The Legalities Of A New Business: A Guide

Launching a new business? If so, this is an incredibly exciting time, but it is also one which can be stressful as there is a huge amount of work and preparation that needs to be done before you launch. This is a key stage, and it will determine how successful you are, so it is vital that you take your time with each stage and always make the intelligent decision. It can be daunting initially, and especially if it is your first business venture, so here are a few tips that will help the launch to go smoothly while also ensuring that everything is above board legally.

Business Entities

One of the most important decisions that you will face early on is choosing your business structure. This will impact the amount of tax that you have to pay each year along with the liability that you face, your ability to raise funds and the amount of paperwork that you have to do. Here is a quick look at the different business entities to consider:

Sole Proprietor: One person as the sole owner and operator of the company. This is the simplest and easiest structure and will provide you with complete control, but you are also personally liable for financial obligations and this will put your personal assets at risk. It is the most common form of entity, and you will not need to register with the state and most business losses can be deducted on your personal tax return.

Partnership: Two or more people that share in the profits (or losses). These are also easy to set up, and you do not need to register with the state, but each partner will be liable for the financial obligations.

Corporation: A corporation is an entity to conduct business and is separate from the people that founded the company. The main advantage is the avoidance of personal liability, but it can be expensive to form and the record-keeping can be challenging.

Limited Liability Company (LLC): LLC has become a very popular entity as it enables the owner to choose if you want to be taxed as partnership or corporation and you don’t have personal liability.

A sole proprietorship or partnership is often best for a startup because they are very easy to set up, but if you want legal protection and tax benefits, it is best to opt for an LLC or corporation.

EIN

You will also need to obtain an Employer Identification Number (EIN) from the IRS before you start operating. This is a unique nine-digit number assigned to business entities for the purpose of identification and will enable you to open a bank account, pay taxes and hire employees. The application is quick, easy and the same no matter what type of entity you decide on.

Taxes

The business structure that you decide on will impact the amount of tax you pay. As a business, this can include income tax, employment taxes, excise tax, property tax, sales and use tax, estimated tax, and self-employment tax. It is vital that you understand the federal, state and local tax requirements so always find this out early on.

Tax-Deductible Business Expenses

Any “ordinary and necessary” operating costs are deductible according to the IRS. This can include equipment purchases, business expenses (advertising, employee benefit programs, insurance, utilities, etc.), auto expenses, meal and entertainment expenses and travel expenses. An ordinary expense will be anything which is common and accepted in your industry, while a necessary expense will be anything that is helpful for your business.

Keeping Up With Tax

It is, of course, essential that you keep up with your tax and get your returns completed on time, but this is also challenging and especially if you do not have an accountant (which can be costly). Fortunately, modern day businesses can benefit from professional tax software like UltimateTax, which can make it much easier. It is important that you carefully make a note of any expenses so that every single dollar can be accounted for whether it is coming into the business or going out – in addition to abiding by law, this also makes it much easier to manage your company finances and see how you can maximize profit.

Business Insurance

You will want protection in place in the form of business insurance in case something goes wrong. Lawsuits, natural disasters, and accidents are all threats to your company, but you can protect yourself with the right type of business insurance. Here is a quick look at the different types of business insurance available to you.

General liability insurance: Protects against financial loss as a result of property damage, medical expenses, libel, slander, defending lawsuits, settlement bonds and bodily injury.

Product liability insurance: Protects against financial loss from defective products that cause harm.

Professional liability insurance: Protects against financial loss from negligence, malpractice and errors.

Commercial property insurance: Protect the company against damage or loss of property as a result of a wide variety of events.

Home-based business insurance: Coverage added to homeowner’s insurance to protect business equipment and liability for third-party injuries.

Business owner’s policy: An insurance package that combines all the usual coverage options into one bundle.

The type of business insurance that you need will depend on your industry, but you should always assess your risks, shop around and re-assess your options each year.

Funding

The majority of entrepreneurs will need to secure some form of funding to get their idea off the ground, and there are a few different options for you to consider. You could opt for a traditional bank loan or a government loan program, but many people prefer to find investors for their company. Using investors may require giving up complete ownership, but it can be beneficial, particularly if they know the industry well and have a lot of contacts.

Finding investors is now easier than ever thanks to crowdfunding, which can be an excellent way to find investors from all around the world. Alternatively, there may be business grants available through state or local programs, but these often require you to combine the grant with other forms of financing or require you to match the funds. There may also be federal and state programs which can help you to finance your business depending on where you are operating from.

Hiring

If you plan on hiring employees, it is important that you know how to go about doing this and also ensure that you are complying with federal and state regulations. You will need to create a plan for paying staff before hiring and to set up a payroll you will need to get an Employer Identification Number (EIN), determine whether or not you need state or local tax IDs, create compensation plans for holiday, vacation and leave and more. Employee benefits will need to include social security taxes, worker’s compensation, disability insurance, leave benefits and unemployment insurance. You must also adhere to the labor laws and business practices with industry regulations in order to protect your business along with your workers’ rights. You can do this by consulting the Department of Labor’s federal and state law resources.

Consumer Protection Law

You should also understand your rights and responsibilities for protecting your customers by complying with consumer protection laws. Consumer rights laws exist at both federal and state level, so always familiarize yourself with these laws and ensure that your business is abiding by the law at all times.

Register Business Name

Your business name is an important decision, so always take your time to come up with something that is memorable. Once you have decided on a name, you will need to check if it is currently in use or trademarked. If not, you can register the name – sole proprietors will register the business name with the state or county clerk, while limited partnerships, corporations and LLCs normally have to register the business name when the formation paperwork is filed. In addition to your business name, remember to register your domain name so that you can have a web presence under your business name.

Licenses & Permits

Finally, there may also be a variety of business licenses and permits that you need to obtain before you commence. This will depend on your location, your industry and your situation, so always research this early on so that you have plenty of time to obtain the license or permit.

Launching a new business is incredibly exciting and you will be eager to get up and running, but it is vital that you take your time initially to ensure that you are completing every necessary stage so that you are operating efficiently but also legally. There are a number of legal processes to complete first, so follow the above advice to make sure that your company is registered and operating within federal, state and local laws at all times. This will give you the foundation to go on and build a successful business from the ground up.