6 Key Legal Choices You Have to Make When Starting Your Business
| 5 minutes read
Starting your own business can be both exciting and challenging. The first few years can be downright scary, especially if you don’t have experience. Fortunately, many common challenges business owners face in the beginning are fixable if you get it right in the first place.
One specific area that needs attention is the legal choices you must make to set your business up for success.
Main Legal Concerns When Starting a Business
Failing to address legal concerns when starting a business is a big mistake. It can create significant liability, leading to lawsuits, fines, and penalties. It can cause your business to close or even bring about criminal charges in some cases.
When you are starting a business, it helps to look down the road. You’ll want to think about whether you plan to keep your company small, stay private, or go public. Do you expect to have partners, take on investors, or fund it yourself? Will you have other employees and how big do you expect to grow? Answering these questions can help guide you as you make decisions about the legal framework for your business.
Here are six key legal considerations you need to address.
1. Choosing the Right Business Structure
The business structure you choose will impact the way your business operates, how much taxes you will pay, and how much of your personal assets are at risk. Choosing the right business structure will provide you with a solid foundation for the future.
There are numerous types of business structures to consider, including:
- Sole proprietor
Pro: Easy to form and gives you complete control, ease of filing taxes
Con: Personally liable for business debts, may be more difficult to secure outside funding
- General partnership
Pro: Flexible, simple, and offers shared liability
Con: Potential conflicts between partners, liability for partner’s debts
- Limited partnership
Pro: Maintain control with limited partners providing financing
Con: Can be complex to set up and limited availability in some states
- Limited liability company (LLC)
Pro: Separates personal assets from business liability
Cons: Report filing, set up fees, and potential minimum annual taxes
- C Corporation
Pros: Limited personal liability, can issue stock, and avoid self-employment taxes
Cons: More complex than other entities, less control due to stockholders, additional regulatory requirements.
These pros and cons just scratch the surface. Each business structure has its own unique advantages and disadvantages, so you will want to make sure you choose the structure that works best for your business.
2. Check All the Licenses, Permits, and Registrations You Might Need
Depending on the type of business, your business structure, and where you are located, there may be licensing, permitting, and registrations you need. You’ll need to check federal, state, county, and city regulations.
This can include such things as:
- Business license
- Building permits
- Health and safety regulations
- Seller’s permit
- Zoning permit
- Commercial signage permit
Some types of businesses are regulated and require specific permitting, such as establishments that prepare or sell food or liquor, those that transport people or goods, or work in construction. Some states require licensing for hairstylists, manicurists, florists, travel agents, auctioneers, security guards, and other types of businesses.
Some professions also require professional licenses to operate legally. The National Conference of State Legislatures (NCSL) has put together a list of the most common occupational licensing requirements, but it’s not an all-inclusive list. You will want to check with your state licensing board to make sure you are in compliance.
Making sure you have everything required before starting a business can protect you from significant legal problems in the future. Requirements vary widely, so you’ll need to do some serious research to ensure you are compliant. State, county, or city business licensing agencies are a good first starting point, but you may also need assistance from legal counsel.
3. Understand if You Have any Intellectual Property That Needs Protection
Intellectual property (IP) is one of your most important business assets. When you develop a brand, invent a product, or establish a reputation, you want to protect it from others who may wish to appropriate your success.
While the intellectual property may be protected by common law, it may be much more difficult to prove ownership of IP without getting legal protection. If it’s something important to your business, you want to have a clear record of ownership.
There are three types of intellectual property protection that you can pursue:
The U.S. Patent and Trademark Office (USPTO) grants patents for inventions. When you have a patent, it allows you to prevent others from making, selling, or using the invention without your permission.
Many businesses flourish because they’ve figured out a better product or a new process and it becomes a competitive advantage. If that’s you, you need to protect it. You can apply for:
- Utility patents, cover processes new products, processes, or machines.
- Design patents, which protect the visual qualities of products.
Copyrights provide legal protection for creators of original material. This includes things such as computer software, website content, and original creative works such as music, graphic design, or books.
You can’t copyright an idea, but you can copyright the paper you wrote about the idea.
Trademarks are words, symbols, or designs that distinguish your business. You can apply with the USPTO to register a trademark for products or a service mark for services. It’s a good idea to search the USPTO trademark database before naming or creating business products or services to avoid trademark claims.
4. Do Proper Bookkeeping from The Start
Bookkeeping provides accurate information about your business and helps keep your finances in order. Since the number one reason businesses fail is a lack of cash flow, it’s essential that you always have a firm understanding of your finances.
When you do proper bookkeeping right from the start of your business, it makes everything easier down the line. Going back and recreating what you did for tax filing can be painful and expensive.
The IRS has a long list of records you’ll need to maintain, including:
- Payments and receipts
- Employment taxes
- Travel and entertainment
An organized and consistent approach to bookkeeping also helps you plan and budget.
5. Get Business Insurance
Whether you are starting a sole proprietorship or a large corporation, you have liability. Business insurance helps cover the costs of any property damage or liability claims. Without it, you’d be forced to pay out of pocket, which could be devastating.
Business owners should think about the potential risks associated with their business and make sure they have the right protection. Companies may want to consider a business owner’s policy (BOP) which combines property, liability, and income insurance in a single policy. Depending on how your business operates, you may also need coverage for:
- Commercial vehicles
- Errors & omissions (E&O) or professional liability
- Employment practices
- Director and officer liability
- Key employees
- Umbrella insurance
In all states except Texas, you will be required to carry workers’ compensation insurance once you reach a certain number of employees.
6. Use Confidentiality and Non-Disclosure Agreements
Trade secrets are the processes, strategies, formulas, and business information that provide a competitive advantage. When disclosure of these things would hurt your business, it’s generally considered a trade secret. Examples would be your customer lists, computer algorithms, or formulations for food items.
You can’t register, trademark, or copyright your trade secrets, but they are important intellectual property that needs to be protected. One way to do this is to use confidentiality and non-disclosure agreements (NDA).
A properly-crafted confidentiality agreement and NDA provide a legal framework to protect your ideas and information. When entering into a business relationship, a confidentiality agreement requires parties to the agreement to keep trade secrets and proprietary information confidential. An NDA is a type of confidentiality agreement that provides the details and legal consequences of sharing confidential information.
Depending on your business, you may also need basic contracts that define the services you are providing and govern the transaction.
When you’re starting a new business, it’s an exciting time. You’re ready to get going and take on the world. Many entrepreneurs, unfortunately, jump in without taking the time to create the proper legal framework and pay the price.
When you address the legal issues upfront, you can protect your business and set yourself up for success.