If you want to start a business but don’t know where to start, you’re not alone. Often business owners run into trouble, because they inadvertently forget to license or follow an applicable rule when establishing their business. Starting your own business doing something that you are passionate about is very exciting. However, all of the pieces that factor into keeping your company compliant are not the most exciting part to starting your company, but are essential to its overall functioning and success. The consequences for not having your company compliant with the proper legal rules and regulations can be devastating and costly.
It is always recommended that you seek the advice of an attorney or business consultant to assist you in working out all of the details, for good reason. In addition to explaining what it entails to start a business, an attorney who specializes in business law can identify the risks you face and help you minimize them.
Assure you are legally permitted to use your company name
Every state has specific rules about the names that new business entities can use. Generally, you can’t choose a name that is substantially similar to one already being used by another company. It could be a costly mistake to choose a name or logo that might infringe on another business’s registered trade name or trademark.
If you think you’ll want to protect your business name or logo, you will want to assure that the name and logo you choose meets the criteria for trademark protection. An attorney can explain the rules associated with trademarking your company name or the risks associated with infringing on another company’s trademark. Once you have registered a name or trademark, you will need to be sure to keep up to date on necessary filings and renewals to retain your protection.
Prepare a Business Plan
A business plan is technically not a legal document, but will generally be required to obtain financing or other forms of start up capital. It should give clarity on your business and its structure, and how you plan to accomplish your company’s goals.
Choosing a business entity
Before starting a business, you need to decide how your business will be structured. Depending on your specific circumstances and needs, each business structure has its own advantages and disadvantages. For instance, with certain types of entities, such as a sole proprietorship, you and your business are considered the same legal entity. Therefore if your business is sued or has debts, you may be personally responsible for those obligations. You can form a business entity such as a corporation, limited liability partnership, or limited liability company to limit these risks. The owners of these types of entities can generally protect their personal assets if the business cannot meet its financial obligations and are limited to the amount they have invested into the company. Formal entity formation isn’t mandatory, but can provide you and your business greater flexibility, tax benefits, liability protection and access to capital.
Here are some of the most common types of business entities:
Sole Proprietorship: This is the default business entity and is created automatically simply by doing business. Individual contractors and freelancers are often classified as sole proprietorships. This type of entity is not a separate legal entity, meaning that there is no legal distinction between you and your business. This type of entity generally provides no protection from liability if your company is sued.
Limited Liability Company: A limited liability company, or LLC, gives many of the same benefits as a corporation without some of the compliance rules that come along with operating an S- or C-corporation. This entity form creates a separate legal entity which can offer owners protection from business liabilities, however the owners cannot issue stock.
S-Corporation: S-Corporations also have limited liability status, but can issue stock to up to 100 shareholders. This business entity is subject to more complex compliance regulations.
C-Corporation: C-corporations are the only entity that can issue an unlimited amount of stock and different classes of stock.
Partnerships: Partnerships are essentially business owned by two or more individuals or entities, and may have opportunities for liability protection for some of the partners.
It’s important to weigh your options and choose carefully because your choice of entity will affect the flexibility afforded your business, and the way your business is owned, managed and taxed.
Formation and Registration of your business
Once you have selected the form of legal structure that suits your needs, you will need to form and register your company with the jurisdiction of your choosing.
File for a Federal Tax Identification number
Also referred to as an Employer Identification Number (EIN), obtaining a tax identification (“ID”) from the IRS is one of the most crucial steps you must take when establishing your business. The number is issued by the IRS and is used for reporting financial activities of a business, similar to an individual’s social security number. This will distinguish the company as a separate legal entity, grant it its own separate taxation in some circumstances, and activate the tax benefits associated with the business entity. This number is required for many reasons, including if your business does any of the following:
- If you have employees
- Operate as as corporation or partnership
- File tax returns for employment, excise, alcohol, tobacco, or firearms
- If you have a Keogh plan (a retirement account for self-employed individuals)
- If your business is involved in estates (trusts and IRAs), real estate, non-profit organizations, farming cooperatives, or plan administrators
Obtain the necessary business permits and licenses
Depending on your business type and the physical location, you may be required to have one or more business licenses or permits from the state, local and even federal level. These licenses may include:
- A general business operation license
- Zoning and land use permits
- Sales tax license
- Health department permits
- Fire Department permit
- Occupational or professional licenses
Failing to have the proper licenses and business permits could result in fines or other penalties. Most states have resources online to assist business owners to determine the licensing they will need in order to remain in compliance.
Learn about employment laws
There are several state and federal employment laws that may apply to your business, and you risk fines and penalties if you don’t follow them. Your legal obligations as an employer do not begin until you hire your first employee, however they could have costly consequences if you are not careful. You should spend time with a business law or employment attorney and/or a CPA to fully understand your obligations for the following (and other) procedures:
- federal and state payroll and withholding taxes
- self-employment taxes
- anti-discrimination laws
- OSHA regulations
- unemployment insurance
- workers’ compensation rules
- wage and hour requirements.
Depending on the size of your company, and the type of business in which you engage, it may be necessary to develop procedures and policies, handbooks and possibly training courses to assure that your company does not inadvertently violate any rules.
Operating agreement or bylaws
Although you are not required to file a copy of your company’s bylaws or operating agreement with the state’s office, most states require businesses to keep a written record of them. These documents provide important guidelines for how your company will operate and explain how decisions will be made, how to handle ownership changes, how shares of stock are issued and more. Essentially, these documents explain how the company will govern itself and can assist in settling company disputes if necessary. A business attorney can assist you with preparing operating agreements, bylaws, and other governing documents that meet the unique needs of your business.
What contracts does my business need?
Contracts play an essential role in protecting your business by carefully outlining the rights and responsibilities of the parties in the agreement. A well-written contract can reduce the number of disputes that arise, ensure that you get paid for the work you or your company does, and provide a clear remedy if a contract is broken. You should always have an experienced attorney draft or review contracts, including routine contracts that you’ll need to use over and over, such as service and employee contracts.
Getting business advice and legal help from a business attorney is key in helping you to start your business on the right foot. Hiring a general practice lawyer may save you money upfront, but could cost you down the road. A business attorney can assess your risks, identify ways to minimize the risk factors and assist you in staying compliant with all of the rules and regulations associated with your business. You should make it a habit to seek business legal advice on a regular basis to ensure that you are protecting yourself as your business grows and changes.
If you are in the process of starting a business or have already begun operating a new business and have legal questions, please call our office at 410-497-5947 for a consultation.