Legal Guide for Starting and running a small business

Most small business owners make their biggest legal mistakes in the first month, when they pick a structure without understanding the tax or liability consequences. Fishman gives you the plain-English map: what each form costs, protects, and requires. If you're launching a business, adding a partner, hiring your first employee, or signing a lease, this book pays for itself the first time you avoid one bad decision.

1. 1Chapter 1

   The default is the simplest: sole proprietorship

   Fishman notes that the sole proprietorship is the simplest and most common business form, with millions of sole proprietorships compared with far fewer corporations and LLCs. A sole proprietorship requires no formal paperwork to establish.

   The idea

   Simplicity cuts both ways. The sole proprietorship asks nothing of you up front, which is why it dominates by sheer numbers. But that same lack of structure means no liability shield and no tax planning options. Fishman's point isn't that it's bad; it's that you should choose it knowingly, understanding what you're giving up in exchange for the zero paperwork.

   Try this: Before you register anything, write down what you'd actually lose if a customer sued you personally. That answer determines whether the default form is enough.

2. 2Chapters 1 and 5

   Two friends, one landscaping truck, instant partnership

   Two friends (Bob and Carol) start a landscaping business together without a written agreement. What they don't realize is that the law has already done the paperwork for them: the moment two or more people carry on a business for profit, a general partnership exists automatically. And that default comes with a nasty edge. Each partner is personally liable for all business debts and lawsuits, including debts incurred by other partners' actions.

   The idea

   Personal liability for a partner's actions is the price of the default. Fishman uses Bob and Carol to show that 'we never signed anything' is legally meaningless.

   Try this: If you're working with anyone on a for-profit venture right now, assume you're already partners and put the money and exit terms in writing this week.

3. 3Chapters 1 and 3

   The LLC: corporation armor, sole proprietor taxes

   An LLC combines the personal liability protection of a corporation with the tax simplicity of a sole proprietorship or partnership. The operating agreement is the key legal document, laying out members' rights and responsibilities, how profits are shared, who manages what, and how voting works, whether each member gets one vote or votes count by percentage ownership.

   The idea

   The LLC's appeal is that you don't have to choose between safety and simplicity. The operating agreement is where you decide, before conflict, how money and power are split.

   Try this: Draft a one-page operating agreement this week, even for a single-member LLC, covering profit splits and what happens if a member wants out.

4. 4Chapters 1 and 4

   The corporation's rigid ladder

   A corporation isn't just a filing; it's a machine with a fixed hierarchy. Shareholders own it and elect a board of directors. The board appoints officers who run day-to-day operations. Fishman calls the structure rigid. Getting there means incorporation: filing articles of incorporation with state officials and paying a filing fee.

   The idea

   The corporate form has a specific shape: shareholders, directors, officers. Fishman's framing helps you see the corporation as a specific tool with a specific structure.

   Try this: Sketch your company's decision-making as a chart: who owns, who governs, who manages.

5. 5Chapters 2 and 4

   Schedule C and the disregarded entity

   Sole proprietors report business income and expenses on Schedule C of their personal Form 1040 tax return. A single-member LLC is treated as a 'disregarded entity' for federal tax purposes unless the owner elects corporate taxation.

   The idea

   'Disregarded' means the LLC exists for liability purposes but vanishes for federal tax purposes: one return, one set of records. The election to be taxed as a corporation is a lever you can pull later. Fishman's point is that your tax treatment isn't fixed by your legal form; it's a choice layered on top of it.

   Try this: Check which box your LLC currently falls into on its tax filings, and note the deadline for electing corporate treatment if you ever want it.

6. 6Chapters 2, 8, and 16

   The 15.3% you can't dodge as a sole proprietor

   Sole proprietors and partners must pay self-employment tax (both the employer and employee halves of Social Security and Medicare taxes) on their business net income — roughly 15.3% on net earnings (12.4% Social Security portion up to the annual limit, 2.9% Medicare on all earnings). Business owners who don't have taxes withheld must make quarterly estimated tax payments (April 15, June 15, September 15, and January 15); individuals who expect to owe more than $1,000 in tax must make estimated payments.

   The idea

   Owners see the whole 15.3% at once, unlike employees whose payroll taxes are split and partly invisible. The quarterly schedule exists because the government wants its money as you earn it. Fishman's point is about cash flow: missing the rhythm turns a manageable tax into a tax plus penalties.

   Try this: Set up four calendar reminders for the estimated tax dates and move 25-30% of each month's profit into a separate savings account.

7. 7Chapters 2 and 3

   The $100,000 experiment: S corp vs. sole proprietorship

   S corporations allow owners who are active employees to take a reasonable salary and receive remaining profits as distributions not subject to self-employment tax — illustrated with a comparison using a hypothetical $100,000 profit, where the sole proprietorship pays 15.3% self-employment tax on the full amount while the S corporation owner avoids self-employment tax on the remaining distributions.

   The idea

   The S corporation doesn't reduce your income tax; it reclassifies how profits are labeled on the way out. The IRS requires the salary portion to be 'reasonable,' which is the catch. For a profitable business, splitting income between salary and distributions is one of the few structural tax savings available without changing what you do.

   Try this: If your net profit is climbing past the point where 15.3% stings, ask a tax professional to run the salary-versus-distribution math for your actual numbers.

8. 8Chapters 3 and 4

   The owner who skipped meetings and owed $50,000 personally

   One recounted case involved a business owner who failed to hold annual shareholder meetings and keep corporate minutes, leading a court to pierce the corporate veil and hold the owner personally liable for a $50,000 debt.

   The idea

   Piercing the veil is the legal system's way of saying the entity was a costume, not a structure. The $50,000 case is memorable because the failure was administrative, not criminal. Paperwork is the price of the shield.

   Try this: If you have a corporation or LLC, hold and document one formal meeting this month, and check whether you've personally guaranteed any business debt.

9. 9Chapters 6 and 9

   What's in a name: legal, fictitious, trademark

   There is a difference between a legal business name, a fictitious business name (DBA/'doing business as') for local registration, and a trademark for nationwide brand protection. There is a difference between federal trademark registration (with the USPTO) and state registration, with federal registration offering benefits including nationwide priority. Before settling on a name, conduct a trademark search using the USPTO's online database to ensure the name is not already in use.

   The idea

   The distinction matters because each name type does a different job: the DBA registers locally, the trademark protects the brand nationally. Fishman's sequence matters: clear the trademark search before you print anything.

   Try this: Spend 20 minutes on the USPTO's online database searching your business name and its closest variants before you buy a domain or print a sign.

10. 10Chapters 7 and 10

    The permits nobody warns you about

    Sales tax permits's permits are required in most states for businesses selling taxable goods or services. Home-based businesses may need special permits or zoning variances, and some cities restrict home businesses by limiting customer traffic, signage, and noise.

    The idea

    Permits are the least glamorous part of starting up and the one with the most asymmetric payoff: an afternoon of checking prevents fines and forced closures. The home-based restrictions surprise people most. Traffic, signs, noise: the city cares about what your neighbors experience.

    Try this: Call your city's business licensing office this week and ask two questions: does my business need a seller's permit, and are there home-occupation restrictions on client visits?

11. 11Chapters 8 and 12

    The 23-item dossier before you buy a franchise

    Franchisors must provide a Franchise Disclosure Document (FDD) to prospective franchisees before the sale, as required by the FTC Franchise Rule; the FDD contains 23 specific items, including the franchisor's litigation history, initial and ongoing fees, and audited financial statements.

    The idea

    The FDD forces the details into print before you sign. Fishman's practical angle: pay attention to the litigation history, not just the fees. A franchisor sued repeatedly by its own franchisees tells you more than any earnings claim.

    Try this: Request the FDD from any franchisor you're considering and read item 3, the litigation history, before you read anything about projected revenues.

12. 12Chapters 12, 13, 14, 15, and 18

    The cook, the designer, and the $35,000 lesson

    A restaurant owner whose part-time cook was reclassified after a state labor department audit, forcing payment of $15,000 in back payroll taxes, penalties, and interest. A graphic designer who worked exclusively for a marketing firm for six months using the firm's office, computer, and schedule, whose reclassification cost the firm $20,000. The IRS 'common law' test distinguishes employees from independent contractors, focusing on behavioral control, financial control, and the relationship between the parties; the key factor is 'behavioral control' — whether the business has the right to direct and control how the work is done.

    The idea

    The label on the invoice doesn't decide anything; control does. Both stories share a pattern: the business controlled the how, and the bill arrived later with interest. Misclassification gets more expensive the longer it goes unnoticed.

    Try this: Take your current contractors and ask one question for each: can I direct how the work gets done, or only what the outcome should be?

13. 13Chapters 12, 13, 14, 18, and 19

    The employee checklist: I-9, minimum wage, overtime

    Employers must verify a new employee's eligibility to work in the U.S. by having the employee complete Form I-9. Employers must pay at least the federal minimum wage ($7.25/hour at the time of writing) and comply with overtime rules under the Fair Labor Standards Act (FLSA); there is a difference between 'exempt' (salaried, not eligible for overtime) and 'nonexempt' (hourly, eligible for overtime) employees. Under the FLSA, nonexempt employees must be paid 1.5 times their regular hourly rate for hours worked over 40 per week — e.g., a worker earning $10 per hour who works 45 hours must be paid $400 for the first 40 hours and $75 for the 5 overtime hours, for a total of $475.

    The idea

    These obligations start immediately, not when the business 'gets big.' The exempt distinction is where small employers stumble: calling someone salaried doesn't make them exempt. The overtime example is worth memorizing because it shows the calculation is mechanical, and mechanical means auditable.

    Try this: Before your next hire, download the I-9 form and classify the role as exempt or nonexempt in writing, with the reasoning documented.

14. 14Chapters 14 and 23

    At-will employment and the vacation you still owe

    Most employment is 'at will,' meaning either the employer or employee can terminate the relationship at any time for any reason (except illegal ones); a worker fired for poor performance is an example. The employer must still pay any accrued vacation time if required by state law.

    The idea

    At-will is the default, not a blank check. The 'except illegal ones' clause covers discrimination and retaliation, and state law adds obligations at the exit, like accrued vacation. Know your state's final-pay rules before you need them.

    Try this: Look up your state's rule on paying out accrued vacation at termination and write it into your employee paperwork before your first firing, not after.

15. 15Chapters 8, 12, 14, 16, and 17

    The separate checking account, opened on day one

    'Open a separate checking account for your business as soon as you start up.' Corporations and LLCs must maintain separate business bank accounts and keep business and personal finances separate to preserve liability protection. Home-based business owners may be able to deduct a portion of rent, mortgage interest, utilities, and insurance as a home office deduction if the space is used regularly and exclusively for business.

    The idea

    The same discipline that protects you also pays you. Separate accounts preserve the entity boundary that shields your house from business debts, and they make the home office deduction clean to claim. The 'regularly and exclusively' standard is the trap: a desk you also use for family email doesn't qualify.

    Try this: Open the business checking account this week, even before revenue, and route every business expense through it from now on.

16. 16Chapters 10, 12, and 16

    Gross lease, net lease, and who really pays the taxes

    A gross lease is one where the landlord pays operating expenses, while a net lease requires the tenant to pay a share of expenses like property taxes, insurance, and maintenance in addition to base rent (a triple net lease covers all three).

    The idea

    Commercial leases are priced in a code most first-time tenants can't read. The gross distinction is the decoder ring: it tells you whether the quoted number is a ceiling or a floor. Triple net sounds technical but means simply that every operating cost lands on you.

    Try this: Pull out any lease you're considering and list, line by line, which party pays property taxes, insurance, and maintenance under it.

17. 17Chapters 9 and 15

    Insurance: the five policies and the one that matters most

    Major types of business insurance include general liability, property, workers' compensation, business interruption (to replace lost income if a disaster like a fire forces the business to close temporarily), and professional liability (errors and omissions). Product liability insurance is crucial for businesses that manufacture or sell goods, covering injuries caused by defective products.

    The idea

    Insurance is liability protection you buy from a company instead of building through an entity. The business interruption category surprises owners because it insures income, not property. The product liability emphasis is a sorting rule: what you sell determines which policy is non-negotiable.

    Try this: List your three biggest disaster scenarios, a customer injury, a fire closure, a defective product, and ask an insurance agent which policy answers each.

18. 18Chapters 10 and 30

    Money from banks and the SBA's real role

    Small businesses often rely on personal credit, personal guarantees, and small business loans (including SBA loans) to obtain financing. SBA loans are not direct loans from the government but are made by banks with a government guarantee.

    The idea

    The guarantee structure explains the whole lending experience: the government reduces the bank's risk, not yours. That's why personal credit and personal guarantees remain central even with an SBA loan in the picture.

    Try this: Before applying for any business loan, list which personal assets a guarantee would expose, and decide in advance what you're willing to pledge.

19. 19Chapters 21 and 32

    Nexus and the Wayfair earthquake

    After the 2018 Supreme Court decision in South Dakota v. Wayfair, states can require out-of-state sellers to collect sales tax even without a physical presence. 'Nexus' is the connection between a business and a state that triggers tax obligations, including physical presence or economic activity thresholds.

    The idea

    After Wayfair, nexus is a question of volume as well as geography. Fishman's point for small sellers is that the obligation follows your customers, not your warehouse. The practical response is tracking where your sales concentrate before the states come looking.

    Try this: Run a report of your sales by state and flag any state where your volume might cross an economic nexus threshold.

20. 20Chapters 19 and 25

    The Coca-Cola formula and the secret that outlives patents

    The classic example being the Coca-Cola formula, kept secret for over 100 years. A trade secret is valuable business information not generally known to the public; it can be a formula, pattern, compilation, program, device, method, technique, or process that derives independent economic value from not being generally known. Protected as long as the owner takes reasonable steps to keep it secret.

    The idea

    Trade secret protection is the only intellectual property that expires the moment you stop being careful. A patent trades disclosure for a 20-year monopoly; a secret trades vigilance for potentially unlimited protection.

    Try this: Identify your business's one genuinely secret advantage and write down the three steps you'd take this month to guard it, from NDAs to access limits.

21. 21Chapters 17 and 27

    Copyright, patents, and the 20-year clock

    Copyright protects original works of authorship fixed in a tangible medium, including software, websites, marketing materials, books, music, and written works. Patents protect inventions and last 20 years from the filing date; the invention must be novel, nonobvious, and useful.

    The idea

    Copyright arrives automatically with creation; patents must be earned through a filing and a novelty test. The 20-years-from-filing clock matters because delay eats your protection. Fishman's sorting helps you see which assets need which treatment, instead of treating 'IP' as one blob.

    Try this: Inventory your creative assets, website copy, code, marketing materials, and note that each is already copyrighted; then decide if any invention justifies a patent filing.

22. 22Chapters 11 and 29

    The contract's three-part skeleton

    The elements of a valid contract include offer, acceptance, and consideration (something of value exchanged), along with mutual assent (a 'meeting of the minds').

    The idea

    The elements give you a checklist for spotting deals that were never contracts at all. Fishman's practical use is preventive: run the checklist before signing, because each element is also a place where ambiguity breeds lawsuits.

    Try this: Take your most important current agreement and label where the offer, acceptance, and consideration each appear; if you can't find one, that's your risk.

23. 23Chapters 17, 24, and 35

    Mediate, arbitrate, or sue: the escalation ladder

    Small businesses can resolve disputes through negotiation, mediation, arbitration, or litigation, and alternative dispute resolution is often cheaper and faster. Mediation is a process where a neutral third party helps disputing parties reach their own settlement and is usually non-binding, while arbitration is more formal — an arbitrator hears evidence and makes a binding decision, often with limited grounds for appeal. Small claims court handles disputes up to a state-specific dollar limit (often $5,000–$10,000) without the need for a lawyer; a winning party must collect the judgment themselves, which can take several months.

    The idea

    The ladder's logic is that each rung trades control for finality. In mediation you keep the outcome; in arbitration you trade it for speed and an end to appeals. Small claims court is the odd rung: fast and lawyer-free, but winning is only half the job, because collection is on you.

    Try this: Check the dispute-resolution clause in your standard contracts today; if it names arbitration, know that the decision will be binding with limited appeal.

24. 24Chapters 18 and 36

    When to hire a lawyer, and how to pick one

    A small business owner should hire a lawyer for complex contracts, lawsuits, or specialized regulatory matters, while self-help resources (or legal document services) may suffice for routine matters like incorporation; for complex issues, 'hiring a lawyer is a wise investment.' Guidance on finding and interviewing lawyers includes asking about experience with small businesses and getting a written fee agreement that specifies whether the lawyer charges an hourly rate, a flat fee, or a contingency fee.

    The idea

    The book's honesty is its credibility: it tells you where its own approach stops working. The fee agreement detail is the practical core, because billing surprises poison client-lawyer relationships more often than bad advice does. Fishman's sorting rule, routine versus complex, gives you permission to do some things yourself without pretending you can do everything yourself.

    Try this: Interview one small-business lawyer this month using Fishman's questions, and leave with a written fee agreement whether or not you hire them.

25. 25Chapters 16 and 33

    Records: three years, four years, and the audit's long memory

    Businesses must keep records of income, expenses, and assets; the IRS generally requires records to be kept for at least three years, while employment tax records must be kept for at least four years after the tax is due.

    The idea

    Record retention is boring until it's the only thing between you and an unwinnable audit. The three-year baseline covers ordinary income and expense questions; the four-year employment tax rule exists because payroll disputes age badly. Fishman's framing turns retention from a hoarding instinct into a schedule.

    Try this: Set up two folders today, one for three-year retention and one for four-year employment tax records, and purge anything older on a recurring calendar date.

If you're about to sign a lease, hire your first employee, or split a business with a friend, read this before you sign anything. Fishman wrote it for owners who handle their own paperwork — freelancers, shopkeepers, partners, and LLC members who need the legal floor without paying a lawyer by the hour.

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