Starting a business can feel like an overwhelming task, from both a personal and legal standpoint. Today, I’m here to walk you through some of the legal steps you’ll have to take in order to get your company off the ground.
As you’ll soon see, with some planning and preparation, the task might not look so daunting after all.
Step 1: Pick a Business Name
Businesses are a little bit like racehorses: each one has to have a unique name in order to avoid confusion with other competing horses — er, businesses. In fact, choosing a name for your business that’s already in use is one of the fastest ways to find yourself being served with a cease and desist.
You need to find out whether your proposed business names have already been registered with the Secretary of State. From there, you can conduct a trademark search to make sure you’re free to use the name in all 50 states. If you have franchising ambitions, it’s important not to skip this step.
Finally, if you want to protect yourself from prosecution in the event that your competitors never filed with the U.S. Patent and Trademark Office, find an online service to help you run a search of every local and state database.
Step 2: Incorporate Your Business
It’s time to transform your collection of great ideas into a legal business entity. You can either incorporate your business or form an LLC. Both business structures have their own pros and cons, so choose wisely based on your needs and goals.
An LLC (limited liability company) is a great choice for the small business that wants to maintain the appropriate legal protections with a minimum amount of formality and paperwork. Or, if you prefer, you can choose from two different types of corporations:
- S-Corporation status is intended for small businesses, but allows for some of the features of a larger company, such as tax savings. S-Corporations are not liable for self-employment taxes.
- C-Corporation status is useful if you plan to “go public” or eventually seek funding from a venture capitalist.
Step 3: Apply for a Federal Tax ID Number
This step involves differentiating yourself from your business — from a legal standpoint. That means you’ll need to obtain a Federal Tax Identification Number, or Employer Identification Number (EIN) from the Internal Revenue Service. This will make sure that your personal taxes remain separate from your business taxes.
An EIN is similar to your Social Security number in that it identifies you as a sovereign entity with legal obligations as well as privileges. Note that sole proprietorship does not require you to apply for a Tax ID number, but it still may be a good idea to do so if you don’t want to use your Social Security number for your business dealings.
You can apply for your EIN online, directly from the IRS.
Step 4: Familiarize Yourself with Employee Law
Like it or not, you’re going to have to become something of a law expert if you plan on bringing in additional employees to fill out your roster. As a business owner, you have a list of legal obligations, from both the state and federal governments.
In no particular order, you’ll want to research anti-discrimination laws, withholding and payroll taxes, unemployment insurance, workers’ compensation, and wage requirements for the particular state in which you intend to do business.
Luckily, there are some great resources available to help you learn all these things and more. A great place to start is the official U.S. Small Business Administration website.
Step 5: Find Out If You Need Licenses or Business Permits
The fifth legal step involves making sure you find out whether your particular business requires any licenses or permits. Depending on where in the country you intend to operate, your licensing requirements could vary considerably from a similar business in a different state. Even federal requirements may sometimes differ from those enforced at the state level.
The licenses you may be required to obtain include zoning, land use, sales tax, business operation, occupational, health department, and professional licenses.
As before, the Small Business Administration offers a wealth of resources for the aspiring business owner.
Step 6: Open a Separate Bank Account
Finally, step six is less a legal issue and more a “best practice” that will help you avoid legal issues in the future. No matter what type of business you’re building, it’s a good idea to open a separate bank account and to keep your personal finances separate.
It might seem like an inconvenience to juggle two sets of financials, but consider this: using personal bank accounts for your business dealings might have an impact on your legal liabilities. To put it more simply, co-mingling your personal and business finances might make you, as a person, liable, rather than your business, the entity. For some business owners, this issue will never rear its ugly head — still, better to file this one under “why risk it?”