Introducing the ‘Legal Environment’
The "legal environment" of a business is the concept of a changing external structure which affects and is affected by the various aspects of your business. This does not solely mean the laws and government organizations which influence your organization. Instead, it also includes the other private entities which are involved in your business and the laws which govern their involvement.
There are many elements to this idea of the legal environment. On its own, however, "the legal environment" is an extremely broad term. It usually takes the form of the three areas of business regulation most commonly considered:
✓ business formation (corporations, LLCs, etc.),
✓ employment, and
✓ consumer protection laws.
Some specific laws and regulations that American businesses encounter frequently include:
✓ the Americans with Disabilities Act (ADA) ,
✓ the Fair Labor Standards Act (FLSA),
✓ the Fair Credit Reporting Act (FCRA),
✓ the Fair Labor Standards Act (FLSA), and
✓ the Family and Medical Leave Act (FMLA).
One of the biggest reasons understanding your company’s legal environment is so important is that it is continually evolving, sometimes surprisingly quickly. When something big changes in the law (such as how medical leave is defined) this can have big ramifications for the role of a single employee. Other changes in the legal environment can affect entire industries, such as those brought about by changes to how lawyers are permitted to advertise their services in the wake of the U.S. Supreme Court’s ruling in Bates v. State Bar of Arizona.
Business Law: The Standard Edition
In Business Law, the standard edition is a term that is used to refer to the most basic and straightforward edition that is available. The Standard Edition is something that has become more common in the publishing world as it allows those wishing to take Law School courses to do so without having to buy an entire course pack. In the Standard Edition, each law book is purchased separately so that the buyer is not forced to purchase a whole slew of books at once. In Business Law, the standard edition allows students a more affordable and realistic way to get through their classes as opposed to fork out hundreds or even thousands of dollars a semester. While the Standard Edition does not require students to necessarily buy all of the law textbooks that they would have otherwise been required to purchase, it does allow them to pick and choose which ones they might need and which ones they could probably do without. For example, the Standard Edition lets students opt out of purchasing textbooks that may not be useful in their particular program but would be useful in other programs.
The Standard Edition in Business Law also makes it easier on students in terms of managing a budget. Inside a standard edition textbook, the information is much ore condensed and to the point than it is in other textbook editions. The material is laid out with simplicity and brevity in mind, whereas other textbooks often tend to favor either lengthy or civil law to present the material.
Principles of Business Law
At its core, business law is divided into three main areas: the Law of Contracts, the Law of Torts, and the Law of Property. Understanding these fundamental principles can help shape a strategic and efficient legal approach for business entrepreneurs, especially in terms of acquisitions, sales, contracts, lawsuits and/or government draft rules. The Law of Contracts is mandatory for all businesses. Each deal or letter of intent should be reduced to writing (paper) where possible. You don’t simply send an email from your laptop on the plane, leave home for 2-3 weeks and not follow up with your partner until after you get back. Contracts are meant for the business partner who can afford the money to spend on lawyers to go to court for years to come to enforce a breach of contract or partnership. Contracts begin with an offer. Many offer letters out there offer discounts by spending so much in one month, but this is an offer. An offer is the issuer saying if you do this, I will do that. Of course, usually you cannot sue for specific performance, but the damages awarded may be less than you expect. A tort is a wrongful act in which someone intentionally harms another. For example, if you are at a party and someone comes up to your partner and steps on your foot, and you don’t say anything, then you cannot sue for an injury of the toe or the foot on unintentional impact. On the other hand, if you trip over the rug because the rug is torn, you can sue for the damages (if you sue). The state also has an interest in prosecuting or challenging others on torts; therefore, a civil suit occurs when a party files a complaint. Torts require substantial attorney fees, and you cannot go to small claims court. If you file for bankruptcy or file in federal court, the federal rules of civil procedure apply. If you need to prove damages, you will pay for that period; such as an economist or chemist — proper experts are needed to testify. In the end, the tort may cost as much as a settlement, but that is not guaranteed. The Law of Property involves intellectual property. There are three areas to patent protection, copyrights, and trademarks. There are also consideration, conveyance and the rule against perpetuities, which really can be considered in property. In the example above of the rug, it may be the property of the host, but it doesn’t matter; you can still sue for any damages. Tort laws don’t care "who owns the rug." You need a law degree to judge the law on this, but the rule is, if you have title to the property, you can sue. In Law of Contracts, however, you cannot enforce an agreement upon another person where there are no damages. The Law of Business Structure regulates the formal internal rules of doing business. There are a number of rules to follow for four types of business structures; the most common being General Partnership, Limited Partnership, Corporations C and S, and Limited Liability Partnership LLC. There are regulations for Attorneys, Tax, Finance, Construction, and a dozen other industries, and employment law is its own subject.
Influence of Business Law on the Structure of a Company
When considering a business decision, the pros and cons are weighed based on many factors, and often the primary consideration is economic. Actual or potential taxation is analyzed, projected income and expenses are assessed, markets are surveyed and motivational theory is re-written to encourage employees to give just one more decimal point. But the far more critical assessment should be: where does this decision fall with regards to the organization’s risk exposure analysis? The organization should look at how this decision – be it outsourcing ordinary operations, acquisition of an asset, or entering into a specific jurisdiction – will affect the organization’s risk management plan and exposure.
The law is one of the most common factors that affects the decision making process. Many decisions are driven, consciously or not, by how legal rules may have an effect on the ultimate success of the company. Litigation, particularly in the U.S. is a very risky decision point. Most companies have built-in certain levels of litigation costs into their operational budget, and when litigation such as commercial lease issues arise, it is often only looked at on the cost-benefit analysis, and not as a stand-alone issue. How does the litigation affect the company’s perception, or how does the perception affect the company?
Legal risk analysis can be a strong form of risk management. Take, for example, the de-banking of cannabis companies. Everyone knows that, with legalization efforts sweeping the globe, companies who are opening "pot store" are fighting with the banks to open business banking accounts. Arizona’s own Bloom Cannabis recently published a report on how the lack of banking is affecting its business. The company is putting significant amounts of cash on deposit with a security company, who ultimately will deliver the cash to a depository bank. This is an expensive proposition to maintain, and ultimately, the cost of banking will be passed on to the consumer, driving up prices and increasing the likelihood that consumers will look for their marijuana "fix" from their good friends Karl and Sara, rather than pay the premium for the assurance that the "stuff" they bought was legit.
In a traditional banking environment, this would be intolerable, however, in the emerging marijuana industry; it is simply a fact of life for now. The fact that long-standing issues of national federal banking regulation stand in the way, the federal government being at odds with state treating the issue as a states-rights issue, and the continuously conflicting positions of the U.S. Attorneys General on this issue are cause for concern. Not so much that the sale of pot is illegal, but how if/when can the government ever be able to get its fair share of the tax on that sale, and the fear of the regulatory pendulum shifting is very real and very dangerous for the legitimate sale of an otherwise legal substance.
The Legal Environment for business is not static – it is always changing. Keeping apprised of how decisions are made and how they affect different aspects of the business, and your clients (or customer), can greatly reduce risk and enhance the business’ ability to maximize profits and protect its good standing.
Importance of Ethics and Social Responsibility
Ethics, the moral principles that guide the business practices of companies and their employees, intersect with business law in fundamental ways. Both are essential to creating a stable, predictable commercial environment. The rule of law underpins business law and promoting ethical business practices ensures that the rule of law is predominately followed.
Legal ethics is a code of conduct for lawyers. It governs specific behavioral expectations of lawyers, including maintaining client confidentiality, avoiding conflicts of interest, charging reasonable fees, practicing with competence and diligently addressing client needs. Ethical business practices in turn require companies to aim for the highest standards in each of these areas. Together they support the vital social function that the legal profession has of establishing rules and standards that nurture trust and order in society . Without these principles, the law is enforced arbitrarily and its ability to provide the foundation for a civilized society is undermined.
Business ethics most commonly takes the form of corporate codes of conduct, compliance programs and the development of an ethical culture within companies. Many companies also establish whistleblower rules that allow employees to confidentially and anonymously disclose transgressions without suffering retaliation from management. These practices help companies ensure compliance with business law in a way that respects both the law and the ethical expectations of employees and society.
Law firms often have their own codes of ethics in the form of the Model Rules of Professional Conduct, which establish ethics rules for lawyers. Thus, business law and legal ethics converge in the lawyer-client relationship.
Current Trends in Business Law
Among the content included in the standard edition of Business Law and the Legal Environment are recent developments like Internet sales taxes in various states and how they might affect different forms of business entity. Examples of this include details for owners of multichannel businesses to know, like how each state’s statute can vary, the taxability of shipping and handling charges, whether re-delivery fees are taxable, what should be included in invoices, receipts, bills, contracts, and other quotes. There are also examples of how states have attempted to tax transactions in different ways, and how the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. and other matters may change the current landscape.
Other examples of recent developments in business law included in the textbook are:
Regulation Crowdfunding
The new regulation is designed to facilitate the raising of debt and equity capital by private companies and small businesses in the United States through securities offerings made over the internet. Regulation Crowdfunding allows "small issuers" (up to $1 million raised) to generally raise funds from both accredited and non-accredited investors on a portal. The rules impact the registration of some companies, reporting requirements, filing requirements and more. It is important for business owners to read and understand this material.
Modernizing the Conflict-of-Interest Rules
The new rules are designed to update the Dodd-Frank Act with regard to investment advisers; registration of investment companies; regulation of broker/dealers who offer investment advice, and the Securities and Exchange Commission’s authority to issue rules and order exemptions. There are also new record-keeping and written disclosure requirements for broker/dealers.
Case Studies: Business Law in Real Life
Whether or not you’re a business owner, you’re likely familiar with the expression, "One lesson is enough." We’ve all learned things the hard way, with the consequence of a few oopsies resulting in significant financial losses for our businesses. By learning from other people’s business mistakes, we can save ourselves a world of hassle.
We’re going to dive into a couple case studies so you can learn what not to do in your business.
Case Study #1: The Reluctant LLC Sometimes the decision to form a limited liability company or a corporation just doesn’t happen. Business owners have a great idea and recruit a partner. They get to work, building an amazing product with huge potential. Then one day the partner decides he’s had enough of running the business and wants his money back. He decides he’s going to be the sole owner. And you’re sidelined. Ouch! When you start a business with a partner, you want to be smart about how the venture is set up. To protect your interests, you need to structure your business to ensure a successful outcome in the event of a conflict. In this case, without the protection of a limited liability entity, the partner is left in a bind and must face the process of unwinding the yet successful partnership.
Case Study #2: Breaking the Contract Most business owners enter into a contract without thinking through the ramifications of breaking the deal. Oftentimes, owners just use a template they found online and do not take time to address the elements of the deal that are specific to them. Here’s an example: A small manufacturing company enters into a contract with a large vendor to provide forged aluminum components. The company grows quickly and does not have the capacity to fulfill the large orders. The manufacturer must then hire other companies to produce the components. Then, the company turns out a defective batch of components. The vendor wants to sue for millions of dollars, but instead of folding, the small manufacturer dives into the contract he signed to find that it does not even address the issue of damages in the event that these circumstances arise. Then, he pulls out of the contract and pays half in damages. The lesson here is obvious – expand the deal with care so you don’t have to pay more than you should. You can enter into a contract even if you’re an existing company, but the terms of the contract will govern the damages you owe if something goes wrong. If there are no terms regarding the damages, the amount you owe will hinge on the damages proven by the other party. If you can limit the damages by structuring the deal in your favor, you may avoid paying significant amounts.
Further Resources
As part of the "Standard Edition," the For Dummies series on business law will be a great starting point for your exploration of this interesting subject. But if you want to explore further, here are some additional avenues to consider.
Books
The Law of Business Organizations contains 14 chapters written by experts in the field of business law. Each chapter may be purchased separately, and the entire collection also is available for purchase as one book. No other treatise matches it for its depth and scope.
Business Law and the Regulation of Business provides a comprehensive introduction to the legal environment of business. It has a lot of suggested cases, but doesn’t provide the complete text of the cases – which is a plus or a minus, depending on how you want to use it.
Online
Thomas M . Cooley Law School’s Corporate and Partnership Law Resource Center contains basic information such as an overview of corporation laws by state.
Coursera partners with universities, colleges, organizations and even schools to offer courses online, at no cost. Dale Walsh, a law professor at the University of Cape Town in South Africa, teaches The Law of Value and the Business of International Trade.
Nolo provides lots of useful how-to information about business law and business organization.
Professional Organizations
If you want to connect with other business law professionals (lawyers, accountants and finance experts) the International Association of Business Leaders is the organization to check out. This is a professional organization with members from around the world and offices in the United States.