Startup Legal Planning 101: What You Need to Know

Startup Legal Planning 101: What You Need to Know

Having a great idea for starting a business is the first step to becoming an entrepreneur. Putting that plan into action, however, requires more than thinking about your business plan, setting up a website, and finding customers. You also need to think about how you will legally form your business.

Your business’s structure will have a huge influence on your taxes, risk of liability, and day-to-day operations. Part of your startup legal planning should involve finding a balance between legal protections and benefits. 

While you can certainly change your business’s legal structure in the future, it is better and easier to start with the right structure in the beginning. This guide walks you through what you need to consider.

Choose a Legal Entity

One of the most critical decisions you will make as a business owner is how you will operate as an entity. This will drive how the government will tax your business and how your assets will be protected in the event of a lawsuit. Your legal entity is about choosing the combination of legal protection and ease of operation that makes the most sense for your business.

A sole proprietorship, for example, is easy to establish and easy to file taxes. On the other hand, if you are sued, your assets are at risk because there is no distinction between the business and you, personally.

At the other end of the spectrum, a Corporation offers a level of protection for your personal assets. However, a corporation involves a lot of formalities and paperwork. You also need to look at the tax implications of a Corporation because you will generally pay taxes at the individual and corporate levels. 

There are varying levels of entities between a sole proprietorship and a corporation that you can consider that offer a mix of liability protection and tax benefits. The basic types of entities include:

  • Sole Proprietorship
  • Limited Liability Company (LLC)
  • General Partnership
  • Limited Liability Partnership (LLP)
  • Limited Partnership (LP)
  • Limited Liability Limited Partnership (LLLP)
  • C Corporation 
  • S Corporation

Register Your Business Name

Choosing your business name does two things. It reflects your identity and your brand and also legally distinguishes you from other businesses.

Once you have selected a business name, you will want to protect it so that other businesses cannot use the same name. You’ll need to do registrations at the state level with an Entity Name and federal level with a Trademark. You may also be required to set up a Doing Business As (DBA). 

Obtain a FEIN

With certain legal entities, or if you have employees, you will need a Federal Employer Identification Number (FEIN) from the IRS. This is required to open bank accounts and process payroll. 

Prepare Your Finances

It is essential to keep your business finances and personal finances separate. If you need a business loan in the future, a bank or creditor will want to see your business finances. This can include both your bank accounts and your financial statements, so you need to have these set up correctly. 

Bank Accounts

Once you have established your legal entity, you will want to open a separate bank account for business operations. Talk to your bank before you open an account so that you can determine their requirements based on the type of entity you have formed. 

Accounting

You will also need to set up an accounting system. You can do this yourself, or you can hire someone to do this for you. Business finances can get complicated and are critical for managing your business risk and preparing for your tax filing. 

If you prepare your own finances, you can use something like QuickBooks. You’ll have a good handle on your business financials because you’ll be the one doing the work. However, this can become a time-consuming task and can require you to be familiar with accounting principles. 

Hiring an accountant ensures that someone with experience handles your finances. However, it also can make you disconnected from your business. You’ll want to have a strong connection with your accountant to keep tabs on the business financial operations.

Determine Your Liabilities and Insurance Needs

Any number of things can go wrong in a business. An employee or a customer could sue for some type of injury. Even a competitor could come after you with a lawsuit.

A keyway to manage your liability, in addition to your legal entity, is carrying adequate liability insurance. This will minimize the financial impact if you are found to be legally responsible in a lawsuit

You should research commercial general liability, umbrella, and professional liability. An insurance agent can explain the differences, but, as a business owner, you will want to be proactive in determining how much insurance you need. 

Understand Industry-Specific Regulations

Depending on the type of business, you may fall under some industry-specific regulations that require additional work. For example, the restaurant industry has all sorts of legal requirements for permits. Your business may also require specific licenses, such as cutting hair or childcare. 

The requirements can vary state by state. You should talk to a professional with experience in your industry and state laws. 

Set Up Your Contracts

If your business involves any type of contract work, you will want those in place before beginning operations. Contracts may involve clients, vendors, and even employees.

A contract is more than simply outlining the relationship between the parties. It also provides protection if there is a miscommunication or problem. Having solid agreements in place will allow you to enforce agreements. 

You may also have business partners, in which a contract is imperative. A “handshake agreement” will not protect you if something goes wrong.

The Right Lawyer to Guide Your Startup Legal Planning

Every business is unique, and you will want the right guidance for your new business. Generic advice that doesn’t focus on your business’s needs could expose you to tax or legal binds in the future. You want to protect your business and intellectual property to ensure your business’s success. 

It is better to consult with an attorney experienced in startup legal planning who can give you personalized attention. Your law firm should focus on business law in all stages, from planning to growth needs. Finding an attorney you can trust will arm your business with a resource it could need in the future.