Not So Fast: Important Legal Considerations for Entrepreneurs Starting a New Business
Reading Time: 8 minutes
Starting a new business can be both incredibly exciting and substantially stressful, and many entrepreneurs hastily begin business without considering many important legal considerations in starting up. However, with legal guidance and proper planning, starting a new business can be easy, effortless (sort of), and smooth.
1. Your Business Structure
First, a new business owner must decide which business structure best suits his or her business. A business can be structured as a sole-proprietorship, partnership, limited partnership, corporation, S-corporation, or limited liability company. To decide which form is best, one must consider the liability issues associated with the business, and which form will provide the best tax structure. Brandon C. Meadows, Esq. has written an incredibly informative article outlining the key similarities and differences between sole-proprietorships, limited liability companies, and corporations, which can be found here. Mr. Meadows’ article will help considerably in your decision as to which form your business should take.
Once you have selected the legal structure for your business, you will need to register your company with the jurisdiction you choose. Incorporating the business in the state where the company’s headquarters are physically located is called “home state incorporation.” No matter what legal structure your business has, you must pay filing fees to the state when the incorporation documents are filed, and will be subject to future and continuous requirements and fees imposed by that state. Some business owners misguidedly think that they will save money by incorporating in a different state than where the business is physically located, maybe because that state boasts lower fees. However, companies incorporated in one state but doing business in another must register to transact business in those states, known as “foreign qualification.” This will require fees and continuous requirements with that state as well.
When considering which state is best for your company’s incorporation, research each state’s statutes regarding corporations or LLCs to help inform your decision. One of the most important considerations is how each entity is taxed state by state, because this will most likely have the greatest impact on your future revenue. Consider how corporations and LLCs are taxed by each state and the taxation requirements imposed on foreign-qualified businesses. Important questions to ask yourself are: Is there an income tax imposed on corporations or LLCs; and does the state have a minimum tax or a franchise tax? For consideration, here are the Florida Statutes on Partnerships, Limited Liability Companies, and Corporations.
Depending on the type of business you plan to engage in, you may need a variety of licenses or permits. At a minimum, you will need a tax registration. One of the most important steps in starting and registering a business is obtaining a tax ID from the IRS. This creates the separate identity of the business entity, establishes its separate taxation apart from the individual business owner’s, and activates the tax benefits of the chosen form of the business entity. Another important step to consider, at least if you are registering your business in Florida, is registering your business with the county tax-collector. If you are doing business in a county in the state of Florida, that county may levy a business tax for “the privilege of engaging in or managing any business” within that county. See Fla. Stat. § 205.032.
While contemplating the business structure for your business, you should strongly consider drafting a business plan. The business plan is the roadmap for the business that provides you and your investors with key information as to what your business is going to do and how it will operate. The plan is a work in progress that should evolve over time and be influenced by outside factors, such as the economy. There are numerous resources available for developing the business plan, including the Small Business Administration website.
2. Your Business Name
A seemingly minute detail of starting a business, choosing the name of your business not only requires a consideration for what best fits the business, but has legal implications as well. Before choosing the name, you must make sure it is available and not trademarked or used by another business. Perform a search of the name with the United States Patent & Trademark Office to make sure you are not infringing on someone else’s trademark. Infringing on another’s trademark will lead to a lawsuit, which many new business owners cannot afford.
There are other important considerations to make as well. If you find out that your perfect name’s web address is already taken, you might have to buy that domain name for a high price, if it is even for sale. This is not likely, nor feasible for a new business. Before picking the name, ensure that the web address for that name is available. The fact that the web address is not available for a name that is legally available is not the end of the world. You can always choose a web address that relates to the name of your business in order to avoid the issue of buying the domain or changing the name of the business.
3. Intellectual Property, Confidentiality, Non-Disclosure and Non-Compete Agreements
Early on, one will have to disclose the business model or idea to several people. Some may be potential employees, others will be individuals from the industry. You might also meet potential investors or even share information with a consultant. It is crucial, especially in the early days of the business, but continuously important as the years go by, to ensure that everyone who comes in contact with sensitive information understands that this information may not be disseminated.
If financing will be set up for the business, or if the business will be entering into contracts with suppliers, you should consider confidentiality, non-disclosure, and non-compete agreements. Because employees and these outside firms will have access to business information that one may want to keep private, it is important to ensure all those with sensitive information are legally bound to keeping this information confidential. Getting everyone you engage with in your business to enter into such an agreement, whether employee, supplier, or outside firm, is crucial. It does not matter whether the employee, supplier, individual, or outside firm is someone you feel as though you can trust, it is always a good idea to have a safety net on which to fall back.
When first starting out, most new business owners find it tough to imagine that one day, they might potentially face issues with someone infringing on intellectual property assets and rights. It is worth considerable time and money to ensure you get your copyrights, trademarks, patents, and trade secrets legally registered so you do not have to stress about it later if an issue arises. An experienced attorney will be able to foresee many legal issues a new business owner may not, and will draft the nondisclosure or confidentiality agreement with the new business owner’s best interest in mind.
4. Shareholders’/ Members’/ Partners’/ Other Investors’ Agreements
A partners’, founders’, or shareholders’ agreement is a key step in starting a new business. You may be friends, or even family, with these individuals, but there is potential for things to go very wrong when starting a business together. There might be disagreements concerning the roles of the founders within the company, the vision of the company, and even compensation. You must discuss each of these points carefully. Also important is the discussion regarding what happens when one of you leaves the company.
Everything discussed and agreed upon between the founders should be detailed in writing and signed by all of the founders. The agreement should detail the rights and obligations of all members, shareholders, partners, etc., and ideally should be negotiated and executed prior to starting to conduct business. What is written in this agreement will determine the outcome of any disagreements that may arise. It is in the business’s best interest to have an attorney draft this agreement as an independent party with no stake in the business. Then, each party should consider having their own attorney review the draft to ensure it meets everyone’s needs. This will ensure the fairest draft of the agreement and each founder may then review the agreement and provide his or her feedback. This makes for an easy and smooth negotiation process.
5. Find a Lawyer
This step is not required, but is advisable. While technically one can form a business on one’s own, lay people often do not understand the legal implications of decisions that will need to be made. Here is an article summarizing reasons why a startup should hire a lawyer. This helps ensure that all of the steps previously discussed are handled properly from the beginning. The best way to do that is to have a lawyer by your side every step of the way to ensure your new business has adequate legal protection.
Starting a new business can be an intimidating and daunting task. Make sure not to overlook the importance of establishing your business correctly from the start. This will pay off considerably in the end. Hiring an attorney allows you to focus on what you do best, which is managing your business.