Starting a business without the legal requirements into consideration can be a slippery slope. The steps of pursuing legal obligations can be convoluted and overwhelming. But for a company to be successful and thrive in a competitive market, compliance with these legal obligations is crucial. The worst-case scenarios of not pursuing them are getting punched with fines and lawsuits, which can drag your business’s reputation and drive you out of business.
There are legal counselors and resources to help you with overwhelming procedures. It is of utmost importance that you have an attorney in your back pocket when you need legal advice. To prepare yourself for any legal challenge during your business’s inception, the best way is to do your research.
How Can I Make My Small Business Legal?
After thorough research, make a business structure to help you with the required permits, gather the necessary documents, and short-list attorneys. However, to start with the planning, here are some essential legal requirements for starting a small business that you should know of:
A- Types of Business and Choosing a Business Structure
Depending on your industry, there are many types of business. However, the main types are service, merchandising, and manufacturing companies. In the service business, your organization provides intangible products in the form of your skills, expertise, advice, or other types. One such example can be a salon.
In a merchandising business, you will buy products wholesale and sell them at a profit, for example, a grocery store. In the manufacturing business, you by-products and make a new product. However, there is another kind, which is known as the hybrid business. What business structure you will choose depends on the business types. There are four main types of business structure:
1- Sole Proprietorship:
In a sole proprietorship, you are the sole owner of your company and handle all matters related to debts and liabilities. An individual doing business without a legal structure is considered a sole proprietor. However, like all business owners, all the laws related to taxes, permits, licenses, and regulations apply to you.
Pros:
- The owner owns the company and its assets.
- Simple to set up and running costs are nominal.
- Complete authority on decision making
- The organization will be easy to dissolve.
Cons:
- Cannot raise the capital for the company or sell equity
- Unlimited liability and responsibility for all debts and business obligations
- Hiring a talented employee can be a challenge.
2- Partnership:
A partnership is when two or more people join in together to start a business venture. Although no legal documentation is required, it is recommended that a formal agreement is created. Business partners discuss business plans, capital, management & hiring, exit strategy, and internal disagreement resolution.
Pros:
- Easy to establish
- Chances of hiring quality and talented employees increases
- Taxation becomes more comfortable as each partner pays taxes for their shares.
Cons:
- Each partner is responsible for debt and obligations.
- Profits are shared
- Disagreements can occur
- Each partner can initiate a business contract with the others.
- Partnerships raise less capital on their own
3- Limited Liability Company:
Many SMEs are structured as LLC. Here are some of the requirements for registering as an LLC.
Pros:
- Partners have limited liability.
- Owners are responsible for earning and losses.
- Unlimited shareholders
- Any member can conduct decision making or business operation.
- Less paperwork and administrative requirements
Cons:
- Some states dictate that after 30 years, LLC should be dissolved.
- Some states also dictate that the LLC should dissolve if a member dies.
- Requires more paperwork, filing than other business structures.
4- Corporation:
One of the expensive and convoluted business structures is a corporation. However, it is considered an individual entity separate from the ones who own it. Shareholders can separate their assets from company debts.
Pros:
- The owner of the corporation has liability protection.
- Owners have their assets protected.
- The corporation can reap the profits without the owners paying their taxes.
- Chances of raising capital by the corporation become higher as they offer different levels of stock in return
- They are not required to dissolve by a certain period.
- They are not required to dissolve when the owner dies.
Cons:
- Paperwork, filing, and administrative requirements are higher than other business structures.
- Higher overall tax rates
- Dividends of shareholders are not subjected to taxes.
- Income is taxed twice, once at the corporate rate and then on an individual level.
- Formal regulatory requirements on federal, state, and country-level hence increasing compliance cost.
- In the case of S-corp, they are limited to 100 shareholders.
IRS and CRA closely monitor taxation; therefore, one way to avoid double taxation is to pay the company’s shareholders reasonable compensation in the form of salary. However, it requires a trusted and agile legal team to create taxation loopholes and decrease the burden.
B- Register the Name of your Business
Every business needs legal recognition. And there are two categories, “Doing Business As” (DBA) or “Fictitious Business Name” (FBN), where you will be registering your business to let your state or local government know the name of your operating company. Although it doesn’t provide you trademark protection, you can use the name as branding. But a DBA name will not offer you brand protection in the 49 states of the USA.
Your business will acquire your name automatically if it isn’t registered under DBA. For example, if your name is “Sara Ramsey,” and you have a Bakery with the title “Sara’s Bakery,” then without the DBA registration, your business would be named “Sara Ramsey.” The rules of the DBA differ from state to state and from Canada to the USA.
However, if you are the sole proprietor who has decided to operate under their name, you do not have to register as a DBA. For more formal business structures, you might need to register as an LLC or corporation. A corporation LLC can help you acquire business loans or venture capital, which will grow your business. Some of the other rules for DBA can be found here.
C- Licenses and Permits
The type of business activity will determine which licenses and permits you would be needing. A permit’s procedures are different in your country, state, city, or county—their many types of business licenses and permits. For example, your business activity lies in the agriculture sector; then, the issuing agency will be the Department of Agriculture of your country’s government.
Other examples can be health-safety-related permits, permit for a home-based business, building permits, air, water pollution control permit, local business permit, or industrial manufacturing, construction, or hospitality. It is easy to overlook what licenses you may require; hence it’s best to contact your city’s business license department for more information.
D- Taxes
“Man is not like other animals in ways that are significant: animals have instincts; we have taxes.”
Erving Goffman
Taxes can be intimidating but highly crucial. According to a report, 1 to 5 small business owners don’t know about the tax rate. Not paying taxes can slap your business with an unwanted lawsuit. Its recommended to hire an accountant or a tax advisor. Moreover, for your research, best to enlist all the taxes that apply to your business activity. Some of the types of fees are mentioned on this page. Moreover, the forms you will need depends on your business structure. For example, a single owner of a sole proprietorship or LLC will need Schedule C and files their taxes under the owner’s fees by the date 15th April of the previous year.
As a business owner, some business taxes are income tax, self-employment taxes, or sales tax if you are selling something. There is much software that helps you with filing taxes and filling forms concerning your business activities. IRS or CRA prefer that business owners pay their taxes every quarter; however, for information, visit this page to learn more about fees.
E- Up-to-date and Proper Bookkeeping
A bookkeeper has a domino effect on your business. An experienced bookkeeper will never miss any transactions or make mathematical errors, no matter how small it is. There are many business accounting software that can help your bookkeepers avoid mistakes and do their work efficiently.
Moreover, some may have misconceptions as to what a bookkeeper does; hence it is listed below:
- Record financial transactions
- Reconcile your financial accounts
- Handle accounts receivable
- Handle accounts payable
- Prepare financial statements
- Take on payroll and HR responsibilities.
- Work with your tax advisor or accountant.
An inexperienced bookkeeper can have many consequences for your business, such as:
- IRS Audit: An incorrect information found in your financial statement can earn you fines and lawsuits from the IRS or CRA. Fines and fees can negatively impact your cash flows.
- Issues with Cash Flow: When it’s time to pay your employees, you don’t have enough money in your bank to create unnecessary problems. There are individual costs and payments you may encounter as the business operates. Hence if you aren’t tracking your cash inflows and cash inflow, it can have an insidious effect.
- Poor Business Decisions: Without your country’s current financial health, you cannot make critical decisions. Decisions like franchising, hiring employees, or marketing are essential for the growth of your business. Therefore, hiring a bookkeeper that keeps you updated on your current financial trend can help you make these important decisions.
F- Employer Identification Number
For a business, a corporate business account is necessary. However, you would also need an employer identification number (EIN), and it can be easily requested for free from the IRS or CRA through their website. The purpose of getting an EIN is to identify your business for federal tax purposes. As a business owner, your social security number is required to complete the form for EIN.
A business entity and date of incorporation are also needed for form completion. It is recommended to keep a signed copy of this form in your files. In the case of a sole proprietorship, you won’t require an EIN, although it is recommended to get one to distinguish your liability from the business.
G- Legal Protection of Intellectual Property and Violating Trademarks
Intellectual property is your most vital business asset. Legal protection for IP’s is necessary because they are intangible assets, and protection turns them into valuable, exclusive assets that can be traded for other assets in the marketplace. IPs are your “secret recipe,” the innovative ideas and creative designs that are non-existent in the market; it’s what makes you unique.
Hence, by protecting them, you will have the edge over your competitors, as they won’t be able to freely use your creative ideas. It is recommended that you must consult an IP attorney who can help you with legal protection. Moreover, as a business owner, you need to ensure that you are not violating the trademark.
It can occur when you choose a name, so make sure you have done your research to avoid any violation. Such violations will immediately discontinue your business and earn you a cease. Hence, it’s recommended to register your name with the Patent and Trademark office.
Is an Attorney Essential When Starting My Business?
If you are someone who naturally shies away from paperwork and administrative work, someone who can’t wrap your head around, you might need an attorney. You might need legal advice on an important issue; however, here are some reasons an attorney can help your business to bloom:
- Most business contracts are executed between partners and organizations for space, supplies, or services; hence it’s essential to involve an attorney.
- Registration, permits, and licenses can be exhausting, especially when you don’t know the paperwork.
- Each business structure has different laws applying to them and has various business forms; hence, it is best to involve an attorney.
- Moreover, many legal obligations need to be followed that may include apple to your business activity, and you might know of.
- Acts of partner and double taxation that determine your entities’ decisions; hence you might need legal advice.
- Taxation is crucial and can kill your business if an attorney is not involved.
- Legal liabilities can be cumbersome for a new business owner if they don’t know which laws apply to their business. In personal debt, you put everything at risk; hence an attorney can help you in situations like these.
- Legal advice in the case of lawsuits or essential business decisions, legal advice is necessary.
In conclusion, individual research can you a lot. However, it’s best to involve an attorney to help you with critical legal decisions.