It seems to be the rallying cry of our generation: start your own business.
From cover stories of tech wunderkinds earning billions a year to articles bemoaning the death of the traditional 9-to-5 job, there are endless stories that promote the idea of becoming your own boss.
But if you're thinking of becoming an entrepreneur, do you have the right small business legal advice for success?
Getting Legal Advice When Starting a Business
Starting a business is much more than fleshing out a plan, printing business cards, and putting together a website. There are legal, financial, and time considerations to factor into the decision. That’s why it’s essential to do your research.
In that vein, speaking with a lawyer and an accountant before you file any paperwork is a necessary step, and one that many entrepreneurs often skip. I formed a business myself in early 2017 and consulted a lawyer to get small business legal advice before taking the plunge.
My attorney, Karolyn Knaack, has practiced law in Texas for over 15 years and works primarily with business owners. She has some interesting legal advice for starting a business.
What Kind of Business Entity Works Best for You?
Let’s start at the beginning. When it comes to forming a new business entity, you need to know not only how to do that, but which kind of entity you should form.
A limited liability company (LLC) is different from a sole proprietorship, which is different from an S corporation. How do you know which one is right for you?
When you’re a sole proprietor, there’s no legal distinction between your personal income and your business income.
Incorporating by forming an LLC provides a measure of financial and legal protection by creating a clear distinction between personal and business finances.
S corporations, according to the IRS, “elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.” That means that the shareholders report income and losses on their personal taxes.
“Which entity is the best form depends on structure, liability, management, and tax considerations,” Knaack says. “I suggest that a sole proprietorship incorporate as soon as they start their business. There is no reason to risk your personal assets.”
Sole proprietorships are the most common form of business entity in the United States, according to the Small Business Association — but despite their commonality, these “solopreneurs” retain unlimited personal liability for any debts accrued while operating.
The Different Types of Business Entities
LLCs are common and easy to form. Plus, they can consist of just one person or many people. As such, they’re a popular choice.
Meanwhile, an S corp is an option for businesses with multiple owners and for companies that want to issue stock (which LLCs and sole proprietorships cannot do). Small business legal considerations like taxes and formation vary from state to state.
Small Business Legal Advice for Online Companies
Knaack also says that, “If you are selling goods or services through your website, you need to have terms and conditions regarding the sale transaction. These terms and conditions typically contain the main business terms of the transaction, which may include a description of the goods, quantity, price, and payment terms, among other things.”
Preparing for Tax Season
It’s important to keep accurate records of all financial transactions so that you can understand your tax obligations. Many business owners may need to file quarterly taxes, and the IRS has strict rules about tax deductions and record keeping.
“Finally,” Knaack says, “find a good accountant or bookkeeper to help you with your books and preparing your taxes. You can also look online at Lawyers.com and Nolo, and seek out the Small Business Administration and Trade Associations.”
Common Mistakes That First-Time Business Owners Make
The most common mistake is simply not doing proper research before starting a business.
People get caught up in the excitement of turning a passion into a business and skip over a lot of the legal steps. They may start selling things online and earning revenue before they form a business entity, or host events without vendor release forms.
Start by researching other small businesses’ legal and market positions in the niche you want to enter. For example, if you want to sell vintage clothing, see how other sellers handle their business. That will give you a good starting point.
If you have access to a mentor operating in a similar sector, it can also help to draw from his or her own experiences — both positive and negative.
This can help in fine-tuning your approach to starting your business, and avoiding potential pitfalls.
Another mistake first-timers make is not keeping accurate and detailed records. This applies to both financial receipts and records of contracts, licenses, or partnerships that you make with other people.
You can keep digital records or hard copies, but either way, you’ll need these records if you get audited or sued.
The third biggest mistake comes as the company grows. When you need to hire people — even just on a part-time basis — you need to have iron-clad work agreements.
The Bottom Line
There’s a lot that goes into starting your own business, from nondisclosure agreements about trade secrets to noncompete clauses to keeping accurate documents about your employees’ legal standing on file.
And while you might feel you’ve got a million dollar idea ready to hit the market, it’s critical to prepare legally before you get down to brass tacks.
Consult a lawyer and get small business legal advice even before you put up an ad on Craigslist — you’ll thank yourself later for performing the necessary due diligence when the profits start rolling in.