Get Your Legal Ducks in a Row Before Starting Your Business
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With each new year, budding entrepreneurs look to turn their vision into a business. These startups are often overflowing with tremendous ideas, energy and optimism–but don’t always have a roadmap for the legal aspects involved in starting a business. In the flurry of drumming up new customers, getting ready for a website launch and building the first prototype, it’s all too easy to put off some of the less glamorous, more administrative aspects of running a company.
Yes, company filings and regulations are not the most exciting parts of your startup. Yet they’re critical to the health of your business and personal finances. Here’s a quick rundown of eight administrative aspects you need to consider for your startup or small business. Of course, depending on your situation and type of business, hiring a tax accountant and/or good attorney with specific experience in your industry can go a long way to helping you steer clear of trouble.
1. Did you pick a name? Make sure you’re legally permitted to use it
Before you start printing out business cards, make sure the great new name you thought of isn’t infringing on the rights of an already existing business. In most cases, you don’t need an attorney for this task, as you can perform a free search online that looks at business names registered with the Secretary of State–that will tell you if the name is available in your state. Then, take your search to the next level and conduct a no-conflict, free trademark search to see if your name is available for use in all 50 states.
And considering you can still infringe on someone else’s trademark even if they’ve never formally registered it with the U.S. Patent and Trademark Office, you should also do a comprehensive search into all state and local databases (look for an affordable online service to help you with this).
2. Register a fictitious business name/DBA
Ever notice those endless fictitious name announcements in the classifieds of your local paper? You may need one, too. A DBA (Doing Business As) must be filed whenever your company does business under a different name. If you’ve got a sole proprietorship or general partnership, a DBA is needed if your company name is different from your own name. For an LLC or corporation, a DBA must be filed to conduct business using a name that’s different from the official Corporation or LLC name you filed. For example, my company is officially incorporated as CorpNet, Inc., so we needed to file DBAs for the variations CorpNet.com and CorpNet. These are typically filed at the state and/or county level.
3. Incorporate your Business or form an LLC
Forming an LLC or corporation is an essential step to protect your personal assets (such as your personal property or your child’s college fund) from any liabilities of the company. Each business structure has its own advantages and disadvantages, depending on your specific circumstances. Three popular options are: the LLC (great for small businesses that want legal protection, but minimal formality), S Corporation (great for small businesses that can qualify), or C Corporation (for companies who plan to seek funding from a VC or go public).
And one other word of advice, Delaware and Nevada are two popular states for business incorporation. However, if your business has less than five shareholders, you’re better off forming an LLC in the state where you operate your business (i.e. where you live).
4. Get a federal tax ID number
To distinguish your business as a separate legal entity, you’ll need to obtain a Federal Tax Identification Number, also referred to as an Employer Identification Number (EIN). Issued by the IRS, the tax ID number is similar to your personal social security number and allows the IRS to track your company’s transactions. If you’re a sole proprietor, you’re not obligated to get a Tax ID number, but it’s still good practice as you won’t have to provide your personal social security number for business matters.
5. Learn about employee laws
Your legal obligations as an employer begin as soon as you hire your first employee. You should spend time with an employment law professional to fully understand your obligations for these (and other) procedures: federal and state payroll and withholding taxes, self-employment taxes, anti-discrimination laws, OSHA regulations, unemployment insurance, workers’ compensation rules, and wage and hour requirements.
6. Obtain the necessary business permits and licenses
Depending on your business type and physical location, you may be required to have one or more business licenses or permits from the state, local or even federal level. Such licenses include: a general business operation license, zoning and land use permits, sales tax license, health department permits, and occupational or professional licenses.
7. File for trademark protection
You’re not actually required by law to register a trademark. Using a name instantly gives you common law rights as an owner, even without formal registration. However, as expected, trademark law is complex and simply registering a DBA in your state doesn’t automatically give you common-law rights. In order to claim first use, the name has to be ‘trademarkable’ and in use in commerce.
Since you’ve spent untold hours brainstorming the ideal name, and you’ll be putting even more effort into cultivating name recognition, you should consider registering your trademark for proper legal protection. Registering a trademark makes it exponentially easier to recover your properties, like if someone happens to use your company name as their Twitter handle. Having the right documentation means you have the legal right to that handle, and Twitter will take steps to give it to you.
8. Open a bank account to start building business credit
When you rely on your personal credit to fund your business, your personal mortgage, auto loan and personal credit cards all affect your ability to qualify for a business loan (and for how much). Using business credit separates your personal activities from that of the business. To begin building your business credit, you should open a bank account in the name of your company, and the account should show a cash flow capable of taking on a business loan.
Get your legal ducks in a row
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.