Starting your own business can be fun and exciting. By turning your passion into your occupation you never have to “work” another day in your life! However, it can also be a scary time. You have to balance the risks with the reward and many new business owners don’t really understand the legal ramifications of launching their own start-up. In order to get your business off on the right foot, it’s important to ask yourself certain legal questions and have the answers handy when it comes time to hang that shingle.
1. Do I need a business License?
That, unfortunately, is not an easy question to answer. Business licensing regulations vary widely from state to state. Additionally, local licensing may or may not be a requirement depending on which municipalities your business operates in. To find out whether or not you need a business license, connect with your state’s Office of the Secretary of State. Usually you can find the information you need right on their website. If not, give them a call.
2. Can I Use Personal Assets for My Business?
Capital is often a hard thing to come by and it’s tempting to mix in your personal assets in to give yourself a leg up. However, if you establish a pattern of using personal assets (such as using a personal checking account for buying business supplies) they can become targets of creditors or courts in the future. If the money does need to comingle, consult an attorney to find the best way to transfer these funds.
3. How Do I Ensure Legal Compliance?
In addition to licensing, your business is required to meet certain other standards as defined by the law. For instance, if you’re selling home-baked bread from your kitchen, you have to have your kitchen inspected by the food safety officials else your business could be shut down in the blink of an eye. In order to ensure that your business is 100% compliant with national and local regulations, speak with an experienced small business attorney. It may seem like an unnecessary expense, but when it comes down to a life or death situation (for your business at least) you don’t want to take any chances.
4. Have I Selected the Correct Business Structure?
There are four basic types of business entities: sole proprietorships, partnerships, limited liability companies and corporations. Each has advantages over the other (mainly in the financial liability arena). Incorporation in either an LLC or an S Corporation protects your personal assets should a liability suit arise and should your business accumulate debt it cannot repay. However, you’ll want to thoroughly consider what tax status would best fit your business. If you need help deciding that, a public accountant is probably your best bet.
5. What’s the Best Option, an LLC or an S Corporation?
LLC’s are sort of a hybrid entity. Like corporations, they offer legal liability protection for the individual owners but, unlike corporations, are treated similar to sole proprietorships when tax time comes around (LLCs never pay taxes—the owners do).
S corporations, on the other hand, offer similar personal liability protection and pass-through income tax treatment for owners, however, there are stricter limits on who can be classified as an owner. For instance, owners must be citizens of the United States and cannot exceed 100 in number.
For more information on which type of incorporation would be best for you, visit the Small Business Association’s blog.
6. What is a Legal Business Partnership?
Partnerships are unincorporated businesses. Unlike LLCs and S Corporations, you don’t have to file any paperwork to form a partnership but that doesn’t mean they’re not subject to oversight. In fact, it’s a very good idea to create a formal partnership agreement and have an attorney examine the document in order to clearly define the partnership (and each individual’s role in it) in order to protect yourself from problems in the future. You will also want to register it with the IRS and your state and county as under your “Doing Business As” name (DBA).
7. How Do I Pay Myself in My Own Business?
It’s tempting to simply take your payment out of the company’s funds and call it good. It’s also financially dangerous to do so. A business should be run as a business, not a personal checking account. To avoid legal snags and tax questions you should always pay yourself with a check written from your business’s account.
8. Are You Infringing on Someone Else’s Intellectual Property?
You know it’s wrong to steal another person’s idea and make money from it, but did you know you could be held accountable even if you didn’t know you were doing so? For example, if you set up a business in New York selling a certain type of product without determining if somebody else is selling the same thing (say in California), you could be facing a cease and desist notification or even a lawsuit. You’re required to perform due diligence when it comes to researching your products, your services, and your proposed product and service names.
The best place to start is Google but then you should move beyond a basic search and dig into the U.S. Patent and Trademark Office or U.S. Copyright Office to ensure you’re in the clear.
9. How Do I Protect My Own?
For products you’ll want to apply for patents. Even simply applying for a patent can protect your intellectual properties against the competition. The process is a bit complicated and can get pricey so it’s best to consult a lawyer before you get started.
For ideas and marketing “mojo” you’ll want to apply for trademarks or service marks. These can be used to protect your company name, logos, slogans, and more.
To protect your internal processes and such, you’ll want proper and binding non-disclosure agreements (NDAs) for all of your employees and outside contractors.
10. Do I Need an Attorney?
As Keith Lowe of Entrepreneur says, the answer is always yes. “You need a good attorney. If you’re going to go to all the time, trouble and expense of starting a business, you need to make sure your company is structured so that it protects your interests and fits your goals.”
But that doesn’t mean you have to go the traditional route and put an expensive local attorney on retainer—especially if you only need legal advice during your start-up phase. A more affordable option may be to outsource your legal work through a service like UpCounsel, which connects legal experts with clients like you that need a little help getting off on the right foot. This way you get the advice you need without all of the overhead.
Do Your Homework
You’ve heard that an ounce of prevention is worth a pound of cure. In the case of your new business, an ounce of prevention could very well be the difference between a long and prosperous life and a short and agonizing death. Don’t let your fledgling business be sidelined by legal snafus and liability lawsuits you didn’t see coming. As the owner, you need to understand what regulations and legislation apply to your business and what your financial responsibilities are. If you can’t find the answer to your questions yourself, get professional help.