So, you’ve decided to start a business. It’s an exciting idea. Owning your own business provides an opportunity to escape the rat race, to work how you want to work, and to reap the rewards of your own labor. However, there are some potential pitfalls and obstacles to consider as well.
Starting a new company, but failing to follow proper legal procedures, could end up harming your new business before it even gets off the ground, and the mistakes could put your personal assets at risk.
Here are three major considerations you should consider before embarking down the new business path.
1. Choose Your Business’s Structure
Perhaps, the most important choice you will make when starting a business is the legal structure selection. Choosing the right business structure provides you — and your family — protection from negative consequences your business may encounter. Without a legal structure, you could be personally liable for contracts your business enters into, or acts it takes, and your personal assets could be called upon to satisfy these liabilities.
Three common options to choose from in organizing your business include: forming a limited liability company (LLC), incorporating as a C corporation (“C-corp”), or incorporating as an S corporation (“S-corp). LLCs provide excellent flexibility both from a management perspective and from a tax perspective. S-corps are available to small companies and offer more tax options, but have significant incorporation costs and recordkeeping requirements. A C-corp is generally a favorable form of organizing for large companies, or if you are launching a startup that is planning to seek venture capital funding. For the majority of startups, an LLC is the best way to go, but each business is different.
It is important to sit down with a legal professional so your business’s founding documents fit your specific industry and situation. All too often, we see business owners get in hot water as a result of the founding documents being inappropriate for the situation. While it can be tempting to go the DIY route on these documents, doing so can cause unforeseen problems. An ounce of prevention is better than a pound of cure, and preventing legal problems is vastly cheaper than solving them — once they arise. While nobody can predict every potential problem, a legal professional can help you draft a document that prevents many common problems.
2. Protect Your Assets
Depending on your industry, your new company will have and acquire new assets such as equipment or property. Most business owners understand they need some form of insurance to protect equipment or property. However, many business owners fail to protect what can become their most important asset: their intellectual property. Your intellectual property includes your business’s name, logo, and potentially the product itself, which your business produces.
A legal professional can help you select a name and logo that is protectable. As your business develops a solid reputation for the great products your business makes, or the excellent service that your business provides, that reputation will be closely tied to your name and logo. Selecting a protectable name and logo gives you the right to prevent others from profiting off your hard work. Simply using a name in commerce can give you some common-law rights as an owner. However, to more completely protect your name and logo you will need to file for trademark (or servicemark) protection. Depending on your situation and business, you may want to register your trademark on the state level, or federal level, or both. A legal professional can help you select the best level of protection.
3. Check for Regulation
When you start a business, there’s likely to be general business regulations and specific industry regulations that you’ll need to comply with. As an example of a general business regulation, if you intend to purchase goods at wholesale to sell to customers, you’ll need to apply for a reseller’s permit to allow you to avoid sales tax on those goods you purchase at wholesale. You also may face specific industry regulation. Contractors, those selling alcohol, and those transporting goods, among many others, face specific industry regulation that you will need to navigate and comply with.
The Bottom Line: There are many legal issues a new business will want to consider such as employment law, tax obligations and consequences, and how to navigate the new contracts your business will enter into. Don’t make common and potentially costly mistakes.
Eric Stokes is an attorney with JDSA Law. His areas of practice include Alternative Dispute Resolution (ADR), business law, land use and homeowner associations, and litigation.