Starting a Business? Get Your Legal Ducks in a Row

Monday, 14 July 2014 Andy Anderson

fund businessEvery year, budding entrepreneurs take steps to turn their vision into a new enterprise. Their ideas may vary, but they all seem to have an abundance of energy and optimism, which is inspiring to everyone around them.

As exciting as it can be to get caught up in the flurry of getting new customers and opening that first office, most entrepreneurs lack the legal knowledge they need to start and run a business. Without this roadmap, it is all too easy to put aside the less glamorous aspects of business ownership.

It’s true that reading into regulations and company filings isn’t all that exciting, but they are critical to the health of your business. To make it easier for new business owners, we’ve compiled a list of eight legal aspects that should be considered for your startup or small business. Depending on your individual situation, you may need to hire a tax accountant or attorney with specific experience related to your industry. Either way it is important to get your legal “ducks in a row” early on.

Choosing a name for your business

Before you start designing a logo or printing out business cards, be sure your business name doesn’t already exist. If so, you could be infringing on the rights of another business owner. This is a simple task. Just do a free online search of business names already registered with the Secretary of State where you live. Then you can conduct a free trademark search to see if the name is available in all fifty states. You should also do a comprehensive search of all state and local databases.

Register your fictitious name (DBA)

Have you ever noticed those endless announcements in the classified sections of local newspapers? Your business might need one too. A DBA means “doing business as” and it must be filed whenever your company does business under a different name. For example, if you have a sole proprietorship or general partnership, a DBA is needed if the company name is different than your own name. An LLC or corporation must file a DBA when they will be conducting business using a name that is different from the official corporate or LLC name.

Form a Corporation or LLC

Forming a corporation or LLC is an important step in protecting your personal assets, such as your real estate or child’s college fund. Without this, your personal assets could be used to pay your company’s debts. Each of these two structures has distinct advantages, so choosing one will depend on your specific needs. 

An LLC is great for small businesses that want the legal protection without all the formality of a corporation. An “S Corporation” is ideal if your small business qualifies, and a “C Corporation” is needed if you expect to seek venture capital or go public. Delaware and Nevada are two popular states for incorporating your business, but if you will have fewer than five shareholders it is better to form an LLC in the state where your business operates.

Obtain a Federal Tax ID number

One way of distinguishing your business as a separate legal entity is by getting a Federal Tax Identification Number, also known as an EIN (Employer Identification Number). Similar to an individual’s Social Security Number (SSN), this is the way the IRS tracks your company’s transactions for tax purposes. Sole proprietors are not obligated to get a Tax ID number but it’s still a good way to keep from using your personal SSN for business matters.

Get comfortable with employment laws

As an employer, your legal obligations begin the moment you hire your first employee. It makes sense to confer with an employment lawyer to fully understand your legal obligations, including federal and state payroll and withholding taxes, anti-discrimination laws, unemployment insurance, self-employment taxes, OSHA regulations and workers’ compensation rules.

Get the necessary business licenses and permits

As a business owner, you may be required to have a few licenses or permits from local, state and even federal authorities. These include zoning and land-use permits, a business operation license, sales tax license and health department permits, as well as professional or occupational licenses.

Consider filing for trademark protection

While not legally required, it makes sense to register your trademark. Just using a name automatically gives you common law rights as a business owner, but trademark law can be complicated. Simply registering a DBA in your state won’t automatically protect your rights to the name. The only way to claim “first use” the name must be a registered trademark. This makes it much easier to exercise your rights in the event that another entity tries to use your name.

Open a business bank account and start establishing credit

When you rely solely on personal credit to fund your business, you are putting your personal mortgage and other loans at risk. In addition, your personal credit score would be used to determine your business credit score. It is better to separate your personal financial life from your business credit, but this means you must first establish a credit score in the name of your company. Start by opening a bank account in the name of your business. Ideally, the account should show cash flow indicating the company’s financial health and capability of taking on a business loan.

No matter how busy things with your startup get, set aside some time to address these matters and take your legal obligations seriously. Getting your legal ducks in a row right from the start will help you avoid any pitfalls down the road, and will help you scale your business successfully as you grow.

Read 2167 times Last modified on Monday, 14 July 2014

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