When a new idea strikes, and an entrepreneur wants to turn it into a new business venture, the last thing they want to do is think about the legal requirements.  Nevertheless, it is extremely important for entrepreneurs to make sure they’re in compliance with the legal obligations of running a small business before they begin operations.  There are a range of legal requirements for new businesses and startups, including financial regulations, tax obligations and employment laws. Make sure your new company complies with all its legal responsibilities so you can get back to focusing on growing your business.

Here’s an checklist to guide through some important legal steps:

□ DECIDE ON A TYPE OF BUSINESS STRUCTURE:  CREATE A LLC OR CORPORATION

The thing you need to do is determine what type of business structure you want to form (to help, check out this Business of Success vlog on Origins & Types of Business Structures).  You will want avoid defaulting to a sole proprietorship or partnership where your personal assets are at risk, but rather choose between a limited liability company or a corporation. As Mr. Shrum points out in the BOS vlogs, there are advantages to these structures particularly with regard to the protection of your personal assets, so do your research before selecting a business structure for your startup.

  • LLC: A LLC, or Limited Liability Company, protects you from personal liability under most circumstances. This means that if your business is sued or if it declares bankruptcy, your personal assets including your home and vehicle won’t be at risk. With a LLC you’ll be able to file your business income as part of your personal income taxes, but you will likely need to pay self-employment tax.
  • Corporation: A corporation, or C corp, is a company that is legally a separate entity from its owner or owners. Corporations offer the greatest level of personal protection from liability out of all business structures. However, they’re more expensive and complicated to form. Corporations file separate income tax on their profits.

When you file your documentation to form your business structure, you will automatically be registering the name of your new business entity with the state of incorporation, and beginning the process of establishing a common law trade name presence in that state.  In addition to our valuable information here on Business of Success, the Small Business Administration created a helpful guide on the different business structures, that also discusses the advantages and disadvantages of each option. 

Photo by Dominika Roseclay from Pexels
□ CAREFULLY DEVELOP A BRAND

Once you’ve decided on a business structure, and taken the necessary steps to form it, you’ll want to turn your attention to branding and select and design a logo that reflects your corporation vision and mission (check out this Business of Success vlog on The Importance of Branding and Trademarks for help with this task).  Consider colors and tag lines that convey the values of you and you business.  Choose a name that reflects your brand and make sure it hasn’t already been claimed.  You may want to engage the services of a dedicated graphic design to assist you with this or, if you are struggling to stay within a budget and cannot afford to hire a dedicated designer, you can opt to use a service such as Fiverr where you can get your logo designed cheaply instead.

□ CLEAR YOUR CHOSEN WORD OR DESIGN

Before you take the time and spend the money to come up with and design that perfect brand logo and/or tag line, you’ll want to clear the name for trademark purposes. Clearing the name simply means searching corporate records, the Internet, and the USPTO.gov principal register to make sure your name doesn’t conflict with someone else who might be using it for similar goods or services. 

□ REGISTER IT AS A TRADE OR SERVICE MARK

You should then register your business brand as a trademark or service mark at the U.S. Patent & Trademark Office using the appropriate international classification for your goods or services. There are four ways to register it, each serving its own purpose:

  • An entity name: is the name under which you filed you corporate documentation (step 1 above), and offers some legal protection for  your business name at a state level;
  • State, Federal and/or International Trademarks: lists your mark on a primary register and offers greater legal protection your business brand at these various levels of use;
  • A DBA (Doing Business As): doesn’t offer much legal protection other than common law trade name status, but may be required, depending on your location and business structure.  A d/b/a can be different than the name under which the business is registered.
  • A domain name: Claims your business’s web address (URL).  There is some interaction between tradenames and domain names, so consult with your attorney to clarify.
□ APPLY FOR A FEDERAL TAX ID NUMBER

Your federal tax identification number is known as an Employer Identification Number (EIN) and it allows you to legally hire employees, pay federal taxes, apply for business licenses and open a business bank account. You can apply for an EIN through the IRS website. Your business will need an EIN if you plan on doing any of the following:

  • Hiring and paying employees
  • Filing employer tax returns
  • Operating as a corporation
  • Using a tax-deferred pension plan

You also need an EIN if you wish to open a business account in the name of the company.

□ DETERMINE IF YOU NEED A STATE TAX ID NUMBER

Do some research to find out whether your startup needs a state tax identification number. You’ll only need one if the state you operate in collects taxes from the type business or industry you’re operating in. Since tax obligations vary from state to state, it’s best to visit your own state’s website and check the local laws related to your income and employment tax obligations.

□ OBTAIN BUSINESS PERMITS AND LICENSES

You will need to apply for business licenses and permits at the federal and state government level, but the specific licenses you need depend on the industry you work in and your business location. The Small Business Administration has a list outlining common federal business licenses required based on industry, which is a good starting point for your research. At the state level, the licenses and permits needed and the fees owed will depend on where you’re located and what your primary business activities are. Usually, a state’s revenue department is responsible for collecting taxes and issues these types of requirements.  Research those requirements at the state and local levels based on where you do business.

□ PROTECT YOUR BUSINESS WITH INSURANCE

While the business structure serves generally as a shield of liability to protect your personal assets from liability, various forms of business insurance offer additional protections both for your business assets and in special cases where the these personal liability protections offered by the specific business structure aren’t enough (for example, most professions such as lawyers and doctors do not allow these professionals to use the business entity to circumvent malpractice issues). Business insurances such as comprehensive general liability, errors & omissions, and other forms protect not just your personal assets if the corporate veil is pierced, but they serve to protect your business assets as well. Some types of insurance may be required by law depending on your circumstances, such as is the case with unemployment and disability insurance. It’s also a good idea to purchase business insurance to protect your startup from other potential risks, especially when you operate in special industries:  for example copyright infringement insurance is available for businesses dealing in book publishing, musical compositions, sound recordings and movie production. Some of the more common business insurance options include:

  • General liability insurance: Protects your business from various forms of financial loss, including property damage, injury, medical issues, lawsuit settlements or judgements;
  • Product liability insurance: If your business sells products, this insurance protects you in the case that one of your products is defective and injures a customer;
  • Commercial property insurance: Protects your business from loss or damage to company property, as a result of natural disaster, accidents or vandalism; and
  • Commercial vehicle insurance:  Automobiles, transport and delivery vehicles used by businesses require special forms of insurance.
□ OPEN A BUSINESS BANK ACCOUNT

From a legal perspective, it’s important that you separate your personal and business finances before you start collecting payments from clients. You may want to choose a local bank and begin to establish a relationship with a business banker.  Local banks can be more competitive than national brands.  This would also be a good time to begin to research accountants or MBA’s to offer business advice.  Choose a bank that’s convenient and serves your needs, maybe by offering lower banking fees for small business clients or even better, one that offers free business accounts. When you’ve chosen a banking institution, you’ll need to provide some information about your business to open an account, including:

  • Your Employer Identification Number (or Social Security Number, in the case of a sole proprietorship);
  • The formation documents for your business;
  • Your business license, if any; and
  • Ownership agreement documents
□ CONSULT THE PROFESSIONALS

To ensure you’ve covered all your legal, financial and business responsibilities as a new business, it’s a good idea to consult professionals for advice. Certainly, you should consider sitting down separately with both a lawyer and an accountant to make sure that your company is covered from a legal and a financial standpoint before opening for business, and don’t forget about the banker and the insurance agent we discussed.  You may also want to consider a business manager who can combine some of the talents of both a lawyer and an accountant.