All the Boring Legal Stuff You Should Know Before Opening Your Own Business
Don't let your awesome business idea go bust due to mistakes complying with regulations.
Photo via Getty Images and Beckett Mufson
There are about 30.2 million small businesses spread across the United States as of 2018, according to the Small Business Administration. With so many companies, it shouldn't be too hard to start one, if you've got the entrepreneurial spirit—right?
Actually, there's a lot that goes into opening up a new business. And some of it can get complicated.
“Starting a business can be challenging because it requires the owner to delve into areas well outside of their expertise,” advised Laurie Giles, President and CEO of Next Level Consulting, LLC. “In my years as a business lawyer, I've seen many budding owners fail because they failed to understand the legal and business arenas.”
You don't want your awesome idea to go bust because you make mistakes complying with regulations and handling the financial issues associated with running a business.
Fortunately, we've got some key advice from experts on technical and legal issues involved, all the boring stuff you don't want to think about when that big biz dream is brewing. Here are the key steps they suggest you need to take before opening your doors, be they physical or electronic.
Check out the zoning and licensing laws to make sure you can operate
Before you start that tattoo parlor out of your house or open a quaint restaurant in a residential neighborhood you'll need to know some basic things, chief among them whether or not that's even allowed. Zoning. Licensing. Lack of knowledge in these areas can turn your brick and mortar dreams into nightmares.
“It's important to look up the licensing and zoning requirements with your local city government before starting a business,” advised Michelle Wodynski, a business law attorney at founder of MDS Premier, P.C.
Zoning rules determine where your company can be located, while licensing laws dictate the conditions that must be met before you can run a particular type of business. “A person who wants to operate a dog kennel or dog training facility would have to get a license from the city and pass inspection for the location for sanitation, noise, odors, and related issues,” Wodynski explained.
Licensing isn't just for doctors, lawyers, and skilled professionals either—nearly 30 percent of all workers across the U.S. need a license to do their jobs, according to research from the nonprofit Brookings Institute. Still many businesses can operate without a license, and requirements vary considerably from state to state and industry to industry.
To find out if a license is necessary and if your area is zoned for the type of products or services you want to provide, Wodynski advises checking with your city licensing bureau, which should maintain a list.
Figure out how you want to structure your company
As a business owner, it's important to understand the different ways you can own your business—because there are a surprising number of solutions.
“In general, there are four options,” according to David Barmak, attorney and founder of Barmak and Associates, LLC. These options include owning your business as a sole proprietorship, a partnership, a company, or a trust.
Barmak described sole proprietorships as your typical mom-and-pop operation. The company and its owners are one and the same in the eyes of the law, and income from the business is just declared on the owner's individual income tax returns.
While the simplicity of a sole proprietorship is nice—you don't have to do any special paperwork to form one—there's also a big downside. “A lawsuit involves personal liability and can reach into Mom and Dad’s personal assets... and that’s scary,” Barmak said.
Partnership is another simple business entity, which Barmak explains is formed when two or more people run a business together. However, like with a sole proprietorship, personal assets are at risk with a partnership. And, a third way to structure ownership simply involves having a trust—which is a separate entity—own the business on behalf of another individual.
The fourth option is one many business owners should consider, and it involves forming a company with a separate legal identity from its owners. This could be a Limited Liability Company (LLC) or a corporation. There's more paperwork involved in forming an LLC or corporation, but personal assets are protected and you have flexibility in how your company pays its taxes.
Which one's right for you depends on your situation. “A new company should consult an attorney before deciding what type of entity it will be, how it will be governed, and what type of control it will be under,” advised Bobby Lucas, head of the corporate department at Dinsmore & Shohl LLP.
Get the right insurance
As you're starting to see, business owners have a lot to worry about. One worry you don't want is whether you can cover catastrophic losses if something bad happens. From a fire that destroys your inventory to someone slipping and suing you, a lot can go wrong.
That's why you need insurance.
“Not everyone is required to purchase insurance for their small business,” explained Jeff Somers, president of Insureon. “However, many business owners are, depending on their industries, state laws, and other requirements.”
Somers explained your state may require workers' compensation coverage in case an employee gets hurt on-the-job. And if you've decided to run your company as a corporation, you may count as an employee and trigger this coverage requirement, even if you don't have anyone else on your payroll.
You may also be required by your landlord or mortgage lender to get property insurance and general liability insurance to protect against losses from damage to the property or from lawsuits if someone gets hurt on the property. “If your business is sued, the litigation process can be financially devastating—even if the lawsuit is dismissed,” Somers explained.
While most businesses can get by with property damage coverage, general liability coverage, and workers' comp, Somers also explained you need to know the risks specific to your industry. For example, he said restaurants may need liquor liability insurance because they could face a lawsuit if a drunk patron injures someone, while an accountant may need professional liability coverage in case he makes a costly error on a tax return.
“By carefully evaluating the risks they're most likely to experience in their industries, business owners can ensure they're purchasing the appropriate coverage,” Somers said.
Take care of your tax issues
We warned you this would be boring! Think taxes are a pain in the ass as a civilian? They get way more complicated as a business owner, and you need to be prepared for that from day one because you don't want to mess with the IRS.
“Businesses have to pay state and federal payroll taxes on wages paid to employees,” explained Ken Stalcup, a CPA with Houlihan Valuation Advisors. “The state or local government may impose property taxes on business property. And the state or local government may impose sales tax or excise taxes. All those should be addressed for each business. And then there’s the taxes paid by the business owner.”
Taxes have to be paid as-you-go in the U.S. system, which means you'll need to submit tax forms and money throughout the year. You'll need to submit quarterly estimated taxes four times annually to the IRS as an individual, sole proprietorship, partnership, or owner of an S corp if you expect to owe at least $1,000 in taxes. Corporations, on the other hand, have to submit quarterly estimated taxes if the business will owe at least $500. Finally, the rules for paying in state taxes, including sales taxes, vary based on where the company operates.
Understanding your tax obligations is essential because the stakes are really high.
“Do not mess up your payroll taxes,” advised Vanessa Kruze, founder and CEO of Kruze Consulting, a CPA firm focused on venture-funded startups. “The IRS can press charges on the company owner or individual responsible for making an egregious payroll tax mistake,” Kruze explained.
She recommends using a payroll service, such as Gusto, to handle this process for you. They'll charge a small fee, but it's worth it.
Don't neglect the technical issues
It's tempting to focus on the fun parts of starting a company, like advertising your services and connecting with customers. But all this other stuff is key to ensuring your business operates within the law and can ultimately be successful.
“You have to make sure you’re ready to run it as a business,” Lucas said, stressing that organizational structure, regulatory compliance, and operations are all of equal importance.
The good news is, now you know what you need to do and are ready to be your own boss. It's a lot of work, but that alone can be its own reward.
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Christy Rakoczy Bieber is a full-time personal finance writer whose work you can find in USA Today, CNN Money, MSN Money, Credit Karma and Yahoo Finance.