Amidst the adrenaline rush of creating a new business, there are several legal items I regularly discuss with people who are starting a business. Below are six (6) critical items you need to consider prior to getting your business up and running:
- Be an entity. You may have been called worse things, but this is actually not a slam. An entity, in this context, is a structure that provides separation between you, your assets and your business. For example, a corporation and a limited liability company are both entities. In contrast, someone doing business under their name, with nothing more formal, is operating as a “sole proprietor”; there is no separation between personal and business.
- What type of entity should I be? Surprisingly, for legal purposes there is not a huge difference. Both a corporation and a limited liability company provide a wall of separation between their owners and the business. A corporation has shareholders, a limited liability company typically has members.
- Have your organizational documents in place. For a corporation, it is written minutes of the organizational meeting of the shareholders and board of directors, plus bylaws. For a limited liability company, it is an operating agreement.
- Know who your employees are or are not. One of the easiest ways for a business to create a mountain of liability is to treat individuals who are actually employees as independent contractors. That means failing to withhold taxes and do payroll properly and to secure worker’s compensation insurance. If you have any doubt about whether an individual is an employee or independent contract, talk to an attorney. You do not want to get caught in the Independent Contractor Trap.
- Protect your Intellectual Property. If you have words, pictures, symbols, code, software or an invention, take the proper steps to legally and officially claim ownership to it. It might be registering a trademark, securing a trade name, seeking copyright or even patent protection.
- Maintain the regular records that are required. For a corporation, it is at least the written records of shareholders and directors meetings and other major actions. Treat the entity like it is a separate and distinct entity (separate records, separate bank accounts, etc. . .).
What other issues have you considered when starting a business?