Starting a business may be both the most exciting and the most stressful endeavor an individual will ever participate in.
There are numerous important details to consider. In addition, the rules for starting a business may differ slightly depending on the state.
An individual starting a business will need to ensure that they address the legal requirements to get their business started on the right foot.
What are the Steps to Get My Business Started?
There are several steps an individual will need to take when starting a business, including:
- Choosing a business structure;
- Picking a business name;
- Filing organizational documents;
- Filing for an employer identification number (EIN);
- Creating a business plan; and
- Taking steps to protect any intellectual property.
One of the most important decisions an individual will make for their business is choosing the business structure. The organizational structure the individual chooses will impact their legal and financial status.
What business formation type is chosen will also have different tax requirements and affect the owner’s personal liability differently. There are several different business formation types an individual can choose from, including:
- Sole proprietorship;
- Limited liability partnership (LLP);
- Limited liability company (LLC); and
A sole proprietorship is a business type where the owner is the only member of the business. With this formation type, the owner receives all of the profits of the business but also bears all of the responsibility. Because no legal distinction exists between the individual and the business, the individual is liable for all debts incurred by the business.
A partnership is created when two or more individuals start a business together and each partner contributes to the creation of the business. The partners also share the business profits as well as its losses.
A partnership agreement can dictate the percentage of the business each partner will own and what portion of the profits each partner is entitled to. If no partnership agreement exists, each partner owns equal shares of the business profits and losses.
If a lawsuit is filed against a partnership, all partners are responsible for the responsibilities and obligations of the partnership. Partnerships are considered pass-through tax entities because the partnership itself does not pay taxes on the income of the business. Rather, each partner pays taxes on their individual share of the business income in addition to self-employment taxes.
Limited liability Partnerships, or LLPs, are similar to partnerships but provide the individual partners with a shield from the debts and liabilities of the other partners in addition to certain debts of the partnership. This provides the partners with a layer of protection if a lawsuit is filed against the LLP so that no one partner is personally responsible. Each partner, however, is responsible for their own negligent actions.
Limited liability companies, or LLCs, are a popular choice for new business owners. This type of business structure provides the limited liability benefits or corporations which still provide flexibility and tax benefits of partnerships.
Members of an LLC cannot be held personally liable for the actions or debts of the LLC. This protects the personal assets of the members from creditors even if they are actively engaged in the everyday operation and management of the business.
A corporation is a business entity with the authority to act as an individual, independent from the shareholders who own the business. There are numerous different types of corporations, but they typically follow the same basic format.
Corporations are typically classified according to:
- The purpose of the business;
- The manner in which the business is taxed;
- The number of shareholders the business will have; and
- Whether the corporation incorporated in order to make a profit.
The second step in starting a business is to choose a business name. This is important for building the brand for the business, but there are some limitations and rules.
For example, if the business is an LLC, the business name must include LLC or Limited Liability Company. An individual will also need to ensure that their business name is unique and different in order to avoid confusion with an existing business.
An individual can search for their proposed business name in their state records. In most states, these records are kept at the Secretary of State’s Office.
If the business name is available, an individual may be able to reserve it for a brief period of time while they are preparing their filing documents. If the name is already taken, an individual will have to decide on a different unique business name to register with the state.
The third step to starting a business is to file organization documents and filing them with the government. The documents which are required will depend upon the type of business that is being created and the state in which it is being formed.
The majority of the paperwork will establish:
- The name of the business;
- The principal members or owners of the business; and
- Contact information for the business.
If an individual is creating an LLC, they will be required to file Articles of Organization with their Secretary of State’s Office. Corporations require a corporate charter as well as Articles of Incorporation. An operating agreement will outline the internal rules by which a business will operate, specifically related to financial and functional decisions.
The fourth step to starting a business is to file for an employer identification number, or EIN. a business will require an EIN in order to open a business bank account and to file business tax returns. An EIN is easily obtained by contacting the IRS by phone or by applying online at the IRS website.
The fifth step in starting a business is to create a business plan. In order for an individual to have a successful business, they will want to have a business plan which takes into consideration issues such as:
- Financing and budgeting;
- Raising capital, such as with loans or investors;
- The possibility of future growth; and
- Conflict resolution.
The sixth step to starting a business is to take steps to protect the intellectual property of the business. It is important to file for patents, copyrights, or trademarks for any ideas or products that a business develops in order to protect the business’s intellectual property.
What are Some Legal Issues Associated with New Businesses?
Starting a new business may be complex and there are a variety of legal issues which an individual may encounter when trying to get their business off the ground. It can be helpful to be aware of the types of issues which may arise in order to be prepared for them.
Common legal issues which arise associated with starting up a new business may include:
- Breach of contract. Breach of contract disputes may arise when parties do not meet their contractual obligations related to the business;
- Licenses. Depending on what industry the business is in, it may require various licenses or permits. At the very least, a business license will likely be required;
- Non-disclosure agreements. It is important to consider confidentiality and non-disclosure agreements when negotiating financing or entering into contracts with suppliers;
- Zoning. It is important to ensure that the business location is properly zone for the industry or type of business;
- Taxes and bookkeeping. This may seem simple, but it is essential to have organized bookkeeping methods, which will also come in handy when filing income taxes for the business;
- Business succession. Corporate business succession laws govern issues regarding company termination and transferring the business to a new owner, either by plan or due to an unforeseen circumstance.
An individual may also encounter issues related to hiring or staffing as well as the start-up loan, financing, or capital which is required to get a business up and running.
Can a Lawyer Help Me Get My Business Started?
It is essential to have the assistance of a business lawyer when starting a new business. Your attorney can provide advice regarding the laws in your state, can answer any questions you have, and will assist you with all of the steps required to start your business.
Should a legal dispute arise related to starting your business, your attorney can assist with negotiations as well as represent your interests and the interests of your business in court, if necessary.