Having a business registered at the state level can be exciting. There are many people who start businesses without doing research on how to successfully start a business. At the end of 2021, there were 3.25 million small businesses and counting. That’s 99% of all the businesses in the United States alone. In contrast, the latest statistics from the Bureau of Labor Statistics indicate that more than 20% of small businesses fail in the very first year, and nearly half of them fail within the first five.
There are many challenges when starting a new business and a lot of things to do that will ensure you start the right way. Additionally, there are some legal considerations worth understanding before even getting started. Taking care of these legalities will aid you further down the line.
5 Legal Steps You Should Consider
- Form a Business Entity
Forming a business entity is the first step of the journey once you have validated your business idea and gone through the process of selecting a name. There are a few different business structures, but the most common for small businesses is the limited liability corporation, or the LLC.
Why an LLC? For starters, an LLC can have one member or many members. They can be individuals or another business. There is no limit to how many members an LLC can have. This business entity protects the personal assets of the members from creditors and lawsuits. With an LLC, the profits go directly to members without being taxed by the government, there is a lot of flexibility, and it is usually easier to form.
When putting together the LLC, you must have the name of someone or a business to act as the registered agent. You will also need information on each member to fill out the incorporation documents. Once you have filed and the paperwork has gone through, you must obtain an EIN number.
An EIN is an Employer Identification Number. This can be obtained at the IRS site and sent by mail, online, by fax, and through the mobile app IRS2Go. Businesses cannot operate without an EIN number. This is almost like your social security number, but for businesses. An EIN number is needed to obtain business loans and other business-related assets.
- Trademark Your Name and Logo
When you’re serious about your business, you are going to take steps to do all the things needed that will protect your brand. That begins with trademarking your name and logo. Trademarking a logo takes just as much time as trademarking a name. Some people just trademark their name, but if your logo is protected, no one else can use it.
When you file and receive a trademark from the USPTO, you have first rights and can pursue action if you send a cease-and-desist letter, and the other party continues to use your assets. Names too similar or logos could cause a likelihood of confusion, which is why trademarking is essential. There are tons of businesses out there that could use the same name or a variation of it. When you have the trademark, any likeness can be shut down.
- Open a Separate Business Bank Account
As a business owner, co-mingling funds is a no-no. Every legal business entity should have a bank account solely dedicated to the activities of the business. To open this business bank account, you must have an Employer Identification Number. This can be obtained at the IRS site and sent by mail, online, by fax, and through the mobile app IRS2Go.
Any bills related to the business must be paid out of the business account. Any profits received should be deposited into the account. That means any professional fees paid to accountants and attorneys, annual registration fees, subscriptions for software and publications for the business, office supplies, and other operational expenses. The Registered Agent should be paid from this account to if applicable. This helps keep accurate records for an accountant during tax time.
- Obtain Business Licenses & Permit
Depending on where the business will be located, it’s important to research whether you have any special ordinances with restrictions, or if you need a business license to legally work at a facility, office, or at home (yes, that’s a thing).
This is one area where businesses fall through the cracks. Many people do not take the time to research and find out what they need in this area. Certain permits are required to do business. Even as a home-based entity, you may need to obtain a special license. Each city is different, so going through a database to ensure you haven’t missed anything makes a difference.
Some of the types of licenses you may need are listed below:
* General Business License
* Professional License
* Safety and Health permits
* Sales Tax License (if needed)
* Zoning permit
* Home occupation permit
* Sign permit
As a business owner, you may also need business insurance to protect the assets of the company. A general liability policy and an E&O (errors and omission) are very important aspects of setting up a business. Having insurance when you don’t need it is definitely better than needing it and not having it.
- Consult a CPA for Tax Structure
A tax professional will be equipped to provide guidance on how the entity should be structured. This is important, especially when it comes to being taxed. Not working with a tax professional could cost you if your paperwork is not done correctly. The last thing you want is to have to deal with the IRS as a new business because of simple errors that could have been alleviated.
A CPA is well equipped to provide advice that will save you time and money. They also know about tax codes and laws that have or are about to change which could directly impact your bottom line. A CPA also helps review your finances to make sure you’re compliant and on track. A CPA keeps things in order so the operation can run smoothly.