How to Start a Business: Getting the Right Legal Advice
It seems to be the rallying call 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.
How to Start a Business
Starting a business is much more than 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 before you start a business.
In that vein, you should probably speak with a lawyer and an accountant before you file any paperwork. I formed a business myself in early 2017 and consulted a lawyer for my legal needs before taking the plunge. My lawyer, Karolyn Knaack, has practiced law in Texas for over 15 years and works primarily with business owners. She has some interesting advice for people starting new businesses.
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 it, but which kind of entity you should form.
An LLC is different from a sole proprietorship, which is different from an S corp. 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 (which stands for “limited liability company”) provides a measure of financial and legal protection by creating a clear distinction between personal and business finances. S corps, 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.”
What are 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. Legal considerations like taxes and formation vary state to state.
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 description of the goods, quantity, price, and payment terms, among other things.”
It’s also 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 before they form a business entity, or host events without vendor release forms.
Start with researching other businesses’ legal and market positions in the niche you want to enter. If you want to sell vintage clothing, see how other sellers handle their business. That will give you a good starting point.
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. There’s a lot that goes into this, from non-disclosure agreements about trade secrets to non-compete clauses to keeping accurate documents about your employees’ legal standing on file. Consult a lawyer before you put an ad up on Craigslist.
Sign up now for CentSai's latest.