation
Using IP law to safeguard your business’s intellectual property is crucial for maintaining a strong brand image. It also stops others from profiting from your efforts.
For example, registering a trademark for your logo stops your competitors from using it and confusing your customers.
Imagine another company stealing your name and logo and treating customers poorly. Your company’s reputation would suffer even though you weren’t involved.
Securing copyrights for original content – such as written materials, designs and software – prevents others from copying and distributing your work without permission.
By protecting these and other forms of IP, you ensure that only you can benefit from the assets you create.
Hiring a small business law firm
Even when you understand the basics of business law, professional help is invaluable.
A trusted business law attorney will help you navigate complex legal matters, advise you when laws change and ultimately give you more freedom to run your company.
More specifically, a business lawyer can support you by:
Drafting legal documents, including contracts
Conducting legal research to determine your exact responsibilities
Representing your small business in legal environments (e.g., court appearances)
Hiring a legal professional can be a significant expense, so choosing carefully is essential. Prioritize the following credentials to ensure a great return on your investment.
Experience with small businesses. Ensure the lawyer has experience with companies in your industry or your size.
Specialization. Look for expertise in the specific areas of law you need help with, such as intellectual property, consumer protection or employment law.
Strong reputation. Check for positive reviews and ask for client referrals to gauge their reliability.
Transparency. Choose a lawyer with transparent pricing who explains legal terms and processes clearly.
If you don’t know a law firm that fits these criteria, ask other small business owners in your sector or area. Legal services can be complex and costly, so a recommendation from someone you trust is highly valuable.
5 small business law tips to stay protected
Now you know what business law entails and who can help, follow these simple tips to make your business journey as smooth as possible.
1. Update contracts regularly
Having a lawyer review your contracts periodically ensures they are clear, up-to-date and legally sound – even as your business and relevant laws evolve.
Consider dedicating time every year (a day or week, depending on how many contracts you have) to checking and updating legal documents with a professional.
This proactive approach helps prevent misunderstandings, disputes and legal issues that stem from outdated or ambiguous terms.
For example, a contract might include outdated payment terms that don’t reflect current business practices or industry standards. A lawyer can revise these terms to ensure clear payment deadlines and penalties, reducing the risk of non-payment disputes.
2. Stay informed on employment laws
Employment laws change often. You can avoid fines, penalties and potential lawsuits by monitoring those changes.
Adapting to changes in law also fosters a positive working environment. Employees will feel secure knowing your business is committed to following legal guidelines.
For example, changes to family leave laws might affect the benefits you must offer employees. By keeping informed, you can adjust your policies accordingly, ensuring your business complies with legal standards while keeping your team happy.
A legal professional with expertise in your industry will be on top of the latest rules. You can also subscribe to industry podcasts and network in your sector to stay informed on best practices.
NFIB’s Small Business Rundown podcast has guests offering legal and general SMB insights from state capitals nationwide.
Recent episodes have covered the minimum wage in California, navigating tax season and notable Supreme Court cases.
3. Document everything
Keeping a central record of important documents helps protect your business in case of disputes, audits or misunderstandings.
Among the documents you’ll want to keep organized are:
Contracts and agreements
Quotes and sales invoices
Internal policies
Communications
You can keep these documents in a secure customer relationship management (CRM) system or a project management tool.
Smart Docs lets you generate and manage documents from within Pipedrive. It’s included on the Professional, Power and Enterprise plans and is available as an add-on for the Essential and Advanced plans.
Keeping records means you’ll have a clear evidence trail you can refer to when questions arise or if legal action becomes necessary.
For instance, records of employee performance reviews and warnings can protect your business against wrongful termination claims. You’ll have evidence showing the reasons behind your decisions.
4. Budget for a trustworthy lawyer
Legal problems don’t always come with a warning. Being ready to pay a lawyer’s fees can ease the stress of difficult situations like a disputed business transaction.
Business lawyers generally charge hourly for their services, with rates running from as little as $150 and rising to over $500. The price will depend on your location and the lawyer’s experience and specialties.
For example, an established attorney based in a major city’s financial district will likely charge more than a small-town legal professional who has just left law school – although the latter may still be sufficient for your needs.
You can also hire an attorney on a retainer basis if you need ongoing help. You’ll pay a set fee upfront to secure their services for a certain period or number of hours, almost as though they work in-house, and they deduct their hourly rate from the retainer as they work your case.
Note: Legal fees are tax deductible for small businesses in the US so long as they relate to “ordinary and necessary” business activities like drafting contracts, resolving employee issues and handling supplier disputes. Fees for personal legal services are not deductible.
5. Find local support
Connecting with local business owners, support groups and nonprofits can provide valuable guidance and resources for overcoming legal challenges.
These communities often offer mentorship, networking opportunities and access to shared knowledge that can complement your legal counsel.
For example, if a customer refuses to pay your invoice, you can ask other business owners in a support group for dispute resolution tips. You might find someone who has navigated the same situation and can offer advice.
Networking and small business groups are also great for peer-to-peer recommendations. For instance, if you need a commercial law or cybersecurity specialist, you could ask a mentor or another business owner where to look.
The exact opportunities available will depend on your location. Three of the best places to start looking are your local chamber of commerce, the Small Business Administration (SBA) and Business Network International (BNI).
Final thoughts
Navigating laws might not be why you started your company but it’s critical to being a successful business owner.
By staying informed and knowing when to seek professional help, you can protect your organization and make informed decisions that support sustainable growth.
Use the information in this guide as a springboard for further learning, whether that involves signing up for a part-time university course or simply reading up on the latest legal updates affecting your industry.
