Start a business it’s challenging, and that’s without the complicated legal ramifications you want to protect yourself and your business against. What business owner, you should make sure you have all the legal basesthem to avoid hefty fines, headaches, or worst case, even jail time.
Fortunately, there are many resources available for small companies both online and through hired legal advice. Use this list as a starting point for your initial legal checklist And be sure to resolve any lingering issues before you start planning your business.
16 legal things you must follow as a business owner
1. Designate the appropriate business entity.
The first is the first. Choose the right entity or business structure for your startup. This is crucial because it affects your personal liability, what you pay in taxes, and your ability to raise funds. Possible structures include the sole property, the general and limited partnership, the limited partnership and the limited liability company LLC. Once you decide which structure is best for your company, you must officially designate it through your secretary of state.
2. Check what licenses, permits and registrations your company needs.
Depending on your type of business and where it is located, you may need specific licenses and permits from your country, state, county, or city.
Licenses, permits, and registrations come in many variations. Examples include local business licenses, building permits, health safety related permits, home business permits, fire permits, industry related permits (such as law practice, hospitality, construction or manufacturing businesses), liquor licenses, and more. The possibilities are endless, so be sure to do a thorough research – perhaps with the help of your advisor – on what you need to comply with the law in your area.
3. Make sure you are paying the proper business taxes.
Taxes are the law, and depending on the structure of your business entity, the type of business you run, and where it is located, you may have to register and apply for a multitude of taxes. It may be wise to hire an accountant or tax advisor to make sure you comply with all tax laws. It is true that you need to register your business with the tax authorities in your area and file annual income tax returns for your business.
4. Keep proper accounting.
In most places, you are required by law to record all business transactions and maintain all business documentation in certain formats for a minimum period of time. See what is required of you for your industry and location in terms of record keeping obligations and establish a proper filing and accounting system for all documents and transactions. This will help you greatly down the line of doing taxes or if you ever run into other legal problems.
5. Sign written agreements between all business owners.
If your business operates with multiple business owners, it is important to ensure that each person knows and understands their rights and responsibilities in relation to the business. How this happens depends on the structure of your business. If you form a corporation, you need a shareholders agreement and the appropriate articles of incorporation. You also need a designated legal advisor to make sure the agreements and articles are correct.
6. Establish a vesting program for all founders and early employees.
This is a practical measure that many startups often overlook when they are just starting out and are excited about taking off. But this will protect your business in the future and ensure a certain level of commitment that every founder or first employee brings to the table.
The creation of a vesting program upon incorporation establishes that ownership of the shares will be acquired over time, preventing a single person from being able to eat and dispose of all their shares whenever they want. Keep in mind that most investors require this measure before making any initial investment.
7. Obtain your Employer Identification Number (EIN).
This may seem obvious, but to open a corporate bank account and properly file your business tax returns, you need an Employer Identification Number (EIN). You can easily apply for one from the IRS over the phone or by using an online application on the IRS website.
You need the social security number of the person completing the company form (usually the president or CEO). Include information about your business entity and the date of incorporation. Be sure to keep a signed copy of this application for your records.
8. Protect your intellectual property (IP).
Intellectual property is the bread and butter of many companies. Intellectual property also includes patents, copyrights, trademarks, and trade secrets. Be sure to file patents as soon as possible, a process that can take more than five years. Protecting your intellectual property will be attractive to investors, but it will also help you sleep better at night. Having exclusive rights to reproduce and display your work will make your life much, much easier in the future and will ensure that no one tries to rip any IP carpet from under you.
Intellectual property can be very complicated from a legal point of view, so it would be wise to consult an intellectual property lawyer who can help you throughout the process and provide maximum protection.
9. Classify your employees.
Many start-ups often misclassify their first employees. It is important to know what type of worker you are hiring, essentially the difference between an employee and an independent contractor. This is important for tax reasons for both you and the employee and will help clarify what is expected and what is not expected of you and the employee. This will only help protect you legally in the future.
10. Make sure you comply with the securities laws.
Founders and investors of LLCs, C corporations, and partnerships are subject to federal and state securities laws. These laws were made to require companies to provide reliable and accurate information about their businesses to allow for a fair market. They also protect against insider trading and business fraud.
Failure to comply with these laws may result in the new company having to buy back all of its shares at the issue price, even if the company has lost all of its money.
11. Is your business international?
If you have international clients, it is a good idea to research the implications of doing business in the specific countries you work with. For example, you may be required to register and apply for taxes in those foreign countries, as well as be subject to other compliance structures such as privacy and intellectual property law. Do your research or consult an international business attorney.
12. Follow the email rules.
Email marketing is a big part of many businesses. When you send emails to your customers or when you are targeting potential customers through email campaigns, you need to find out what the regulations are for email. Please note that each country has its own set of rules.
Aspects covered by these rules generally include opt-in versus opt-out, B2B or B2C emails, unsubscribe rules, and the minimum information that must be included in your emails. You can check out a complete guide here.
13. Make sure your investors are accredited.
The current definition of an accredited investor under the rules of the Securities and Exchange Commission includes eight categories of investors, but the more general investor accreditation means that the person:
- You have at least a million dollars in the bank
- Has at least $ 200,000 in annual income
- Understand and are willing to take the investment risk
The SEC has guidelines for what constitutes “reasonable efforts” on these accounts. Fundraising is possible outside of the narrow limitation of accredited investors, but this will open a Pandora’s box in terms of values and compliance. So, if you want to be as legally sound as you can be, go through accredited investors.
15. Hire a competent legal advisor.
In case this was not clear up front, work with attorneys on these complicated legal matters early on. Startups are often so preoccupied with expenses that they overlook the importance of sound legal advice that could save them thousands, if not millions, down the road. You can’t put a price on having the right lawyers on your side.
Ideally, you should have experience in employment law, contract law, securities law, and intellectual property law. You may have a “general attorney” on your staff at some point, but it is common for the work to be spread across different law firms and attorneys. The cost is worth avoiding any legal problems.
16. Create a company manual.
Once you have all the legal headaches resolved and probed, make sure everyone in the company is aware of and understands your company’s legal responsibilities as well as you do – as a business owner, you could be liable for anything your employees do while representing your organization.
Company or employee manuals are a great way to instill the values and legal limits of your company. It can also help establish what is and what is not appropriate behavior internally and externally. Ask your legal advisor to review it well or even help you write it, and then get the company together to review the material.