Where does law come from? How do individuals and businesses know right from wrong?

Not all actions

Social norms are the informal rules that govern behavior in groups and societies. Social norms and
cultural expectations may be violated with negative social or professional consequences for doing so.
However, no legal repercussions follow violating social norms alone.

Violations of law are different. Violating the law carries penalties, such as civil liability, fines, or loss of
liberty. While it is optional to conform to social customs, people are compelled to obey the law under
threat of penalty.

Laws are generally classified as public law or private law. Public law applies to everyone. It is law that has
been created by a legitimate authority with the power to create law, and it applies to the people within
its jurisdiction. In the United States, the lawmaking authority itself is also subject to those laws, because
no one is “above” the law. If the law is violated, penalties may be levied against violators. Examples of
public law include constitutions, criminal laws, and administrative laws. For example, if someone steals
items from a store, the thief is violating public law. He committed the crime of theft which affects the
community as a whole (not just the store owners), and the crime is defined in public legislation.

Private law is law that is binding on specific parties. For instance, parties to a contract are involved in a
private law agreement. The terms of the contract apply to the parties of the contract but not anyone
else. If the parties have a contract dispute, the terms of the contract and the remedy for breach will
apply only to the parties of the contract. In addition to contracts, other examples of private law include
tort and property laws. For example, if someone installs an industrial smoker on his property and the
smoke creates a dense haze in the neighbor’s yard, there may be a violation of private law because the
smoke is interfering with the neighbor’s right to peacefully enjoy one’s property.

Laws are also classified as civil or criminal. Civil law is usually brought by a private party against another
private party. For example, one company decides to sue another for breach of contract. Or a customer
sues a business when injured by the company’s product. Most laws affecting businesses are civil.

Criminal law involves a governmental decision to prosecute someone for violating a criminal statute. If
someone breaks a criminal law, he or she could lose their freedom (i.e. be sent to prison) or lose their
life (i.e. if convicted of a capital offense). In a civil action, no one is sent to prison. Usually, liability results
in the loss of property such as money or assets.
Civil Criminal

Source of Law statute or common law statutes defining crimes

Who files case? business or individual suffering harm the government (e.g. District Attorney)

Burden of Proof preponderance of evidence beyond a reasonable doubt

Remedy damages, injunction, specific performance punishment (e.g. fine or imprisonment)

Purpose provide compensation or private relief protect society

Additionally, some law is procedural and some law is substantive. Procedural law describes the legal
process and rules that are required and must be followed. For instance, parties who are sued in court
must receive notice of the lawsuit before the court can impose judgment against them. Substantive law
refers to the actual substance of the law or the merits of the claim, case, or action. Substantive law
embodies the ideas of legal rights and duties and is captured by different sources of law, including the
Constitution, statutes, and common law.

For example, if someone drives fifty-five miles per hour in a forty mile-per-hour zone, she has broken the
substantive rule of law of the speed limit. However, how and what gets decided in court related to the
speeding ticket is a matter of procedural law. For example, whether the driver is entitled to a hearing
before a judge, whether she has a right to be represented by legal counsel, whether the hearing takes
place within a certain amount of time after the ticket was issued, and what type of evidence can be
presented are procedural law issues.

Sources of Law

In the United States, our laws come primarily from:

Federal and state constitutions;

Statutory law from Congress, the state legislatures, and local legislative bodies;

Common law from federal and state appellate courts;

Administrative rules and regulations;

Treaties and conventions; and

Executive orders.

Constitutions

The most fundamental law in the United States is the US Constitution, which is the supreme law of the
nation. Any law that conflicts with it is void. The Constitution serves three important functions. First, it
establishes the structure of our national government and identifies the powers of the legislative,
executive, and judicial branches. Second, it defines the boundaries of each branch’s authority and
creates “checks” on each branch by the other branches. For example, the president is the commander-
in-chief of the armed forces, but does not have the power to declare war. That duty falls to Congress.
And, third, the Constitution guarantees civil liberties and individual rights.

The power granted to the federal government by the Constitution is limited. Any powers not expressly
granted to the federal government by the Constitution are reserved to the states. This means that if the
Constitution does not give the federal government power over a particular area, then the states regulate
it.

The first ten amendments to the Constitution are known as the Bill of Rights. Despite the limited power
granted to the federal government by the Constitution, the Bill of Rights protects certain individual civil
rights and liberties from governmental interference. These rights include the freedom of speech and
religion, the right to bear arms, and the rights of individuals who are suspected and accused of crimes.

Figure 1.2 Separation of Powers of the Federal Government

Graphic showing the responsibilities of each branch of the federal government

Each state also has its own constitution, which serves essentially the same function for the state
government as the US Constitution serves for the federal government. Specifically, they establish limits
of state government power, establish the organization and duties of the different branches of
government at the state level, and protect fundamental rights of state citizens. This dual system of
government in the United States is called federalism, which is a governance structure whereby the
federal government and the state governments coexist through a shared power scheme.

Figure 1.3 Separation of Powers of the State Governments

Graphic showing the responsibilities of each branch of the state governments

Statutes

Statutes are laws created by a legislative body. Congress is the federal legislative body, and each state
also has its own legislative body. Almost all statutes are created by the same method. An idea for a new
law is proposed in the legislature. This proposal is called a bill. The House of Representatives and Senate
independently vote on a bill. If the majority of both chambers approves it, the bill is sent to the president
or governor for approval. If the president or governor signs the bill, then it becomes a statute.
Local governments, such as counties, cities, and townships, may be authorized under a state constitution
to create or adopt ordinances. An ordinance is a legislative act of a local government entity. Examples of
ordinances include building codes, zoning laws, and misdemeanors such as jaywalking.

Common Law

Binding legal principles also come from the courts. When appellate courts decide a case, they may
interpret and apply legal principles in a way that are binding on lower courts in the future. The process of
applying a prior appellate decision to a case is called precedent. Simply put, precedent is when judges
use past decisions to guide them. The benefit of precedent is that it makes the law predictable and
furthers the rule of law by applying legal principles to the greater community, not just the parties to a
lawsuit. Businesses value common law systems because they reduce the cost of business. For example, if
a business is unsure of how its contract rights will be applied by the court, it can understand its rights by
learning how courts interpreted similar contract provisions in past lawsuits. This allows businesses to
assess their risks, determine their liability, and make rational business decisions without the expense of
litigation.

Administrative Rules and Regulations

Administrative law is the collection of rules and decisions made by agencies to fill in particular details
missing from constitutions and statutes. For example, the Internal Revenue Service (IRS) is the federal
agency responsible for collecting national taxes and administering the Internal Revenue Code enacted by
Congress. All businesses and individuals must follow the IRS rules and regulations about how to report,
file, and pay applicable taxes that Congress levies. Congress passes statute defining “what” taxes need to
be paid. The IRS adopts the rules about “how” those taxes are paid.

In the United States, many of the day-to-day regulation of businesses is done by administrative agencies.
These agencies are created by the legislature to implement and enforce a particular statute. Agencies
often report to the executive branch, but some are run by independent commissions. Legislative bodies
give agencies the power to create rules and regulations that individuals and businesses must follow to
comply with the statute. For example, the Environmental Protection Agency (EPA) was created to
implement and enforce the Clean Air Act and the Clean Water Act.

Treaties and Conventions

A treaty is a binding agreement between two nations. A convention is a binding agreement among a
group of nations. In the US, a treaty or convention is generally negotiated by the executive branch. To be
binding, the US Constitution requires the Senate to ratify treaties by a two-thirds vote. Once ratified, a
treaty becomes part of federal law with the same weight and effect as a statute passed by the entire
Congress. Therefore, treaties and conventions have equal standing as statutes in US law.
Executive Orders

Article II, Section 1 of the US Constitution gives the president the power to “take care that the laws be
faithfully executed.” Under this power, the president may issue executive orders requiring officials in the
executive branch to perform their duties in a particular manner. State governors have the same authority
under state constitutions. Although they are not laws that apply directly to individuals and businesses,
executive orders are important legal documents because they direct the government’s enforcement
efforts.

Hierarchy of Sources of Law

Priority Source Comment

1 Constitutions Exist at both federal and state levels

2 (tie) Statutes Laws passed by the federal or state legislatures

2 (tie) Treaties and Conventions International agreements that have the same standing as
statutes

4 Judicial Opinions Court interpretation and application of constitutions, statutes, treaties,

5 Agency Regulations Rules and regulations adopted by administrative agencies at the federal,
state, or local level

6 Executive Orders Guidance from the president or governor to executive branch officials
about how to perform their duty
1. Intellectual property laws

The term “intellectual property” relates to intangible property such as patents, trademarks, copyrights,
and trade secrets. The U.S. Patent and Trademark Office (USPTO) oversees domestic and international
intellectual property protection for U.S. companies.

Trademarks

A trademark can be a word, phrase, symbol, design, sound, movement, color, or anything else that
serves to identify a brand, good, or service and distinguish it from others’ brands, goods, and services.
Trademarks function as the face and heart of a business; they’re the first thing a customer sees when
interacting with a company, and they represent the quality, reputation, and “goodwill” of a company.

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In the U.S., a company can develop protectable trademark rights merely by using its mark in commerce;
however, obtaining a trademark registration through the U.S. Patent and Trademark Office offers many
useful benefits. Before selecting a trademark, businesses often employ trademark attorneys to perform
“clearance searches” to make sure the trademark is not already taken.

Patents

Patents protect the rights of inventors. They give the patent owner the right to stop others from making,
using, or selling an invention. Patents usually last 20 years from the date the patent application was filed.

There are three types of patents you can apply for: utility patents, design patents, and plant patents.
Doing your research on these patents can help you protect your one-of-a-kind idea and give you an
advantage in the market.

2. Business tax laws

In the same way that you need to familiarize yourself with tax laws in your personal life, there are
specific tax laws for business. It’s important to understand these laws and consult with professionals so
you can try to avoid audits and hefty fees.

When you start a business, one of the first things you need to do is register your business with the IRS.
The IRS tracks businesses through an Employer Identification Number (EIN), so you need to apply for
one. You also need an EIN to open a business bank account, apply for business licenses, and register with
a payroll service, among other things. You can apply free at IRS.gov.

Of course, the IRS oversees all of the taxes you’ll encounter, including:

Income tax

All businesses must file an annual income tax return, unless you are a partnership (then you file an
informational return). Learn more about different business structures and how they affect your taxes.

Employment tax

If your business has employees, you must pay all taxes associated with employing them. These taxes
include Social Security and Medicare taxes and Federal unemployment (FUTA) tax. Employers are also
responsible for withholding federal income tax from their employees’ wages. Other taxes may apply.

Excise tax

Excise tax comes into play when you manufacture or sell specific products, operate certain kinds of
businesses (such as businesses with trucks and/or tractors), use various kinds of equipment, facilities, or
products, and/or receive payment for certain services. Common U.S. excise taxes include taxes on
gasoline and tobacco, but indoor tanning providers are also subject to excise taxes. Check with your
accountant to see if your business is subject to any.

3. Employment laws

Employment laws, or labor laws, are the general set of rules that apply to businesses that have workers.
These laws cover the rights and responsibilities between employers and workers and are governed by
both state and federal law.

Some of these laws only apply to businesses over a certain size, but it’s a good practice to follow them
regardless of the size of your business to make sure you’re treating employees fairly. Here are just a few
to be aware of:

Fair Labor Standards Act

The Fair Labor Standards Act (FLSA) sets the federal minimum wage, which is currently $7.25. It also
classifies employees as exempt or nonexempt from overtime pay. In general, all employees are entitled
to overtime unless a legal exemption applies. Typically, you do not need to pay employees overtime pay
if they earn a guaranteed salary of at least $455 a week (subject to possible future increase) and meet
the requirements of the executive, administrative, or professional (like an engineer, doctor, or lawyer)
exemptions. Details and other exemptions can be found here.

Equal opportunity laws

The Federal Equal Employment Opportunity Commission oversees laws that ensure all people have an
equal chance for work, including laws that make it illegal to discriminate against someone in the hiring
process or make employment decisions based on protected characteristics such as race, color, age,
disability, sex, or national origin. Many states have additional EEO protections, such as sexual orientation,
gender identity, and genetic information, so it is advisable to consult with a legal professional if you have
any questions.

Workers’ compensation

Workers’ compensation is a type of business insurance that provides monetary benefits and/or medical
care for workers who are injured or become ill as a direct result of their job. As an employer, you are
required to pay for this insurance, and you cannot ask your employees to contribute. This is important to
adhere to so you can cover any accidents that may happen.

Family and Medical Leave Act

The Family and Medical Leave Act requires employers of 50 or more employees to give up to 12 weeks of
unpaid, job-protected leave to eligible employees for the birth or adoption of a child, or for the serious
illness of the employee or a spouse, child, or parent. This can be unpaid, but you must hold the
employee’s job for them for 12 weeks. Many states have additional leave laws that may be applicable to
smaller businesses and/or that expand certain types of leave entitlements, so it is advisable to direct any
questions to a qualified professional.

Occupational Safety and Health Act

The Occupational Safety and Health Act requires employers to provide employees with a workplace free
from recognized and serious hazards. The act can be enforced through inspections and site visits. It’s
important to have a safe workplace to prevent accidents and avoid fines.

Americans with Disabilities Act

The Americans with Disabilities Act prohibits discrimination and guarantees that people with disabilities
have the same employment opportunities, ability to purchase goods and services, and more. This may
affect your business in a variety of ways, including, for example, handicap-accessible entrances at your
retail store or providing auxiliary aids, and providing reasonable accommodation to employees with
physical or mental disabilities.

Equal Pay Act

The Equal Pay Act requires employers to pay male and female employees who perform similar jobs and
tasks under similar conditions the same amount of money.

4. Health-care laws

Several federal agencies, including the Department of Health and Human Services, the Department of
Labor, and the Internal Revenue Service, oversee laws regulating health care and the health insurance
coverage provided by employers, including the Affordable Care Act (ACA). In addition, state and local
laws also regulate health care.

The ACA imposes reporting obligations on certain businesses, such as employers with more than 50 full-
time employees, as well as employers who offer self-funded health-care coverage. If you decide to offer
health insurance to your employees, you must offer this health coverage to all eligible employees within
90 days of their employment start date.

The Small Business Health Options Program (SHOP) was created as part of the ACA. It allows small
businesses that employ 1–50 employees to offer affordable health and/or dental care to their
employees. SHOP plans allow for lower premium costs.

Learn more about your responsibilities as a business owner under the ACA.

5. Advertising laws

If you’re thinking about advertising on the internet or in print, there are rules and guidelines to protect
businesses and consumers — and help maintain the credibility of those advertising media.

The laws work to prevent acts or practices in advertising that might deceive or be unfair to consumers.
The Federal Trade Commission (FTC) is the governing body that enforces these laws and enacts rules.

The CAN-SPAM Act is a law that sets the rules and requirements for email and gives recipients the right
to have you stop emailing them. The fines for violating this act can be detrimental to your business.
The main requirements of CAN-SPAM include not using false or misleading headers in your email,
avoiding use of deceptive subject lines, and letting recipients know where you’re located. Giving
recipients the opportunity to unsubscribe is also a critical part of CAN-SPAM.

Businesses also need to comply with Telemarketing Sales rules and the Telephone Consumer Protection
Act. If you’re making marketing calls or selling anything by phone and say that you’ll repair credit,
promise loans for a fee in advance, or tout investment opportunities, you need to follow these rules.

You may also need appropriate disclosures and consent before you make calls or send texts. You cannot
misrepresent or mislead customers via these channels.

There are also regulations about customer testimonials that you might use in advertising. For example,
the testimonial must reflect the typical customer’s experience and you may have to explain that results
are not the same for everyone.

There are regulations on endorsements. Unclear or unexpected connections between an endorser and
the company must be disclosed also. That means that if you’re paying for the endorsement (with money,
position, or stock), it needs to be disclosed.

These laws tend to be complicated, so we recommend seeking counsel from an expert in the field to
determine if these apply to you and what steps you need to take to be compliant.

6. Privacy laws

It’s important to maintain the privacy of your customers and the Federal Trade Commission also enforces
laws that protect consumer privacy.

Consumers and employees care about the privacy of their personal information, and it’s critical that
you’re clearly communicating how you use their data. This includes everything from storing and sharing
email addresses to protecting payment info.

If you accept credit cards at your business, for example, you want to ensure that you are PCI-DSS
compliant. This standard ensures that businesses that accept, process, store, or transmit credit card
information have a secure environment in which to do so. (Square is PCI-DSS certified, so you don’t have
to worry about compliance if you use Square for all your payments and payment data).

If your business uses consumer credit reports to evaluate customers, or credit scores for job applications,
leases, or insurance, you also have responsibilities under the Fair Credit Reporting Act. You must ensure
you’re using, reporting, and disposing of information in those reports in a way that aligns with the law.

7. Finance laws

As a business, you must follow finance laws. Finance laws govern how companies can spend money and
grow their businesses.

Bankruptcy falls under this category. If your business debts become unmanageable, you can file for
Chapter 7 (closing your business) or Chapter 13 bankruptcy (plan to reemerge). The type of chapter you
file for depends on the structure of your business, how much debt and assets you have, and whether
you plan to continue running the business.