Legal Foundations for Startups: Navigating the Initial Procedures for Success
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Updated May 2024
Launching a new business venture can be exhilarating. It’s exciting to conceive of a cool idea for a product or service, then to actually build out the structures necessary to turn that idea into a real company. I remember this phase of starting One Nine Design so well.
However, in this initial rush of excitement, it’s crucial not to get so carried away that you overlook some of the more tedious aspects of business development. For example, there are a number of legal requirements you have to fulfill in order to launch a business successfully. Here’s a quick roundup.
Choose the Right Legal Structure
First and foremost, you’ll need to come to a decision about the type of legal structure you want for your business. Some of the most common options are the Sole Proprietorship, the Partnership, the Corporation, and the Limited Liability Company (or LLC).
The Sole Proprietorship is the simplest option, wherein one business owner is responsible for all business taxes and liabilities. The business owner also declares all business profits on their personal tax return. Partnerships work in much the same way as a Sole Proprietorship, only with the option of bringing on multiple business owners to share in management duties (and in profits and liabilities). In the realm of solo entrepreneurship, the guidance of a skilled sole trader accountant is invaluable, offering tailored financial advice and ensuring compliance with legal obligations
These two options are easy and affordable to establish, but they come with some downsides. The most notable is personal liability risks. When you operate a Sole Proprietorship or a Partnership, there is no legal distinction between you and your business; as such, a creditor or a lawsuit could threaten your personal savings or other assets.
The LLC actually creates a distinct business entity; to put it a bit differently, it allows you to maintain a dividing line between personal assets and liabilities, and business assets and liabilities. This shields your personal assets from creditors and lawsuits, providing some peace of mind and some much-needed risk mitigation. As such, the LLC is by far the most popular option for small business startups.
Still another option is to incorporate. Note that a Corporation is legally required to elect a Board, to release regular reports, and to comply with other restrictive regulations, all of which makes it a slightly more arduous path for startups.
Establishing Your LLC
Establishing an LLC requires a bit more administration than operating a Sole Proprietorship or a Partnership, yet the steps required are still pretty simple. Note that the specifics can vary from state to state; establishing an LLC in New York may be a little different than establishing an LLC in Florida, for example.
Generally speaking, however, establishing an LLC involves the following steps:
Choosing a business name that’s not already in use by another LLC in your state.
Hiring someone to act as your Registered Agent, receiving business and tax documents on your company’s behalf.
Creating an Operating Agreement (not required, but recommended). This document will outline managerial duties, profit allocation, etc.
Registering with the state, which involves filing some basic paperwork and paying a nominal fee.
Obtaining an EIN from the IRS, and starting a business bank account.
Other Legal Considerations for Small Business Startups
Choosing the best legal structure is foundational for your startup’s success. However, there are a few other legal considerations for entrepreneurs to keep in mind.
Registering Your Business Name
When choosing a business name, there are obviously a number of marketing and branding concerns to keep top-of-mind. In terms of legal requirements, note that LLC names cannot be in use by any other LLCs within the state; your name must be unique. Most states offer an online registry where you can double-check that your name is acceptable before you move forward. Also note that LLC names must include “LLC” or “Limited Liability Company” somewhere within them.
LLCs may also register a DBA, which stands for doing business as. This is basically a “nickname” you can use instead of your legally registered name, particularly if you want to divide your LLC into multiple sub-brands with their own distinct identities.
Trademarking
Small business owners are often very mindful of intellectual property concerns, and rightfully so. To begin with, be sure you use a trademark to protect your business slogan and your logo, ensuring these important brand signifiers are fully protected by the law. Investing in a trademark attorney is a wise investment at this stage of the process.
Getting a Tax Number
Every business startup will need an employer identification number, or EIN. Think of this as a Social Security Number, only it’s attached to a business instead of an individual. You’ll ultimately need your EIN for payroll and for filing your tax returns. Thankfully, it’s very easy to get one by visiting the IRS website. In fact, EINs are free for U.S. citizens.
Securing Licenses and Permits
Will you need a license or a permit in order to operate your business? Unfortunately, there is no simple answer to this question, as licensing and permitting requirements vary by industry as well as by geography. The best way to determine whether you need licenses or permits for your business is to check with your Secretary of State’s office.
Managing Risk
Any time you launch a new business, you’re inevitably taking on some level of risk. One way to mediate this risk is by choosing the LLC structure, but it’s also important to ensure the right level of insurance protection. Some of the policies that most small businesses need include:
General liability
Product liability
Errors and omissions
Commercial property insurance
Workers comp insurance (if you have employees)
Secure Your Startup on the Right Legal Footing
In order to set up your business for success, it’s critical to navigate all these legal complexities. With specific questions, it’s best to go directly to a business mentor or an experienced attorney. Keep that excitement of the new ideas and new phase of life but do so with an informed perspective while getting your legal ducks in a row.
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