Legal Requirements When Starting a Business: Minding the Details

Prompt attention to legal details intrinsic to a new business launch can save major headaches down the road. The most important of these tasks include naming your firm, procuring proper certification and documentation, and establishing a corporate structure.

Names, Licenses & More

If you haven’t already done so, review and complete the chores that will cement your new company’s legal framework. Some steps are easier than others, but all of them are critical:

• Name your company. The government distinguishes between a business’s legal and fictitious names. If you are your firm’s sole owner, your legal company name is your full name; in partnerships, the legal name is either the one cited in your partnership contract or the partners’ last names. For limited liability corporations (LLCs) and corporations, the legal name is the one you registered with your state government.

  While official forms and applications require a firm’s legal name, you also may file a trade or fictitious name with your state’s appropriate agency. Sometimes called a DBA (doing business as) name, this tag should embody the unique aspects of the business.

  For instance, the name “Flowers Your Way” tells prospective customers they can order floral arrangements designed to their specifications. “Round-the-Clock Car Repairs” promises to fix automobiles any time of the day or night.

  Before finalizing a name, make sure no other business exists with that name. One way to do this is to visit the U.S. Patent and Trademark Office’s database. On this site, you can search for both trademarked business names, logos and other branding art. The Secretary of State’s offices for most states also provide this information on their respective websites.

• Register your company’s name. This can be done online via individual Secretaries of State websites. Links for all 50 states, as well as U.S. territories, are available on the Small Business Administration site. To trademark a name or logo on a national level, visit the U.S. Patent and Trademark Office, which offers a detailed breakdown of policies and procedures.
• Obtain appropriate business permits and licenses. Depending on the type of venture, various licenses may be in order, with regulations varying from state to state. The U.S. Small Business Administration provides updated links to individual state licensing agencies.
• Procure a state resale tax number (also known as a sales tax number or resale certificate), if applicable. In most cases, retail businesses need this in order to purchase inventory and supplies at wholesale prices. The Internal Revenue Service provides links to individual state websites, including their departments of revenue, and business and economic resources.
• Open a separate small business account. Never mix personal and corporate bank accounts, no matter how small your company. Not only does the IRS require this distinction, keeping clear track of business income and expenses demands this separation from a practical perspective. A mish-mash of family and commercial transactions makes accurate bookkeeping in either category well-near impossible.

  Given that you’ll probably require future financial services such as loans and credit card merchant accounts, opening a business account in a strong bank or other financial institution is a good way to start a relationship with prospective lenders.

• Enlist an advisory team. With the establishment of a business comes the need for all sorts of insurance coverage, financial advice and legal support. In addition to taking advantage of free expertise through the SBA, SCORE or a Small Business Development Center, it’s critical to recruit a good accountant, attorney and insurance agent – at least on a consulting basis.

Small Business Structure: More Choices

Even solo operations require a legal structure, not simply for tax-filing purposes, but also to take advantage of tax deductions, insurance breaks and revenue distribution (e.g. salaries and dividends). Here is a rundown of the models currently in use in the commercial sector:

• Sole Proprietorship. A basic, inexpensive structure, this type of company typically belongs to a single person or married couple. Because the owner runs the operation, he or she assumes personal liability for all debts and may transfer the business in part or in its entirety. The owner reports profits and losses on personal income tax returns.
• Limited Liability Company (LLC). Particularly beneficial for smaller businesses, this structure blends the corporation’s limited personal liability with the tax advantages of a partnership and sole proprietorship. As such, an LLC can opt for taxation, as would a corporation, or pass gains and losses through the firm to its members (owners included). LLCs do not own stock, so corporate formalities are unnecessary.
• General Partnership. Though joint undertakings often require tact and restraint on the part of owners, this model does have advantages. Partnerships are cheap and easy to form, requiring nothing more than an agreement between a minimum of two individuals or entities to jointly own and run a company. Partners share gains, losses and administrative chores, with each owner assuming personal liability for debts. While partnerships per se do not pay taxes and file only an informational return, individual owners report their profit-loss share on their personal income tax returns.
• C Corporation (Inc. or Ltd.). A model involving a good bit of complexity, C corporations are relatively expensive to launch, include corporate formalities and may be subject to higher licensing fees and regulatory oversight than other structures. For these reasons alone, an attorney should be on staff or on retainer. Consider these points before choosing this model:
  • As a legal entity, a corporation remains separate from its owners, who are stockholders.
  • Taxing of profits occurs twice – at the corporate level and upon distribution to shareholders.
  • Shareholders do not assume personal liability for company obligations unless executive personnel have not observed corporate formalities, among them: issuance of stock certificates, annual meetings, recorded minutes of these meetings, regular election of new board of director members and reelection or reappointment of board members already holding positions.
• Sub Chapter S Corporation (Inc. or Ltd.) Similar to the C Corporation, this model, however, sidesteps double taxation. When a company meets IRS standards for S status, it is taxed in the same manner as a partnership. So, the entity itself is not subject to taxation – rather, revenues flow down to shareholders, who report it as income on personal returns.