When you work in or own a small business, dealing with legal issues is something you have to do, whether you like it or not (almost always not). Interestingly, there actually seems to be an inverse relationship between one’s knowledge of the law and the legal issues he or she might become embroiled in; that is, the more you know, the fewer problems you probably will have.


Certainly this was true in my old law office. When someone got to the point where they needed to hire me, the problem had grown out of hand, and often, the potential client had exacerbated the situation by not knowing his or her rights and/or responsibilities.


This is not to say that you should play lawyer, indeed you should not. Having a lawyer who can advise you is smart business. But, a little knowledge can also go a long way. Here is what a small business owner needs to know:


Contracts: Three things are required to create a binding contract:


  1. An unambiguous offer
  2. An unambiguous acceptance of that offer
  3. A bargained for exchange (legally known as “consideration”)


Let’s look at each a little more closely:


Offer: “I will sell you these 20 widgets for $100.” That is a clear and specific offer. The other party can accept it, reject it, or counter offer. Only when he accepts it is the basis of a contract formed.


Conversely, if the offeror had said, “I have about 20 widgets. I might take somewhere in the neighborhood of $100 for them,” that is not an offer. Do you see the difference? It is too vague. In this case, the person being offered the deal really cannot know the terms of the contract if he or she were to accept. Is it really for 20 widgets? Is it actually going to be $100?


An offer must be clear and specific.


Acceptance: Similarly, the acceptance must be clear and unambiguous. “I accept that offer,” is an acceptance. “Let me think about it overnight” is not. “Would you take $75?” is a counter offer.


Consideration: This idea was really a conundrum in law school. But it need not be. It simply means that to have a contract, there has to be a bargained for exchange, a “this for that.” For example, “your widgets for my $100.” As long as there is an exchange, consideration is met.


So the equation is this:


Offer + Acceptance + Consideration = Contract.


Negligence: I once had a contractor in my office who was being sued for negligence by a homeowner because the house my client had built and sold to the homeowner had flooded. The problem for the homeowner was that this area had not flooded in more than 100 years, and my client had built an otherwise perfectly reasonable house. It was not his fault that an “Act of God” caused the house to flood.


So the basic rule is this: As a business owner, you are legally expected to act as “a reasonable person would under the same or similar circumstances.” Would a reasonable builder build with the potential for a flood in the situation above? No. That person who slips on ice in front of your store might have a case if it was reasonable for you to know that ice forms on your walkway. What would a reasonable man do in that circumstance?


Note that the law creeps in here in another way too: It is quite important that you create some sort of separate legal entity for your business – either an LLC or a corporation – because that protects your personal assets from business liabilities.


Employees: Small business owners can also have legal issues with regard to employees. The most common one is this: Is the staff member an employee or an independent contractor? In this era of the so-called “gig economy” more and more small business owners are classifying the people who work with them as contractors because it is cheaper for the business if they are not employees.


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So, are they contractors or employees? Contractors must be truly independent. Courts look at a variety of factors:


  • Who controls when, where and how the work gets done?
  • Does the person use his own tools and equipment or those of the business?
  • Does the person have other clients or customers?


The bottom line is that knowing even a little about the law can save your small business from a lot of legal problems.




About Steve Strauss

Steven D. Strauss is one of the world's leading experts on small business and is a lawyer, writer, and speaker. The senior small business columnist for USA Today, his Ask an Expert column is one of the most highly-syndicated business columns in the country. He is the best-selling author of 17 books, including his latest,The Small Business Bible, now out in a completely updated third edition. You can listen to his weekly podcast, Small Business Success, visit his new website TheSelfEmployed, and follow him on Twitter. © Steven D. Strauss.

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Bank of America, N.A. engages with Steve Strauss to provide informational materials for your discussion or review purposes only. Steve Strauss is a registered trademark, used pursuant to license. The third parties within articles are used under license from Steve Strauss. Consult your financial, legal and accounting advisors, as neither Bank of America, its affiliates, nor their employees provide legal, accounting and tax advice.


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