Before accepting your first customer, you need to ensure your business follows federal, state, and local laws. Certain legal steps, such as registering your business, protect your personal assets. Other measures, like securing a trademark, protect business assets. To cover the right legal paperwork for your type of business, we review the main areas of legal filings and steps it takes to protect your venture.
1. Name Your Business
Before filling out any legal paperwork, you need a name for your business. It’s important to have a consistent business name on legal documents to ensure they are legally binding (enforceable). You also don’t want to waste time updating legal documents because you decided to change the business name.
Some biz owners instantly know what they want to name their business—others need inspiration. Luckily, there are many strategies to help you come up with a business name. Consider using an acronym, dropping a letter to make it unique, adding a number, or making it location-specific by adding your city.
If you need inspiration, consider using a business name generator. Enter information about the business you’re starting and the program will spit out business name ideas. Typically, a name generator will use a combination of your industry, location, and personal name.
2. Register Your Business as a Legal Entity
Filing your business as a legal entity provides certain benefits and protections to you and your business. The most common legal entity is a limited liability company (LLC), followed by an S corporation and C corporation. Depending on your state, it can cost anywhere from $40 to $500 to register your business as a legal entity.
Each legal entity offers different benefits; however, the main reason to register is to protect personal assets if a customer or employee ever sued the business for negligence. If you don’t register as a legal entity, and you lose the lawsuit against your business, the judge could seize your personal assets or garnish your future wages.
How to Register Your Business As a Legal Entity
You can register your business in a few different ways. One option is to go directly to your state’s official business registration website. Many people find their state government website confusing and cumbersome to navigate, so they use an online legal service such as Rocket Lawyer.
A third option, and the most expensive, is to use a local business attorney to file the paperwork for you. You may want to consider this option if you’re registering a more complicated business entity such as a corporation with multiple owners.
An Alternative: Sole Proprietorship
Not registering your business makes you, by default, a sole proprietorship. Typically, you don’t need to file any legal documentation at the state level to become a sole proprietor; however, review any local requirements because your city or county may require all businesses to register.
Unlike the LLC, S-corp, and C-corp, this business structure (another term for business entity) provides no legal protections. It’s helpful to know the sole proprietorship term because many first-time business owners get confused with the different business structure names.
Typically, only very small and low-liability businesses, such as a part-time graphic designer, should be a sole proprietor. For that reason, I recommend all owners register their business as a legal entity, typically an LLC, for the additional liability protection.
3. File For a Doing Business As Registration
A doing-business-as (DBA) registration is the public-facing name of your business in the state it’s operating in. There are two reasons why you would want to file for DBA registration.
One reason is if your business’s publicly facing name is different from the name registered as a legal entity. State governments require that a public business name must be registered with the state so that a customer can make a complaint against that business. It’s for transparency.
For example, let’s say a business was originally registered as a limited liability company (LLC) with the name Plumbing Experts of America. Before officially opening, the owner decides to name the business after himself: Matt’s Plumbing. Instead of refiling the LLC and spending hundreds of additional dollars, the owner can file a DBA for around $50.
A second reason to file for DBA registration is if you’re a sole proprietor and your business name is different from your personal name. Sole proprietors are not legal business entities and not registered with the state, so by default, the business’s name is the owner’s name. If the sole proprietorship is operating publicly as a different name than the owner’s, it needs a DBA—again, for transparency.
You can register a DBA through your state’s official business website, or an online legal service such as Rocket Lawyer.
4. Get an Employment Identification Number
An employment identification number (EIN) is a federally issued, free, and unique number that identifies your business. The federal government uses EINs to track businesses for tax purposes. Owners typically need an EIN to file taxes, open a bank account, and get a loan.
How to get an EIN
You can get an employment identification online in about 10 minutes. Visit the official Internal Revenue Service (IRS) EIN website and enter the required information about your business. You will receive your EIN immediately and can start using it for business purposes.
5. Obtain a State Tax Identification Number
A state tax identification number is similar to the EIN, but for the state level. This state-level ID number is required in 43 states—the other seven states don’t have an income tax. Typically, you’re required to obtain a state tax identification number if you have employees.
If you’re a sole proprietor, you aren’t required to use a state tax ID—you can use your Social Security number (SSN) on your tax return. However, if you’d like additional protection against identity theft, get a state tax ID number and an EIN. If someone steals your SSN, they won’t be able to file a fraudulent business tax return without the ID or EIN.
How To Obtain a Tax ID Number
Your state’s official business registration website or tax revenue website will provide you with the ability to obtain your tax ID number. Make sure to get the EIN first—you will likely need it during registration.
6. Open a Business Bank Account
If you’re registering your business as a legal entity, opening a business bank account is a must-do. Having two bank accounts helps avoid personal and business expenses from mixing. Additionally, if your company is audited by the IRS, having separate personal and business bank accounts makes the audit process go more smoothly.
One of the factors to take into account when choosing a business bank account is the required minimum balance. If your account drops below that balance, typically $1,500, the bank will charge a monthly fee. A solution to that is to choose a bank account without a minimum balance such as Novo.
7. Get Business Insurance
Depending on the type of business you’re starting, you may need one or more types of insurance.
At a minimum, a business that sells products should get general liability (GL) insurance. This insurance provides funding if someone files a lawsuit against your business. Often, the third party is a customer or vendor that claims bodily injury or property damage caused by your products. Expect to pay around $50 a month for GL insurance.
A professional-based business that provides a service such as an architect, accountant, or medical professional, needs to get professional liability insurance. This type of insurance protects the business owner if there was ever a claim of negligence or malpractice. The funding provided by the insurance goes for a defense against a lawsuit. Expect to pay around $60 per month for professional liability insurance.
Other common types of insurance new businesses get:
- Commercial property insurance: Provides funding when a natural disaster or theft causes damage to the building your business owns.
- Cyber liability insurance: You will need this insurance If your business stores customer information such as credit cards or medical data.
- Commercial auto insurance: If you have company-owned vehicles, this insurance provides a variety of coverage, including property and bodily injury.
- Workers’ comp insurance: It covers work-related injuries and illnesses. Many states require workers’ comp for any business that has employees.
- Employment practices liability insurance: If you’re planning on having a large staff with managers, this insurance provides legal funding for issues such as sexual harassment or wrongful termination.
- Key person insurance: This insurance provides a cash payout if your business were to lose an important employee or owner to death or disability.
8. Secure Your Intellectual Property
Think of intellectual property as things about your company that you don’t want competitors to copy. Some businesses secure their name, logo, or tag line to ensure a competitor doesn’t use similar branding. Other business owners may want to secure their product or process so that a competitor can’t steal their product.
Generally speaking, copyright makes you the owner of the content you create. For example, when you create a website for your business, you automatically own that website content. You don’t have to pay to secure it.
However, the government does let you pay to claim a copyright, which costs $35 to $55. This content claim gives you additional protection with the ability to enforce the copyright if a competitor steals your content.
For example, if you write a substantial e-book, you may want to pay for a copyright claim. If a competitor offered the same e-book on their website, you could legally request for it to be taken down.
A trademark is when you lay claim to specific marketable elements of your business such as a name, logo, design, or expression. This claim ensures that competitors cannot use your design elements.
Typically, a trademark will cost anywhere from $225 if you file it yourself to over $2,000 if you hire an attorney to file it for you. A good middle ground is to use an online legal service such as Rocket Lawyer, to handle a trademark application for you, which will cost around $500.
Securing a patent by the federal government gives you time-limited ownership of an invention. This ownership keeps competitors from stealing your new product or process idea for a certain period of time—around 20 years.
Patents can be complicated. We recommend you hire a patent attorney and don’t try to file one yourself. It can be difficult to get your patent approved. Plus, if your patent is approved with technical errors, it makes certain aspects of your product or process vulnerable to copycats.
The cost to file a patent varies depending on the type of patent and its complexity. A patent attorney can cost anywhere from $1,000 or over $10,000. However, you can save substantially—around 50% to 75% of the cost—if you use attorneys at an online legal service such as Rocket Lawyer.
9. Obtain Business Licenses & Permits
Licenses and permits are generally required to ensure a business is safe for customers and the community. Some businesses such as a restaurant, may need up to a dozen different licenses and permits. Other smaller businesses may need one license, or possibly none.
What’s the difference between licenses and permits? Licenses typically confirm competence for the industry such as a veterinarian license or landscaping license. Permits are more safety-related and for the community’s benefit such as an environmental permit or a fire alarm permit.
Where to Obtain Business Licenses & Permits
Three different government levels give out licenses and permits: federal, state, and local—which include cities, municipalities, townships, and boroughs. Depending on the industry and location your business operates in, it will have different requirements based upon government regulations. To obtain licenses and permits, you can go directly to the official government website and apply.
When you only need one or two licenses to open your business, you may want to spend the time navigating your local government bureaucracy. This process might result in a couple headaches, but it’s doable for the first time business owner.
However, if you need several licenses to open your business, searching for relevant administrative requirements can get time-consuming and complicated. For a small fee, a company like Businesslicenses.com can save you time by identifying and filling out the applications needed to operate your business.
10. Draft a Partnership Agreement
A partnership agreement is a contract that outlines the roles of the owners and, most importantly, what happens to the business in certain unfortunate circumstances. It’s uncomfortable to discuss negative situations, but it’s necessary.
For that reason, a partnership agreement only applies to businesses with more than one owner. It’s crucial to create a partnership agreement before starting a business with another owner to avoid potentially costly litigation in the future. For example, a partnership agreement provides guidance if an owner is physically unable to work in the business or has to relocate to take care of a family member.
Talk with any seasoned business attorney and they will tell you horror stories about partnerships gone bad because the owners didn’t have thorough partnership agreements. Partnership arguments often result in months or years of litigation with legal fees in the five to six-figure range.
11. Customize Legal Forms & Documents
Before opening your business, you may need certain legal forms and documents for customers and employees. If you’re creating a long-term relationship with a customer, such as ongoing consulting, you may need a contract. If you’re hiring employees, you will need several human resources-related documents such as a termination letter.
If you have a relationship with a local business attorney, you can work with them to draft up the documents needed. A more affordable option is to work with an online program such as LegalZoom, which allows you to digitally customize templated legal docs.
12. Decide Who Will Do Your Legal Services
After reading through the steps above, you may feel overwhelmed with the legal requirements needed to start your small business. Remember, you don’t have to do all this legal work on your own. To assist, you can hire a local attorney to work on the documents; however, that is an expensive option for the average new business owner.
A more affordable option is to work with an online legal service. Some of the most popular online legal services are LegalZoom, Rocket Lawyer, and IncFile. These services assist with several steps, including registering your business as a legal entity and keeping it registered every year. Online legal services also provide customizable legal documents. Some companies also provide affordable attorney consultations to answer your specific legal questions.
It’s likely you won’t complete all of these legal steps exclusively on your own, with an attorney, or with an online legal service. Instead, pick and choose what you need assistance with based on your available resources and the complexity of the step. As your business grows in size, you may find that it also grows in complexity, and you may need to move from an LLC to a corporation. Whatever your situation, choose the legal assistance that best fits your needs.
No matter what type of business you’re starting, you’ll likely encounter at least one legal step along the way such as securing your personal finances or business assets. Working with a local attorney to assist with this process is always a safe choice. However, if you find that the attorney fees are outside of your startup’s budget, work with a more affordable online legal service or do it yourself.
Once you make the proper legal steps, it’s time to get more serious about building your business. Learn who to hire to make your business a success.