Legal Toolkit Michigan Small Business and Litigation

What to Know About Small Business and Litigation


During the start-up phase and through the ongoing quest for long-term success, small businesses face a multitude of complex decisions, often to be made by one or two people. Small business decisions and plans typically include break-even analysis, competitive analysis, business start-up, ongoing strategy, funding, hiring, operations, marketing, property purchase or lease, legal protection, insurance, and taxes. Start-up tasks can be daunting to a small or one-person staff with limited finances; be sure to take advantage of federal, state, county, and city organizations focused specifically on small business development. Many of these not-for-profit or government organizations will provide free advice, mentoring, and information about funding available just for small businesses. See “Where to Read More” for links to recommended resources. During start-up and before any decisions are made or documents are signed, scheduling an appointment with a small business attorney is an important first step to get a quick picture of business issues in your state, and how best to protect your interests and build your small business successfully.


Small businesses can be organized into various forms, depending on the owner(s), partners, family members, investors, tax considerations, liability considerations, financing, and type of business. Commonly, small businesses are formed as Limited Liability Companies (LLC), Limited Liability Partnerships (LLP), Sole-proprietorships, ’S’ Corporations, ’C’ Corporations, or Family Limited Partnerships (FLP). With the exception of Sole-proprietorships, businesses must file "articles of organization" or "articles of incorporation" with the Secretary of State’s office in order to legally conduct business. A small business attorney can advise you about the best form of business organization for your small business and the degree of flexibility and personal liability associated with each one. An accountant or tax professional can advise you about tax considerations for the different forms of business organization and a business insurance agent can discuss insurance coverage for your business.


Operating Agreements are legal documents that formally state how a Limited Liability Company (LLC) will operate. Operating agreements formally address percentage of LLC ownership that members will enjoy, management plans for the business, rights and responsibilities of members, members’ voting rights, distribution of profits and losses, and future transition of the company ownership (e.g. if one member dies or wishes to sell their percentage of the business). A small business that has an "Operating Agreement" created and filed by an attorney has the benefit of clear expectations and protection for all members and/or investors and may make the business more attractive to banks for financing/funding. While it is possible for members to write their own operating agreement, an attorney, familiar with the business laws in each state, can best address issues and protect members and investors.


Corporate bylaws formally state what a corporation can or cannot do throughout its existence. Bylaws are not filed with any state agency but function as part of a corporation’s business records and may be requested by investors and creditors during investigations into funding, investing, and/or financing. Bylaws often contain information related to voting, numbers of directors and officers, the numbers of shares and type of stock the corporation may issue, and procedures for meetings and corporate record-keeping. An attorney, familiar with the business laws in each state, can create bylaws to best protect the health of the corporation.


Legal protection of the trade mark or service mark (commonly known as a logo), used to represent a small business is an important and sometimes overlooked investment in the business’s future. A small business or intellectual property attorney seeking to register your business mark (with the U.S Patent and Trademark Office) will typically conduct a national search for similar or conflicting marks and names first. If conflicting marks or names are found, a new name or mark can be chosen and protected. It is much preferable to make these kind of changes proactively, before your small business becomes established, than reactively, because of legal action against you by an established business with a similar name or mark. Registering your mark or name will also allow you to confidently expand your business into other markets when the time is right and will give you a legal right to take action against competitors who copy your name or mark or import similarly named or marked goods into the U.S.


Small businesses with employees will need to pay close attention to employment and labor laws in their states, including, but not limited to, laws related to hiring, termination, discrimination, wage and hours, overtime, privacy, worker’s compensation, safety codes, employment agreements, OSHA, FMLA, immigration, taxes, and social security. Small business owners should also plan to employ methods of operation that clearly state job expectations and appropriately reward and regularly coach employees for the best performance, satisfaction, and retention. Having a professional service conduct background checks on new employees may be an appropriate method of calling out serious employee issues (convictions, financial problems, substance abuse, etc) that could be detrimental to your business. See "Where to Read More" for links to IRS forms necessary for hiring employees. A labor and employment law attorney can advise small businesses about the multitude of legal issues they should address in order to protect themselves and operate legally.


Home-based small businesses must pay attention to zoning laws which will dictate the type and number of business (if any) that may exist in certain areas. Some areas are zoned to be residential only and may not legally allow home-based businesses. In addition to zoning laws, home-based businesses should be cautious about how intrusive their business may be perceived by neighbors, especially with relation to excess trash or noise and frequency and type of deliveries and/or client visits.


Business loans or lines of credit for small businesses typically require the pledging of financially significant collateral in order for the loan or line of credit to be approved. Small business start-ups do not often have business collateral (like inventory, equipment, or business real estate) so the bank or Small Business Administration loan program may require that the owner’s home be pledged to secure the loan. If the business were to fail or declare bankruptcy, the home would then be sold to pay off the debt. Small business start-up owners who do not own a home or have other available collateral may be declined for financing. Other possible financing methods include securing investors with patient capital (investment money that does not need paid back immediately) or delaying the start up of the business until the owner has saved enough of their own money to proceed. When starting a business, cash is usually one of your most precious resources and when it is gone, without collateral, it will be difficult to find a new supply. Careful management of cash is one of the keys to successfully starting a business. A small business attorney can help you to focus on what really needs to be done in the short term and what can wait.


Environmental laws must be considered by small businesses that will use solid or hazardous materials, discharge pollutants or emit air pollutants. For certain environmentally-related activities, small businesses must obtain permits from the federal or state environmental protection agency, the local health department, the publicly operated treatment works or other governmental authorities. An attorney, familiar with the environmental laws, can assist the small business in evaluating whether a permit is necessary and in obtaining the permit.