Lesson 9

USS Biz Trek

Lesson 9: Intergalactic Law

Jeff: Fifteen minutes before we get to Planet Mirania.

Briana: (on the intercom) Hey guys, good news! The Gornya-Mirania trade negotiations are off.

Jeff: Cool! But why?

Alicia: Star Central reports they violated a civil-negotiations statute.

Lalo: In other words, they started a fight.

Alicia: Yep! So put down your controllers and get ready — we’re about to make first contact.

Staying Legal

Permits… Licenses… Zoning… Taxes… These words can sound pretty scary to beginning ‘treps. Like the Gornya learned, there can be consequences if you don’t conduct your business legally.

During the time you are testing your business ideas, the IRS considers your activities a hobby. Once your business begins making money, though, it is very important that you obtain any licenses or permits required by your city, county, or state. You will also need to begin keeping detailed records of your income and expenses, in case you earn enough money to file income tax reports.

How Do I Know What’s Required?

Regulations about legal requirements for businesses vary greatly from city to city and state to state. To check up on the regulations, contact the U.S. Government's Small Business Administration or Small Business Development Centers. Other good resources to check are:

Your local Chamber of Commerce
City Hall (speak with the city clerk)
Your local homeowner’s association
Your lawyer or tax consultant

A checklist for making sure your business is legal is provided in Activity #30.

Registering a Business Name

If you create a name for your business that is different from your real name, you must file a DBA form with the county clerk’s office. DBA is short for "doing business as." Filing a DBA form officially registers you as the owner of the business and makes it legal for you to operate under your fictitious (made-up) name.

The fee for filing a DBA form varies from state to state, and it can range anywhere between $10 and $100 or more. Some states also require you to run an ad in the newspaper for several weeks to announce your fictitious name.

In most states, you can do business in your own name without having to file a DBA. If you mow yards, for example, you could hand out flyers that say, "Yard mowing — Call Ben Jones." If you are an artist, you can have business cards that say, "Ann Smith, Artist." You would not have to register either of these names because you are not doing business under a fictitious name.

Who’s the Boss?

The owner is usually the person with the most authority in a company. But sometimes more than one person owns a business and they share the responsibility of making decisions. There are four basic legal structures of ownership to consider:

A sole proprietorship is the simplest and most common form of business operation. In a sole proprietorship, you are the only owner, you make all the decisions, and you get all of the profit. The only disadvantage is that you have no one to share the expenses, the work, or the legal responsibilities.
A partnership is another way to construct your business. Having a business partner means having someone to share the expenses of running the business, the work, and the legal responsibilities — but also the profits. To avoid conflicts, partnership agreements should always be stated in writing. Office supply stores have sample partnership agreements, but it is better to have a lawyer prepare the papers.
A corporation is a common business structure for a business owned by a group of people. In a corporation, the stockholders share the profits and losses of the business according to the number of shares they own. Forming a corporation requires a lawyer and can be very expensive. However, the advantage of a corporation is that it gives the stockholders protection from legal liability in the event the business is sued. The disadvantage of a corporation is that you usually pay higher taxes.
A nonprofit corporation is another way to structure business ownership by a group of people. Most nonprofits (charities) are special corporations that have no stockholders and pay no taxes. The business decisions are made by a board of directors or trustees. Employees who work for the nonprofit can receive a salary, but the main purpose of the nonprofit is to raise money for people or groups in need. Forming a nonprofit requires the help of a lawyer, often takes a long time, and is usually expensive.

Looking for Venture Capital

The money you use to start a business is called venture capital. It can come from many sources: your family, friends, other businesspeople, a non-profit organization, or a professional investor. Sometimes venture capital is given in the form of a loan, which is called debt financing. The lender usually earns money by charging interest on the loan. There is some risk; if you miss loan payments, the lender may be able to take control of your business.

Very few people invest in businesses without expecting something in return. Some investors want to own part of the business, which means you sell them part of the business and use the money for start-up. This is called equity financing. You won’t have a loan to pay back, but you will give up some control of your company. You must also pay the investor a percentage of the profits your company makes.

Five C’s of Credit

Banks and investors get lots of requests for loans. How do they decide which loans to approve? Loan applicants are evaluated according to five criteria known as the five C’s of credit:

Character: The investor must believe in your honesty and dependability.
Capacity: Investors look for your ability to earn money to pay back the loan.
Capital: Banks are strongly interested in being sure you have enough cash on hand to pay your bills.
Collateral: Some investors require you to sign papers describing property you will give them if you fail to make loan payments.
Conditions: Banks and investors consider your company’s potential for growth in the current business environment.

Knowing what investors look for is very helpful when you are writing your business plan. Smart entrepreneurs use their business plans to show their ability to satisfy the five C’s of credit.