August 19, 2024
Rembolt Ludtke Business Formation, Governance and Succession Planning Practice Group
You have this amazing business idea…what’s next? When starting a business, things can seem pretty simple. You have the idea, the inventory, and the website ready to go, but there are several legal considerations to run through before you officially set up shop.
1. Structure
What do you want your business to look like? Will it be just me? Multiple owners? Business structure is one of the first decisions to make because it significantly impacts the rest of the business. Generally, there are a few main options: Sole Proprietorships, LLCs, Partnerships, S-Corps, and Corporations. Each of these may be tailored to the specific needs of your business. All options have different tax consequences and default rules.
2. Name
Choosing a name for your business can be more complex than it appears. The requirements for your business's legal name will vary depending on the type of entity you establish. For instance, if you form a sole proprietorship, your business name will typically default to your legal name. In most states, you’ll need to ensure that your chosen name is distinct from other registered businesses in the state. This name comparison process is essential for maintaining organized business records and ensuring that your business has a unique identity, which is crucial for building and protecting your brand.
3. Licensing and Permits
Most businesses require some permit or license to operate. Federal, State, and Local governments may have different rules for what permits or licenses are required. It is important to ensure that your business complies with governing rules to avoid possible civil and criminal penalties.
4. Legal Responsibilities as an Employer
Depending on your business model, you may hire and manage employees to assist in the operation of your business. If so, it is essential to recognize that being an employer brings additional responsibilities, such as complying with state and federal labor and employment laws. Familiarizing yourself with applicable laws protects your business from potential liability for non-compliance. Additionally, there are various tax and record-keeping requirements, and speaking to your attorney can help determine the best plan forward as an employer.
5. State and Local Taxes
As part of your business, you will likely be required to pay federal, state, and local taxes. You may be required to obtain an Employer Identification Number (EIN), which the IRS issues and uses to identify your business on tax filings. Additionally, obtaining your EIN can be useful for opening business bank accounts as it is often a requirement.
6. Insurance…Protect Your Assets
While expensive, insurance protects you and your business from unintended liability. Specific insurance needs vary between industries, but you can get coverage to protect against property damage, professional errors, or employee injuries. Identifying risk areas and obtaining appropriate coverage is key in protecting against liability.
7. Intellectual Property Protection
Creating a solid brand that maintains a prominent presence in the market occasionally requires intellectual property protection. From trademarking logos and names to establishing patents for new designs, you want your hard work protected. Consider looking at what protection is available for your business and investing in registration.
8. Data Protection
Your business and client data is important and likely contains confidential or secure information. Maintaining proper cyber security measures can help protect against scammers and hackers. Keeping current on the best practices can give you and your customers the peace of mind needed to operate safely and efficiently.
9. Contracts and Agreements
Properly drafted contracts and agreements are among the most vital ways to protect you and your business from disputes. Most entity types require some operating agreement, but you may also have employment contracts, client contracts, vendor agreements, etc. The key to a properly drafted contract is to ensure that it will be enforceable well into the future.
10. Compliance
Beyond federal, state, and local regulations for business formation, there are regulations for nearly every industry and segment of business. Whether related to employment laws, operation, or finance, you as a business must know and abide by the laws that apply to you. Typically, you must ensure that the business meets compliance requirements, pays fees to maintain licenses and permits, and files reports that confirm all requirements are met. Create an outline of applicable regulations and plan how your business can stay compliant.
11. Dispute Resolution
Great planning can help you prevent litigation and disputes, but it is never 100% avoidable. Discuss with your attorney whether alternative dispute clauses may benefit your agreements. Mediation and arbitration are two common ways to resolve disputes before entering the courtroom. These alternative dispute resolution methods can save money and reduce the risk of lengthy court battles.
12. Planning for the Future
Whether selling the business, making succession plans, or dissolving, you should plan for the future. To do so, certain agreements may be required in preparation. Potential exit strategies include passing the business on to a family member, selling the business to another owner or interested party, or merging the business with another. Each plan requires different elements, and it is important to consult an attorney to decide the best path forward for you.
Before meeting with your attorney, consider the needs of your business. Ask yourself: who will be running it, will the business need to change leadership frequently, and how will financials be handled? Then, meet with your attorney and decide what path works best for you.
This article is provided for general information purposes only and should not be construed as legal advice. Those requiring legal advice are encouraged to consult with their attorney.
