Last Updated on March 6, 2024
Navigating the legalities of business is a necessary part of starting any business. While you can easily get caught up in the excitement of developing your product or service, it’s equally important to consider the legal aspects of your venture. Taking the necessary legal steps can help ensure that your business is not only compliant with the law, but also safeguarded against potential liabilities.
In this article, we’ll discuss six essential legal tips that every entrepreneur should consider when starting a new business. These tips are relevant to most types of businesses, regardless of whether they’re sole proprietorships, limited liability corporations, limited liability partnerships, or corporations (S, C or B). Take care of everything from registering your business to opening a bank account, before you actually sell to your first customer or sign your first client.
1. Register Your Business
Registering your business should be the first legal step you take, after coming up with a business name, operating agreement (which many states require), mission statement and marketing plan. In other words, this is the first thing you should do between developing your business idea and actually executing it.
Business registration laws are generally governed at the state level. If you’re forming a sole proprietorship, there’s likely little that you have to do (but check to confirm). If you’re forming an LLC (or LLP), you’ll need to file official forms with the state.
The two structures have different benefits. Sole proprietorships are easy to set up and operate, but provide no personal protections. LLCs normally require more forms and incur a few costs, but they help shield your personal assets from liabilities related to your business.
For this reason, forming a Limited Liability Company (LLC) is one of the most popular ways to structure a business. An LLC offers a flexible structure that combines the limited liability protection of a corporation with the tax benefits and relative simplicity of a partnership.
Should you choose to form an LLC, forming an LLC can be easy if you use an online formation service. The service will help prepare and take care of filing all necessary forms. Alternatively, you can do the legwork yourself if you’re so inclined.
Should you choose to form a C, S or B corporation, it’s broadly recommended that you consult an attorney and a tax professional who are experienced in business formation and operation. These are more complicated business structures that often require advanced expertise.
2. Register Trademarks for Your Business Name and Logo
If you haven’t already, it’s time to create a business logo. This should be something that can be printed on multiple types of material, is eye-catching and easy to recognize, and can be the seed of all your marketing materials. A trademark is the most used — and hopefully most recognized — branding component.
An easy way to create an effective and professional logo is to use an online logo generator that’s AI-powered. A logo generator can use artificial intelligence to make unique logo designs, from which you can choose the best and further customize it. This strikes a middle and more practical path, between an amateur DIY logo and an expensive graphic designer-made logo.
If you use an online logo generator, make sure it’s AI-powered so that you get the best possible design suggestions. Also, pay the additional fee for a vector image. A vector file can be resized without distorting the image, so you can use it on everything from business cards to banners.
You should also consider trademarking your business name and logo. Trademark protection is an essential component that helps protect your brand identity, preventing others from using similar names or logos that could confuse customers and harm your reputation. It also gives you a legal defense should someone infringe upon your business’s image.
At least consider registering a trademark at the state level, which is done through the appropriate department in your state. Contact the department or secretary of state for guidance.
It’s generally not necessary to register a federal trademark when first starting a small business, but doing so is certainly an option. Federal trademarks are registered with the U.S. Patent and Trademark Office (USPTO).
Applying for a trademark with the USPTO is complex, and should be done in consultation with an attorney so that you have a much better chance of being approved. You might be able to register a state trademark without an attorney’s help, although an attorney can be helpful.
3. Obtain a Federal Tax ID Number
A Federal Tax Identification Number, also known as an employer identification number (EIN), is used by the Internal Revenue Service (IRS) to identify your business for tax purposes.
You’ll need an EIN if you have a corporation, or an LLC with employees. An EIN is recommended even if you have an LLC without employees or a sole proprietor, as using an EIN can save you from giving out your social security number. You’ll use an EIN when hiring employees, preparing and filing taxes, opening a business bank account, and in other situations.
You can apply for an EIN online for free through the IRS website. The process is relatively simple and usually doesn’t require professional assistance, but you can have a service take care of this if you prefer.
4. Stay on Top of Bookkeeping
Accurate and timely bookkeeping is crucial for maintaining a healthy financial outlook for your business. Proper bookkeeping helps ensure that you meet tax filing requirements, track expenses, and make informed financial decisions.
There are various bookkeeping software options available that can help you manage your business finances efficiently. Alternatively, you may consider hiring a professional bookkeeper or accountant to handle your financial records, particularly if you have limited experience in this area. If you hire a bookkeeper, ask what software they’d prefer you use to log expenses, revenues, payroll and receipts.
You might also want to consult an accountant at this point. Even if you don’t use an accountant annually to file taxes, one can help you understand the tax benefits and implications of running a business. An hour or two with them could save you much more than their fee.
5. Obtain Necessary Licenses and Permits
Different industries and jurisdictions have specific requirements for licenses and permits. Failure to obtain the appropriate licenses and permits can result in fines, penalties, or closure of your business. To ensure that you are operating legally and to protect your business assets, it’s essential to research and secure all necessary licenses and permits.
An easy DIY way to check licensing and permitting requirements is to contact three separate entities. Your municipality clerk (if applicable) and county clerk will know of any local licensing/permitting requirements. Check with any state entity that oversees your industry for statewide licensing/permitting requirements, or ask the secretary of state if there’s any entity to check with. Many state-level licenses are at the individual level (e.g. medical licenses).
In select industries, federal licenses are also required. You should already know if you’re in one of the minority of industries that this applies to.
LLC formation services usually don’t assist with permitting/licensing, because this legal aspect of starting a business is so specific and localized. You can usually navigate local, and sometimes state, requirements on your own.
6. Open a Business Bank Account
Opening a separate business bank account is another critical step in protecting your personal and business assets. A dedicated business account helps you maintain clear financial records and simplifies tax filing, and is a great aid to bookkeeping. It also reinforces the legal separation between your personal and business finances, which is particularly important if you have formed an LLC or corporation.
When opening a business bank account, be prepared to provide documentation such as your business registration, EIN, and any required licenses or permits. Shop around to find a bank that offers competitive fees and features tailored to your business needs.
Set Your Business Up for Success
Make sure you prioritize legal protection for your business before beginning operations. By following the six tips outlined, you can establish a solid legal foundation for your business and mitigate potential liabilities. While it may be tempting to cut corners in the beginning, investing in legal protection is a smart decision that will contribute to the long-term success and stability of your business.
Remember to register your business, protect your trademarks, obtain an EIN, stay on top of bookkeeping, secure necessary licenses and permits, and open a separate business bank account. Taking these essential legal steps early in your entrepreneurial journey can save you time, money, and headaches down the line.
If you’re unsure about any aspect of the process, don’t hesitate to seek professional advice from attorneys, accountants, business consultants or informative online services. These resources can guide you through the complexities of starting and operating a legally compliant and protected business.