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Law governs and regulates virtually all aspects of the business process, from the right to engage in a business or trade, to the legal form of a business, to agreements for buying and selling merchandise or rendering services. Law regulates the quality of products sold and the advertising of products for sale. Law governs the employment relationship, protects business property, and taxes business income. This article explores the relationship of business and law in several of these areas.

BUSINESS LAW AND LAWYERS

Business in the United States is regulated by the federal and state as well as by town and city ordinances. State law regulating forms of business, business agreements, and some taxes is the most important. Federal law regulates such things as advertising, civil rights, and protection of such property as inventions of computer programs. Local law typically regulates business hours, where one can do business (zoning) and some quality control (building codes).

To qualify as a lawyer today, a person usually must earn both a college degree and a three-year law degree and then pass a rigorous examination (the bar exam). Lawyers are certified in only one or possibly two states. Thus a lawyer certified in New York, for example, would not be qualified to answer a question about law in Texas or even a question about local law in a distant city even within the same state.

Lawyers also do not know a business as well as the owner does. All businesses need lawyers from time to time, but it is important for the businessperson to know as much as possible about the law when working with lawyers.

FORMS OF BUSINESS

There are three basic legal forms of business— sole proprietorship, partnership, and corporation.

Sole Proprietorship. Many businesses begin with an idea worked out at the kitchen table, in a garage workshop, or today, on the Internet. There are no legal impediments to or requirements for starting most businesses. One needs only an idea, perhaps inventory, and customers. When one simply starts a business with nothing more, it is called a sole proprietorship. For some business, licenses are necessary. Plumbers, beauticians, and, of course, lawyers and physicians must be licensed by the state, for example, but carpenters, psychologists, tax advisers, and bookkeepers, while they often have professional qualifications, do not need to be legally certified or licensed.

The sole proprietor is responsible for all the debts of the business and in turn receives, after taxes, all of the profits. The sole proprietor may hire employees under an employment agreement. Employees must be of legal age to work, which is normally fourteen or sixteen. A sole proprietorship usually tends to have up to twelve to fifteen employees. If the number of employees increases beyond this, the business normally evolves into another form.

Partnership. The law says that "a partnership is an association of two or more persons to carry on as co-owners a business for profit." [UPA 6(11)]. A number of factors differentiate this form of business from a sole proprietorship. More than one person is involved, and they are co-owners of the business. A partnership, like a sole proprietorship, may employ workers who are not owners.

Business is defined as "every trade, occupation, or profession." A partnership may be made up of members of any occupation. The goal of the partnership is profit; therefore, an organization of persons whose purpose is to, say, encourage recycling or advocate a political cause is not a partnership.

A partnership can be created very easily. If Sam and Mike are mechanics and put on a sign "Sam and Mike's Garage—Open for Business," they have formed a partnership under the law. Any income or losses are split half and half in the absence of an agreement that says otherwise. Normally a partnership is created by written document with the help of a lawyer. Suppose Jill and Joan wanted to start a sporting goods store. Suppose Jill could only work half time but could contribute $50,000 to start the business, while Joan had no money but knew the business and could work full time. With the help of a lawyer, they might agree as follows: The business would operate month to month. If there was income, Joan would draw the first $1500 as salary. Then Jill would draw $750 as salary. Additional income would pay Jill 6 percent per year on the $50,000 she contributed. Finally and hopefully, any additional income would be split evenly between the partners.

If Sam and Mike call their business "Quality Mechanics" or Jill and Joan call their business "Sports Unlimited," the names must be registered with the state and may not be the same as a name previously registered.

A partnership is easy to create, but its drawback is liability. Suppose Joan buys a large inventory that won't sell. Each partner is fully responsible for company debts. It may cost them their life savings. Protection from such liability can be found only in the form of a corporation.

Corporations. A corporation, which is the form of most large businesses and increasingly of small ones, begins when the state issues a charter to a group of promoters. Today, a single person may form a corporation, but normally it is a group. The owners or shareholders contribute money, property, or services for shares of owner-ship. Shares of larger companies are traded on stock markets, while shares of smaller corporations are held by a few individuals or a single person.

Shareholders elect a board of directors which hires employees. After salaries and other expenses are paid, the profits may be distributed to the shareholders in the form of dividends or reinvested in the corporation to allow it to grow. The corporation insulates the owners from liability. If Jill and Joan's sporting goods store lost money but was a corporation, it might go into bankruptcy, but Jill and Joan would not have to pay any remaining debt from their own money.

Those wishing to start a business would normally consult with a lawyer to determine which legal form the business should take.

BUYING AND SELLING GOODS

Contract law regulates the day-to-day business of buying and selling goods or performing services. A contract is defined in law as an agreement between two parties with an offer, acceptance, and consideration. Jill and Joan now have a corporation—Sports Unlimited, Inc. Ed comes in and decides to buy a tent priced at $225. He offers $225 to Sports Unlimited, which accepts the offer by ringing it up on the cash register. The consideration is what is exchanged; that is, $225 and the tent. When the store accepts the price, there is a binding contract. Suppose a sign clearly in Ed's view says "All returns must be made within thirty days with cash receipt." This sign becomes part of the agreement. If Ed brings the tent back twenty-nine days later, he can get his money back; if he brings it back thirty-one days later, it would be too late. Even though it is not stated by either party, if Ed used the tent on a camping trip, it would not be returnable. If, however, the tent leaked, it is not "fit for the purposes for which it was intended" and Ed could get his money back within a reasonable time.

Suppose Sam and Mike form Quality Mechanics partnership and Mary comes in and says, "The brakes aren't right, please fix them by 5P.M." and Mike says, "It will be done!" A contract now exists, even though many terms are missing. Sam and Mike have agreed to fix what is wrong with the brakes, and Mary has agreed to pay a reasonable price. The brakes may need a simple adjustment or a complete overhaul—Sam and Mike agree to do only what is necessary. If they also tune up the engine, Mary need not pay for the tune-up.

WARRANTIES AND PRODUCTS LIABILITY

Warranties and guarantees are of two types— implied and express. If nothing else is said, it is implied that a product is guaranteed to be fit for the purposes for which it is intended. A tent will not leak for a reasonable time and an article of clothing will stand up to reasonable wear and tear. Today, most products come with express (written) warranties. Most common are limited warranties, whereby the manufacturer guarantees all parts and workmanship for a period of one year. If the product breaks down or wears out after that, the customer is responsible, although extended warranties can be purchased on many products, such as cars and appliances. Occasionally products are clearly labeled "Sold as is—no warranty of any kind."

EMPLOYMENT LAW

As a business grows, employees are normally hired, and the legal aspects can become very complicated. Basically, an agreement to employ is a contract of offer and acceptance, and the consideration is an exchange of services for a wage or salary. In the United States, contracts of employment can be quite simple. Bob agrees to work for Sports Unlimited, Inc., for $400 a week. He agrees to work under the direction of Jill and Joan for a set number of hours, doing as he is told. He, in the words of the law, is an "employee at will." He may quit at any time or be fired at any time. Sports Unlimited, Inc., is not required to give a reason if it fires him. Bob may request a raise at any time and has no legal right to health benefits or even vacation. However, if Bob brings special skills, he himself may negotiate a contract for any length of time (most common one or two years) and include features such as health insurance, a retirement plan, and vacation. The agreement is between Sports Unlimited, Inc. and Bob.

The law does make some unlimited requirements. Bob must earn at least minimum wage (in early 1999, $5.25/hour). If Sports Unlimited, Inc., hires a painter to paint the building or a lawyer to draw up the corporation papers, the service is done by an independent contractor. But Bob must follow the orders and direction of Jill and Joan because he is an employee. Sports Unlimited, Inc., must withhold wages for Bob's income tax and Social Security. It must also pay state workmen's compensation and unemployment insurance to compensate Bob if he is injured on the job or laid off. Typically a gardener who cuts the grass and trims the hedges is an independent contractor and is simply paid a sum of money. A cleaning person working inside the house under the direction of the owner is an employee, and thus the law requires additional paperwork and taxes.

Bob was free to negotiate with Sports Unlimited, Inc., as he chose. Federal law allows employees of most larger companies to form unions and make a single employment contract. This is known as collective bargaining. If employees wish, the government will conduct an election; if a majority of workers want a labor union, that union must be recognized by the employer and the employer must work out an employment contract with it. A typical contract spells out wages, benefits such as health insurance and vacation, rights to compete for promotions, and the circumstances in which an employee may be fired. Normally, the contract says employees may be fired only if they have committed a serious wrong. In the United States, unions represent a minority of employees.

CIVIL RIGHTS LAWS

It is well known that almost all workers are protected by the Civil Rights Act of 1964 as amended and the Equal Pay Act of 1963. Both apply to companies large and small, unionized and nonunionized. The law says that employees may not be discriminated against in terms of conditions of employment including hiring and promotion because of race, religion, creed, national origin, or sex. In the not too distant past, many companies would not hire members of racial or religious minorities for positions of authority regardless of their ability. Women were discouraged from entering many trades, such as construction, or professions, such as law, because they were thought to be unfeminine or forbidden to work in other areas, such as coal mining because they were dangerous—although they were no less dangerous for men.

Affirmative action is not a federal law but an executive policy (ordered by the president) that requires companies that do business with the government, or institutions such as schools that receive federal funds, to work to increase numbers of workers (or students) from underrepresented classes. This can be tricky because companies are required to seek out and promote members of certain minority groups without discriminating against others. This is not an easy task, but it is part of American policy.

BFOQ stands for "bona fide occupational qualification" and represents an exception to civil rights laws. One may discriminate if there is a good reason to do so. Since people have a right to privacy, an attendant in a restroom can be required to be of the same sex. Models for a line of dresses can be exclusively young, slim females, and casting for a movie or play may discriminate on any basis. In a recent case, guards in a male maximum security prison were required to be male. Some questions remain open. Could a Chinese restaurant wishing to create the atmosphere of China have only Chinese servers? That is an open question.

In the 1970's, Congress added older workers to the list of protected classes. Legal protection is given only to persons over forty. A company may refuse to hire a twenty-five-year old as being "too young" or in an actual case, a thirty-seven-year old as being"too old" for a job.

The most recent category to receive protection from discrimination is persons with disabilities—real or perceived—under the Americans with Disabilities Act (ADA) of 1990.

All businesses need to know a few basics about civil rights law. In interviews, no question may be asked about a person's health history or physical or mental condition except "is there any reason physical or otherwise that would prevent you from doing this job?" Reasonable accommodation must be made for those with disabilities. A simple example would be that a desk would be built a little higher for an employee in a wheelchair. The extent of "reasonable" remains an open question. A person subject to occasional seizures would be qualified to work for Sports Unlimited, Inc., as a clerk but probably not for Quality Mechanics as a test driver.

A business must also make sure it is accessible to customers with disabilities. This includes both access to facilities and equal service as a customer. Many open questions remain. For example, to what extent must an Internet sales company provide access to those with vision or hearing impairments? All companies should consult lawyers or specialists on ADA compliance.

There are exceptions. Someone with a history of drug problems need not be hired as an airline pilot or railroad engineer. If drug or alcohol problems come to light, employees must be given reasonable treatment; if they do not respond, they may be fired.

PROTECTION OF PROPERTY AND INTELLECTUAL PROPERTY

Local authorities, of course, provide police protection from theft of inventory and other company property by customers, employees, or outsiders. Yet there is another property that many businesses have that is at least as valuable which is also protected by law—secrets, patents, copyrights, and trademarks/names.

Business Secrets. Businesses frequently keep secret information that is the heart of this business. Customer lists for an insurance company or a stockbroker are examples. State and federal law severely punishes anyone who steals or makes use of such property. The most famous secret in the world might be the formula for Coca-Cola. If any person or company can duplicate Coca-Cola, they may produce and sell it under their own name. The law protects the secret from theft but not from duplication.

Patents. Patents are a protection given by the federal government for inventions. A patent gives the inventor the exclusive rights for seventeen years to use or license the invention. Anyone infringing on the patented product is subject to fine and imprisonment.

Copyrights. Copyrights give authors protection for their works for their lifetime plus fifty years. Works include literary works, musical compositions, and, very important today, computer programs, which includes software. While there are exceptions for classroom use, it is illegal to copy tapes, CDs, or software. This is theft and is punishable by fines. It is important for business today to set high legal standards for employees for proper business use of copyrighted material.

Trademarks and Trade Names. There has been substantial growth in this area in recent years. Trademarks and trade names can be of enormous value, and businesses work hard to protect their property. Coca-Cola and Coke, both the names and the distinctive script, are among the best known of these. Names and logos are now registered in large numbers, and protection is shown by the ™ by the name. Universities, for example, often make substantial money by licensing use of their name, logo, or other associated symbols on clothing and other items. Trademarks and trade names are registered with the federal government. Exclusive use of them lasts as longas they are used.

BIBILOGRAPHY

Bagley, Constance E. (1999). Managers and the Legal Environment, 3rd ed. St. Paul, MN: West Publishing Company.

Charley, Robert N. (1996). The Legal and Regulatory Environment of Business, 10th ed. New York: McGraw-Hill

Cheeseman, Henry R. (1997). Contemporary Business Law, 2nd ed. Upper Saddle River, NJ: Prentice-Hall.

Mann, Richard A., and Roberts, Barry S. (1999). Smith and Roberson's Business Law, 11th ed. St. Paul, MN: West Publishing Company.

McGuire, Charles. (1998). The Legal Environment of Business, 3rd ed. Dubuque, IA: Kendall/Hunt Publishing.