I often get calls from people in the creative flow of starting a business and they always have a myriad of questions. Here are some brief answers to the most common questions I get asked. These are general answers and not meant to be specific legal advice for any individual - for specific answers to your specific situation I strongly recommend you consult with an attorney before you get too far along with your business plan.
1. Do I need a lawyer to start a business?
No, but it's not a bad idea to get the legal advice when you're starting out. An attorney can help you decide what type of entity to form, whether the name you want to use is available, help negotiate or draft leases and contracts, etc. Its much easier to start out on with legal plan in place as your foundation, then to try to fix these kinds of problems later on when the floor is pulled out from under you. I am thinking of a client whose business name was not available but she didn't find out until her business was up and running and all of the signs and marketing documents were printed and released to her audience.
2. Should I use a lawyer to draw up a contract or a lease?
Yes, if you do not feel confident about what you are agreeing to, or if you want a legal review of the terms and conditions. The time for the lawyer is before you sign something, not after.
3. What are the differences in organizational structure, and what legal structure should I choose?
There are three principal kinds of business structures: sole proprietorship, partnership, and corporation.
A sole proprietorship is the simplest business structure to organize. A sole proprietorship is owned by one individual (not a married couple) who has complete control of the business. Revenues are considered personal income and are taxed at the owner's personal tax rate.
A partnership involves two or more people conducting a business together. This business structure is also fairly simple to organize, but may be more costly than a sole proprietorship because it requires a separate tax return for each partner, as well as a partnership agreement.
A limited partnership is two or more individuals who jointly own a business. This form of business allows for general partners and limited partners. Limited partners are generally financially liable for debts only to the extent of their investment. They have limited or no control over management of the company. The general partners manage the company and have the greatest potential risk and reward from the operations of the business.
Limited Liability Partnership (LLP)
In this type of partnership, the liability of each partner can be limited to exclude obligations resulting from professional mistakes made by other partners, or malpractice actions against other partners. The partners do, however, continue to share liabilities resulting from all other activities of the partnership.
A corporation can be complex and expensive to organize. Legal assistance in setting up a corporation is strongly advised. The corporation is recognized as a completely separate legal entity from the owners. A corporation can limit the liability exposure of the owners. However, there can be some tax disadvantages with a corporation.
Limited Liability Company (LLC)
A limited liability company can provide the liability protection of a corporation and the federal tax benefits of a partnership. It is formed in a similar manner to that of a corporation, although directors are called managers while shareholders are called members. The name of the company must include the words "Limited," "LLC," or "Ltd." In an LLC the individual members or managers are not personally liable for debts, obligation, or liabilities of the company. Articles of organization must be filed with the secretary of state's office.
4. What kind of registration and licenses are generally required to start my business?
There are specific requirements in each state, county, and locality. Basic licenses and registrations that a business may need include the following:
Local: A business license from the city, town, or county, depending on your location, will usually be necessary. In addition, you'll have to meet zoning laws, building codes, and similar regulations.
State: If your business isn't a corporation and your full name isn't in the name of the business, you'll have to register under what's called the Fictitious Name Act. You should also file for a Sales and Use Tax Number. In some lines of business (like restaurants, barbershops, and real estate offices), specific licenses are needed.
Federal: You may need an Employer Identification Number (EIN).
5. How do I register my small business?
If you decide to incorporate or become a limited partnership or a limited liability company, you will need to register that entity with the secretary of state. If you organize your business as a sole proprietorship (a business owned and operated by an individual) or a general partnership, you do not need to register your business entity with the state. However, there may be certain city or town permits/licenses that are required to operate your business.
6. I have a name for my company, is it unique enough?
It should be different enough to avoid confusion with other similar businesses. Your business name helps customers identify you and your brand. If your name is similar to others, this identification is made difficult. Avoid confusion by picking a name that is unique.
7. How do I determine if the name I choose is available for use?
You can look on the secretary of state’s web site to determine whether the name you have chosen is being used but keep in mind that there might be a federal trademark and or other problems that might not be readily apparent by such a search.
8. What is a federal identification number, do I need one?
A sole proprietorship or single member LLC without employees can use the proprietor's Social Security number as its tax ID number. Forming any other business structure (partnership, LLC, corporation, or sole proprietorship with any employees requires obtaining a Federal Identification Number from the Internal Revenue Service
9. What are patents?
Patents are protections for inventions and discoveries. A patent is a property right that grants the owner an exclusive right to exclude others for a period of time (usually 20 years) from making, using, offering, selling, or importing anything that utilizes the intellectual property contained in the patent without the permission of the patent owner. Patents are expensive to obtain and generally require the use of an attorney who specializes in this field. In the United States, patents are handled by the U.S. Patent and Trademark Office.
10. What are trademarks and service marks?
Trademark and service mark registrations are protections for certain things that distinguish one source from another. This registration allows the holder to exclude others from using its mark, generally for as long as that mark remains in use by the owner. A trademark is a word, phrase, symbol, or design, or a combination of words, phrases, symbols, or designs, that identifies and distinguishes the source of the goods of one party from the sources of others. Slogans are registered as service marks. This provides trademark protection to a slogan that uniquely identifies your company or service. In essence, a service mark is the same as a trademark except that it identifies and distinguishes the source of a service rather than a product. Trademark and service mark registrations are sometimes expensive to obtain and often require the use of an attorney who specializes in this field. In the United States, trademarks and service marks are handled by the U.S. Patent and Trademark Office.
11. What is a copyright?
Copyright is a form of protection provided to the authors of "original works of authorship," including literary, dramatic, musical, artistic, and certain other intellectual works. A copyright generally gives the owner, for a period of time (usually the life of the author plus 70 years, or up to 120 years for works for hire), the exclusive right to do, and to authorize others to do, the following: to reproduce the work, to prepare derivative works based upon the work; to distribute copies of the work to the public, to perform the work publicly, and to display the work publicly. A copyright exists immediately upon creation of a work; however, registering that copyright provides additional protections. Copyright registration is fairly inexpensive and easy to obtain. In the United States, copyright registration is handled by the U.S. Copyright Office.
11. I have an idea for a business – what are the first things to consider?
a. In general, make sure your manufacturing process, service or business idea will work in the way you want it to by conducting market research
b. Draft and continue to revise a business plan (the E-Myth by Micheal Gerber is an awesome tool for any business getting started).
c. Prepare a financial forecast to know what the start-up and initial operating budget will cost and discuss with partners, investors, accountant, family members, etc.
d. Determine where the money for the start up and day to day operations will come from
e. Decide on what type of entity the business should be from a legal and tax perspective
12. What are the primary concerns from a legal perspective?
a. Who will be the other owners of the business and how will that work practically in the formation documents of the company, and going forward
b. What type of business entity should be formed
c. What type of legal documents must be filed to establish the business
d. What are the tax implications the business entity chosen
13. What are the advantages and disadvantages of the different types of business?
a. Sole Proprietorship – advantage easy to form, disadvantage no personal liability protection
b. Limited Partnership – ease of formation, only general partners are personally liable and can obtain capital from limited partner without their being liable so can obtain capital but management restrictions on limited partners
c. Limited Liability Company – relatively new type of business entity known for flexibility, 95 percent of new businesses become LLCs. The advantages are no personal liability for members, no strict ownership requirements as in corporations, flow through tax treatment (single level of taxation (goes on owners tax return rather then having to file as a separate entity) or can elect corporate tax treatment, very flexible for multiple classes. LLCs do require some legal formalities in formation and thereafter.
d. C Corporation - no liability for shareholders, ability to raise large amounts of capital, but double taxed, taxed on profits and on dividend distribution, very complex formation requirements, stringent legal formality requirements
e. S Corporation - limited liability w/single layer of tax rather then double, but very strict requirements regarding number and type of shareholders, amount of passive income, and equity arrangements…
14. What are the biggest mistake business owners make from a legal perspective?
a. Not creating or maintaining properly a separate entity that will protect your personal assets from liability – it is not the company itself that gives you asset protection, it is how you treat the company. If something goes wrong a litigant will sue both the business entity and the owner personally. The judge performs an alter ego analysis to determine whether the company is separate from the owners thereby releasing them from personal liability – this includes whether the company was formed correctly – emphasis anyone can go on line and register articles of organization for an LLC – this in and of itself provides no personal protection against liability. The judge is going too look to see if there is an operating agreement in place, if certificates of ownership have been executed for the members, whether annual meetings were held, whether funds were kept separate or comingled, etc, to determine whether the individual suing can pierce the corporate shield and go after personal assets, including personal savings, house, etc.
b. Not involving an attorney and accountant early on in business formation process – the accountant can explain and qualify pros and cons of tax consequences of business formation and the attorney can make sure your business is properly set up and that any contracts or leases that you sign or create are appropriate and fair for your business objectives – by bringing in these two professionals early you will save time, money and unnecessary heartache in the long run.