What are the legal considerations of starting a new business?

Q:

What are the legal considerations of starting a new business?

A:

Many people dream of starting their own business. Unfortunately, without the right legal planning and considerations, it’s possible to doom your new business to failure before you even open your doors. So, before deciding whether owning a business is the right thing for you, it’s important to evaluate the legal considerations.

1. Determine the appropriate business structure.

Before starting your business, the first and probably most important business decision you will need to make is how you would like to structure your business. As you might imagine, there are pros and cons for each type of business structure, and the type you choose may depend on your tax considerations, liabilities, investment needs and the expenses you might have when running your business.

  • Sole proprietorship: A common business structure is a sole proprietorship. This is the simplest business structure. It is unincorporated, and you will have little governmental regulation. And while you will receive all the profits from the business, you will also incur all of the liabilities. Another consideration is that you will have to pay personal income tax on the profits generated by your business, and getting capital funding to grow your sole proprietorship can be difficult.

  • Partnership: A partnership is similar to a sole proprietorship, but instead of starting and owning the company on your own, you form an agreement with two or more co-owners. The benefit of a partnership is you can pool your money, resources and skills together while dividing the profits, losses and taxes.

  • Limited Liability Company (LLC): Another very common business structure is a limited liability company. An LLC offers flexibility and tax benefits, but it also allows the owners to protect themselves from personal liability if the business incurs debts – assuming that the debt was not secured by personal assets, a second mortgage or personal credit cards.

  • Corporation: According to Investopedia, a corporation is a "legal entity that is separate and distinct from its owners, but has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes.”

Fortunately, unlike a partnership or sole proprietorship, as an owner in a corporation, you will not have to pay personal income taxes on the corporate profits. You, however, have to pay taxes if you receive annual bonuses, a salary or dividends from the corporation.

Unfortunately, establishing a corporation can be much more difficult and expensive than a partnership or a sole proprietorship. Not only are there fees associated with incorporation, but you will also have to elect officers to help manage the corporation, follow legal requirements of a corporation and keep detailed records of your business decisions.

2. Determine if you need any license or permits.

After you have determined the structure of your business, you must determine if you need any particular permits or licenses to operate your business at the state, federal and local level. Common licenses can include zoning and land use permits, sales tax licenses, city operational licenses, federal employer identification number requests and fire department permits.

The good news is a small business lawyer can help you determine what permits and licenses you will need to operate your business.

3. Understand employment laws.

After you have investigated what business structure you would like to establish and have procured all of the necessary business licenses and permits, it’s time to study employment laws.

Many business owners do not give much thought to employment laws and do not understand the necessity of complying with current regulations, but there are a variety of employment laws that are critical to your businesses success, including the following:

  • The Fair Labor Standards Act, which regulates child labor rules, minimum wage regulations, overtime rules and employment record-keeping.
  • Equal employment opportunity laws, which outline how your business must comply with equal pay for different employees, protect those with disabilities and ensure certain employment classes are not discriminated against.
  • Occupational health and safety regulations, which outline the regulations to ensure a safe work environment.
  • Family and Medical Leave Act, which outlines the regulations for medical leave for employees and how they must be compensated while on leave.

4. Protect yourself, your business, your employees and your customers.

Finally, if you are considering starting a business, you will need to understand how to protect yourself, your business, your employees and your customers. This will include understanding how to protect your intellectual property of your company (i.e., name, brand, products and trademarks), and how to secure the data of your employees and your customers. For example, you will need to understand how to develop data security plans, which ensure that certain information is protected (i.e., health care information under current health care privacy laws such as HIPAA).

Bottom Line

Before starting your own company, you will need to determine the business structure you want to establish; obtain all necessary permits and licenses; understand current employment laws; and learn to protect your business, employees and customers.

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Whether you're facing a legal issue or just seeking information, Justipedia aims to be your most trusted resource for legal information on the Web. With the help of legal professionals across the country, we put the law in plain language to help answer your top legal questions.

Justipedia was founded by Internet veterans Cory Janssen and Mitchell Allen. Janssen founded Investopedia.com and grew it one of the largest investing sites on the Web. Allen is an author, speaker and the founder of LeadRival, the leading provider of pay-per-action advertising in consumer legal services.

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