There are a multitude of legal and business issues to consider when it comes to starting a business. Everything from your business’s name, to its structure, to its operation, has legal implications. The following article is a great place to start in order to address the myriad of legal and business issues you will encounter along the way to starting your own business.
Before you begin taking the formal steps necessary to start your business, it is highly advisable that you first work out the practical and logistical concerns of your business. For example, will you be providing goods or services (or both)? Is there a market for it? Is it sustainable? These questions, along with many others, need to be addressed in full prior to moving forward with permits, licenses, and registration.
In addressing these issues, many top business minds consider the following three-prong approach:
First up, “desirability” – Will your product or service fill a need? Will it appeal to people? Will it fit into their lives? Will they actually want it?
These should be the first questions answered when starting your own venture. By examining the needs and behaviors of the customers you hope to reach, you will gain better insight into whether or not you have the foundation to bring your idea to market.
Second, “feasibility” – Do you have enough funding? Do you have access to distributors and manufacturers? Can you find the right employees?
Think of the feasibility process as pouring a big bucket of water over your red-hot idea. It should determine the logistical side of business, while removing all of the warm and fuzzy entrepreneurial feelings one typically has when starting a new business. In short, you address whether or not you actually have the ability to fulfill the needs and wants of your consumers.
Third, “viability” – Will your venture make money? Is it “viable” in the long-run, or is it just a flash in the pan? What will the return on the investment look like?
Similar to a cost-benefit analysis, you need to determine whether or not your business can survive with all of the unknowns all businesses confront during their beginning stages. If your business is “fragile,” it is not viable. In short, the viability stage can be summed up into two questions:
Even if you are the sole owner and employee of your business, it is not likely you will form a sole proprietorship. This is mostly due to the fact that forming a partnership or a limited liability company (LLC) or corporation is a critical step to protecting your personal assets (such as your home, car, or your children’s college fund) from any liabilities—financial or otherwise—incurred upon your business.
Because there is no legal separation between you and your business, you can be held personally liable for the debts and obligations of the business. This risk extends to any liabilities incurred as a result of employee actions. As such, an LLC, S corporation, or C corporation would be best.
In determining which business entity is best, you must weigh the advantages and disadvantages of all three. In short, LLCs are great for small businesses that want the aforementioned protection provided by the law with minimal hassle; S corporations generally work best for small businesses that want tax savings; and C corporations are best for larger businesses that have outside funding and/or investors.
After determining the viability and choosing your entity type, you should move forward with registering your business’s name. The order is important here because when naming a business you will need to provide the type of entity you will be using and how it will be used in the name (i.e. Joe’s Burgers, Inc.).
After brainstorming your business’s name, you need to move forward with registering it. But first, you need to search the name on various sites and search engines to make sure it is not already in use.
In the United States, if someone is using a term that is the same or even similar (more on this later) to yours, it could limit your ability to register or trademark your business’s name. Therefore, before you get too attached to any one name for your business, you will need to perform what is called a “preliminary trademark search.”
The purpose of such a search is to verify the name you wish to use is available and would not infringe on the name of another officially existing business. Often, it is not necessary to hire an attorney to perform these searches, as they are expensive and likely will require you to purchase a bundle of services—intellectual property attorneys rarely have an à la carte menu of services.
You can do this by searching with your state's business registry—which is typically housed with the Secretary of State. In the event that your chosen name is not currently being used, you can request to reserve it with the Secretary of State's office for a reasonable duration—typically around 120 days—while you set up your articles of organization, articles of incorporation, and partnership agreement.
If your state-wide search results in no similar name, the next step is to visit the United States Patent and Trademark Office’s (USPTO) website and perform the same type of search.
If, again, no strikingly similar name is uncovered, you are in a good position to start moving forward with officially registering your business’s name—but as you will see, you are not out of the woods yet.
The third and final step is to perform a “comprehensive search.” The difference between a preliminary and comprehensive trademark search is that your preliminary search will search for your exact trademark and perhaps a few obvious variations such as separate words in your trademark, plurals, reversed words, and so forth.
But with a comprehensive trademark search you will often check dozens of different variations along with wildcard searches that identify each important “sub-part” in your trademark. This is where the “similar” discussion comes into play.
While sometimes it is enough to simply have a grammatically different name, sometimes it is not.
The USPTO standard for trademark infringement is whether or not a name creates a “likelihood of confusion.” In simpler terms, is it probable, under all of the circumstances, that consumers of the relevant goods will mistake your company for another? For example, if your company is named “Apple IT Services,” there will almost certainly be a problem, as one could reasonably believe that your company is an affiliate or owned by Apple computers.
So in sum, make sure you perform both a preliminary and comprehensive search. Additionally, if you have concerns about your business’s name, it may be prudent to hire a trademark search service (not to be confused with hiring an attorney) that will perform the comprehensive search and provide an opinion regarding any trademark liability concerning the name.
Depending on which entity you choose, you must then draft the appropriate paperwork (articles of organization, articles of incorporation, operating agreement, etc.). Once you understand the basics of these documents, you will find that you are likely able to do this on your own.
Additionally, you will want to draft agreements that are not required by law, but are strongly recommended for the sake of good business practices. Such documents include:
First, a non-disclosure agreement is a way to protect your idea before you reveal it to outside parties. NDAs are commonly executed when two parties are considering doing business with each other and need to understand the material and sensitive information so that the contracting party may properly evaluate the health, nature, and capabilities of the business.
NDAs can be "mutual," meaning both parties are restricted in their use of the materials provided, or they can restrict the use of material by a single party. However, in the case of a start-up, it will typically involve the business requesting potential investors and employees to sign the NDA.
In doing so, you are protecting your business idea by forcing the other party not to reveal any information it comes to learn.
Second, you will want to draft an investor agreement. An investment agreement is a contract between a company and an investor for the sale of “shares” of the company to the investor for a certain amount of money. Investor agreements typically contain several stipulations and contingencies. However, it is relatively straightforward in that it is nothing more than a purchase agreement.
Moreover, the term “shares” is somewhat of a misnomer. One may hear the term and believe they must have a large company to have shares. This is not the case. A share is simply a quantifiable stake in the company.
In your articles of incorporation or articles of organization you will set up how many initial shares there will be (10; 100; 1,000; 1,000,000; etc.). Keep in mind these numbers are arbitrary and the amount of shares created is done so you can sell them. For example, let’s say an investor would like a 10% stake in your business. If you have 1,000 shares, you would give him 100 shares. Essentially, the benefit of having a larger amount of shares is so you can easily sell them to many investors. If you only have 10, you are basically limiting yourself to only a handful of investors.
Depending on your business’s type and location, you are likely required to have one or more business licenses or permits from the state, county/city, or even federal government. Such licenses include:
Moreover, not all businesses require the same permits and licenses. For example, a brewery is going to have different requirements than a dental practice. As such, it is very important to research these requirements and contact your state’s Secretary of State’s office to determine what you will need.
All businesses are required to obtain a Federal Tax Identification Number (also known as an Employer Identification Number or “EIN”). Your Federal Tax Identification Number is essentially your business’s social security number and is used to identify your business for IRS purposes and to keep track of your company’s transactions.
To obtain an EIN, you must file an application with the IRS. You can do this online or via U.S. Mail.
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