There is nothing more exciting and potentially rewarding than starting a business. Whether your goal is to envision and create a vast empire, or start a nonprofit organization dedicated to serving a noble cause – there’s always a way to minimize mistakes and make a solid legal foundation on which to build for future success.
Starting a business is a very complex and demanding process, with many different aspects to it. The legal side of starting a business is arguably the most important for the stability of your venture. Every business needs to make sure everything is in compliance with local, state and federal regulation. There’s no way around it. Failing to do so could prove to be the difference between great success and mediocre business performance.
Here’s a step-by-step guide to help you understand the general requirements.
#1 – Choose the right legal structure
This is one of the first decisions every founder needs to make. It’s also one of the most important decisions. Every legal form has its inherent advantages and disadvantages. Fundamentally, choosing the right legal structure very much depends on what specifically you’re trying to achieve with your idea.
Keep in mind that the initial business type is not by any means permanent. You can convert your business structure to another form if needed. However, it’s always better to choose wisely, so you don’t need to change anything later. Here are all the legal forms.
Sole proprietorship – ideal for small businesses. According to a survey, nearly 70% of businesses in the US operate as a sole proprietorship.
Partnership – the best form for businesses when two or more co-founders share the profits and liabilities of the venture.
Limited Liability Company (LLC) – a corporate legal structure. Essentially a hybrid entity created with the goal to combine advantages of corporations and sole proprietorships/partnerships.
S Corporation – type of corporation that allows businesses to benefit from certain advantages of being incorporated while being taxed similarly to a partnership. S corporations cannot have more than 100 shareholders.
C Corporation – a legal form of corporation allowed to have any number of shareholders. Unlike S corporations, profits from C corporations are taxed both at the corporation’s tax rate and individual’s tax rate.
Nonprofit Organization – these entities are tax-exempt organizations created with the purpose of achieving certain goals different from making profit. Also known as 501 (c) (3) organizations, based on the section of Internal Revenue Code that regulates their existence.
#2 – Choose and register a business name
Naming your business is important for a lot of reasons. From legal aspect, the first thing to do before choosing a new name is to make sure that the same or similar name isn’t being used by other entity. Making sure you are legally allowed to use and protect the name you’d like to operate under is critical.
Here are some ways to establish a business name:
Use the name established when the company was founded
When a business is registered – in most cases it operates under the owner’s name by default. There is no legal need to register the name separately. However, in some cases, choosing another name is very beneficial for creating a more professional image for your business.
File for a DBA name
DBA name is also known as “fictitious name” (DBA – doing business as).
If, for any reason, you want to use a different name than the one already established when the company was founded – you can do that by filing for a DBA name. The process of registering a DBA name is usually done with state government and the rules vary from state to state. There are particular states that don’t require the registration of DBA names at all.
Trademark your business name
Another way of registering a business name is by trademarking your business. It is possible to trademark your business on both state and federal level. In both cases, the trademark is registered via the United States Patent and Trademark Office.
Hand in hand with choosing a legal name for your business is picking a domain name for your website. You can do this by registering a domain name with one of domain name registrars. Keep in mind that domain names containing trademarks are also protected by trademark law.
#3 – File for patents, trademarks and copyrights
Startups usually have great ideas they’d like to show to the world. That’s where they shine. If you feel like you have something great going on, you should definitely do your best to protect your work. The last thing you want to allow is someone stealing that idea you worked so hard on. One more benefit from protection is particularly good for expanding your business. Investors like to hear you did everything you could to protect your assets.
Your intellectual property can be protected by patent, trademark and copyright.
Patent – patent is a legal instrument established with an idea to guard an original invention. It means that everybody else is prohibited from selling, making or using your invention in the United States. Patent protection is granted by the United States Patent and Trademark Office for a certain amount of time.
Trademark – trademark protects recognizable sign, symbol, design or expression which distinguishes products or services from a particular source from all others. Good examples are corporate logos, brand names or recognizable symbols used by companies.
Copyright – copyright protects expressed original work of authorship. For as long as his copyright is in effect, the owner has the sole right to share, perform or license material covered by the copyright. To copyright your work, register with the U.S. Copyright Office. The work you produced is automatically protected by copyright once it takes tangible form. However, officially registering your work makes it much easier to prove that the original work is actually yours in case of a legal dispute.
#4 – Establish a business agreement with co-founders
Important part of doing business is clearly defining the relationship between all co-founders and relevant factors in a newly established company. Although the negative sides of poorly defined deal between the founders may not be visible at the very start, this could spell major trouble down the road. It is highly recommended to create a comprehensive, written founder agreement which clearly defines the deal between co-founders.
Think about defining percentage of the business each co-founder gets, what are the roles and responsibilities, how key decisions are made, what happens if one of the co-founders doesn’t act according to agreement, what is the general mission for the business etc. There is much, much more. Finding balance between covering as much situations as possible and spending too much time on regulation is key.
#5 – Obtain federal, state and local business licenses
Just about every business has to obtain some kind of permit or license to operate legally. In general, types of licenses are different for different businesses. Legal ways to get licenses also differ from state to state. Which specific licenses you’ll need depend on what kind of business you are going to run, where your business is located and where it’s going to operate.
Local licenses – these licenses are issued by cities and counties. For example, cities usually have zoning laws that are made to regulate where particular business activities can be performed.
State licenses – These types of licenses are mostly issued at state level for people in certain trades and occupations such as insurance agents, plumbers, real estate brokers etc.
Federal licenses – Cases in which you need a federal level license are much less common. For example – radio and TV stations, meat processing businesses, businesses that sell alcohol, tobacco and firearms all need federal licenses to operate.
#6 – Register for federal, state and local taxes
Taxes are fees imposed to businesses and individuals by a government entity. Pretty much every business needs to pay certain taxes. However, there are some exceptions to this rule. Nonprofit organizations are granted special, tax-exempt status by the IRS. They are completely relieved from taxes.
Most businesses need to file for a Federal Tax Identification Number, also widely known as Employer Identification number (EIN). It’s essentially a nine digit number provided to businesses by the Internal Revenue Service. Applying for EIN is a free service and you can apply online, via fax, mail or by telephone.
Deciding which income tax return form to file depends on the legal structure of your business. There are four main types of taxes for businesses:
- Income tax
- Self-employment tax
- Taxes for employers
- Excise taxes
Apart from taxes required by federal government, businesses are obliged to pay local and state taxes too. The rules governing these taxes are determined by each state separately. Two most common tax requirements for businesses on a state level are income taxes and employment taxes.
Even though everything regarding legal components of starting and running a business or a nonprofit organization seems overwhelming at times, it’s nothing too complicated. Hiring trained and specialized professionals if you need help is always a good idea. It may be costly, but it will pay dividends in the long run.
If you feel like going down the DIY path, you can definitely make it. Understand how things work, and you’re one giant step closer. Execute properly, and you’ll be on your way to a great start!