Starting a Business: Legal FAQs
There are a hundred things to consider when starting a business. Some of those things are legal requirements for which you might want to seek advice from a business lawyer. Here are some of the most common legal questions start-up small business owners ask.
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Q: How Should My Small Business Be Organized?
There are a number of legal structures for businesses. Each type of structure will have its own requirements for formation. The tax status and owner's personal liability will also vary depending on the type of business structure. A business lawyer can help you understand the pros and cons of each legal structure.
- Sole proprietorships, for the self-employed business owner or business owner with only a few employees. A sole proprietorship structure offers no limited liability protection for the owner.
- Partnerships are businesses with more than one owner. This could be a general partnership, limited partnership (LP), limited liability partnership (LLP), or a joint venture.
- Limited liability companies (LLC) and professional limited liability companies (PLLC) combine the best aspects of a sole proprietorship and a corporation. The owners are protected from personal liability but are not required to observe corporate formalities. There is a tax advantage as well. An LLC is not subject to double taxation, like a C Corporation where the company pays taxes and the shareholder also pays income tax. An LLC enjoys pass-through taxation, which is similar to a partnership or sole proprietorship.
- A PLLC is specifically for owner-members who have a professional license and proof of licensure is required before the business can be registered. Not every state provides formation processes for PLLCs; for example, California instead allows professionals to form professional corporations (PCs), which may be taxed as C or S Corporations (explained below) under IRS guidelines.
- Corporations are legal entities separate from their owners. This business structure shields owners from personal liability (except in certain situations). Owners of a corporation are called shareholders. Profits are distributed to shareholders as dividends. Corporations are complex and have more start-up costs than other legal structures.
There are three general types of corporations — C corporation, S corporation, and nonprofit corporation. There is also a growing movement for corporations to get certified as “B Corporations". This is a private certification awarded to for-profit corporations by a global nonprofit that promotes social and environmental responsibility.
- The primary difference between a C corp and an S corp is taxation and the number of allowed owners. Like an LLC, a small business corporation (S Corp) enjoys pass-through taxation provided certain IRS requirements are satisfied.
- A nonprofit corporation has no shareholders and issues no dividends. It is tax-exempt as a 501(c) organization. All profits are used to achieve its charitable purposes. While nonprofits may be exempt from local taxes like sales tax and property tax, they may still be responsible for paying employee taxes to federal and state governments.
Q: What Legal Documents Do I Need to File With the State to Establish My Business?
The forms you need to file to register your business will vary depending on the type of business entity you have created.
A business owner could benefit from the help of a lawyer to file paperwork with the Secretary of State. You may want to consult a business attorney about the drafting of Articles of Incorporation and Corporate Bylaws, especially for larger corporations.
For simple start-up businesses, however, FindLaw's Legal Forms and Services area may provide all the help you need to put together legally sound business formation documents.
Q: How do I get a Federal Employer Identification Number?
You don't need an Employer ID Number (EIN) to register your business as a sole proprietor. You can use your personal Social Security number for tax purposes, or you can get an EIN to safeguard your social security number. All other new businesses will need to get a tax ID number in the form of an EIN after filing formation papers with the Secretary of State.
Q: What Management Documents Does My Business Need to Start?
Again, the forms you will need depend on the type of business you are forming. You may need a partnership agreement, a bylaws document, an operating agreement, or a shareholder agreement. Early in your business, you may need employment contracts and non-disclosure agreements for key early employees.
Q: How Do I Choose and Protect a Business Name?
For a sole proprietorship, a business name can be as simple as the business owner's name, or they can choose another name. A business name needs to be easy to remember and distinct from competitors. FindLaw's Starting a Business section has several articles about choosing the right business name.
Before you register a name, you must ensure it is legally available for use. The wider your market, the more thorough your search needs to be. You can investigate for yourself whether the name is available or you can hire a business lawyer who specializes in intellectual property, trademarks, and trade names.
You may also choose to operate under a fictitious business name (dba, or “doing business as"). Fictitious business names must be registered with the state and/or county. Check with your state laws regarding fictitious business names.
To protect your business name, however, you should consider filing a state and/or federal trademark.
Q: What Licenses, Registrations, and Permits Does My Small Business Need?
The business licenses and permits that a small business needs will vary depending on the business activity and the location of the business. All businesses need a city and/or county general business license.
Other business licenses and registrations are issued by the county, state, and federal governments. Permits are typically issued by the local government for zoning and building matters. Permits for natural resource use are typically issued at the federal or state level. To learn more, see Business Licenses and Permits.
Q: What Business Taxes Do I Have to Pay? How Do I Pay Them?
While your tax obligations will vary depending on the type of legal structure you choose for your business, there are a few start-up tax issues to be aware of. First of all, it is imperative that you keep good records. You should also be sure to keep your business bank account and personal bank account separate.
The law has a lot to say about how you manage your bookkeeping and your tax returns. you are obligated by law to record all business transactions according to a specific accounting method. Research what's required of you for your industry and location in terms of record-keeping obligations. Commingling of funds and failure to observe other business formalities may subject you to personal liability even if you are operating under a registered business entity like an LLC or corporation.
Q: What Legal Requirements Come with Having Employees?
The first thing you must know is how to properly classify your employees — especially if you believe you have contractors. Misclassifying an employee as an independent contractor could expose your company to costly penalties and back wages. Sometimes it's clear; sometimes it's a gray area and it would help to consult an employment law attorney.
You will also be responsible for collecting employment taxes — state taxes and federal taxes and forwarding the business and employee share of Social Security and Medicare taxes.
Most employers are required to pay into their state's unemployment insurance and to carry workers' compensation insurance. You can learn more about the legal responsibilities of having employees at the Small Business Administration (SBA).
Q: How Do I Protect My Company From Liability and Lawsuits?
Every company faces some type of legal liability. It could be from a customer falling in your shop, a defective product, or a mistake handling an employee complaint. One of the early things you need to do to limit risk to your business is to purchase business insurance. The kind of insurance you need depends on the type of business you are operating. A business attorney can advise on the particular areas of liability your company may face.
Q: How Do I Protect My Intellectual Property?
Simple registration of a trademark can usually be handled by the business owner at the US Patent and Trademark Office (USPTO). But your business idea may need a lot more protection than that. People often work with patent attorneys to secure a patent for their inventions. Learn more about patent law and enforcing patents.
Q: Do I Need a Lawyer to Start My Business
You do not necessarily need a lawyer to start a business. It really depends on the complexity of your business, the amount of advice and support you have from other sources, and your knowledge of starting a business.
- Some would-be entrepreneurs seek legal advice when they have developed a business plan. They hope to catch potential legal problems early.
- Some seek legal help at the point of business formation, although simple businesses can be registered by the owner.
- Some seek legal advice only when they have a problem, using business assistance from the Small Business Administration or their local Small Business Development Center to accomplish everything.
- FindLaw's Small Business Law section is another excellent resource.
Get Legal Help
An FAQ will only take you so far. Contact a business organization attorney for guidance on everything from which business licenses you need and the best business structure for your company.
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