Starting a business brings with it a whole handful of corporate formalities. However, if you want to go about realizing a company legally, you need to take the steps or else you risk running afoul of the law. According to The Houston Chronicle, as much as 627,000 new businesses are incorporated each year. If you intend to be one of those new businesses, here are the vital legal steps you need to follow before registering your company.
Step 1: Personal Asset Protection
The structure of your business may leave your personal assets at risk. The simplest type of business incorporation, a sole proprietorship, sees you and your business trading as the same entity. However, if your business ends up subject to a lawsuit, your assets are forfeit if you lose that case. Business.com mentions that an LLC protects those personal assets from lawsuits against the business. While no new business owner wants to think about failure, we need to address that it may happen. Registering an LLC may be expensive, but it’s worth it to protect your personal assets.
The name “Limited Liability Company” isn’t just fancy wordplay. The registration of an LLC helps to limit your liability in the case of a court matter. However, even though the LLC provides protection for your personal assets, you are still liable for any personal promises you’ve made. The cases you are still able to be brought to court for include failure to pay your payroll taxes and if you’ve done something wrong on your own merit, separate and apart from the company. In these cases, your personal assets may become part of the settlement.
Step 2: Insurance
If your business is just you, you don’t need to insure your employees since you don’t have any. However, in some states, even if your company is as small as five employees, you need to provide some sort of insurance for them. Take a look at workers comp legislation in your state to see if you need to cover your employees. Additionally, you should pay attention to general liability insurance as well. These two types of insurance are crucial to protect your business from things that are likely to impact it during daily operations.
General liability covers your business for a broad spectrum of problems, including (but not limited to) personal and advertising injury, bodily injury, and property damage. However, if you operate a business as a professional, there’s a specific type of insurance designed just for you. Professional insurance or errors and omissions (E&O) coverage deals with any issues that may arise from the delivery of professional services. If you did something you shouldn’t have done (error) or didn’t do something you should have done (omission) this insurance serves to protect you from lawsuits. It also extends to covering certain types of personal injury, such as libel or slander. .
Step 3: Trademarks
Another legal concern is a potential trademark and copyright violation. In recent years, intellectual property laws have made it crucial for businesses to ensure that they’re not overriding someone else’s copyrights or trademarks. A search of the trademark registrations will let you know if you’re infringing (or coming close to infringing) on another company’s branding.
If you’re incorporating a business in a new state, you might be aware of a lot of the businesses that already operate there. Doing your due diligence to ensure that you don’t override another company’s trademark can save you time and money in lawsuits. You might not even want to misrepresent their brand name, or leverage their success. Just the act of using a similar trademark could make you liable to a fine or damages to the other company.
Step 4: EIN, Registration, and Federal Taxes
Uncle Sam doesn’t mess around when it comes to taxes nor his Invisalign dentist plans. When you register your business, you’ll need an Employer Identification Number (EIN) to pay taxes to the government. The EIN helps the IRS determine what payments are coming from you, and if they intend to audit your business, what they should expect in your tax returns.
The IRS notes that if the LLC is a single-member LLC with no employees, then an EIN isn’t strictly necessary since the income from the business would be reflected on the owner’s tax returns. In such a case, the owner would need to use their own personal Social Security Number (SSN) to file their taxes. However, if the business has even one employee, it needs to have an EIN registered for tax purposes. The other situation where an EIN is necessary is if the business will need to file excise taxes with the state.
Step 5: Licensing
Some industries require professional licensing. Some of the more popular industries that require a license to operate within include buying and selling real estate or providing engineering services. The professions that need licenses to work also vary from state to state. Check the local legislation to see if licensing applies to your field, and how much it costs to get your business registered to operate.
Professional LLCs (PLLCs) are LLCs that exist solely for the purpose of helping a licensed professional do business. While the business documents that you’d file for a PLLC are similar to a standard LLC, there is an additional approval step. Along with the standard filed documents, the professional is required to submit a copy of his or her professional certifications along with their current license number. An additional requirement is that the professional must be recognized by the state’s licensing board for their particular profession. Once these criteria are met, the professional can create a PLLC that operates exactly the same as a standard LLC.
Taking The Right Path
It’s easy to forget that registering a business carries with it legal weight. As business owners, operating within the law helps us to avoid losing our hard-earned profits and assets. Hopefully, this guide will give you an idea of what you need to do before starting a business.