Legal Aspects of Opening and Running a Business

Today I'm going to give you a big-picture overview of some of the basic legal items that all businesses need to open and run. Some of the items might not apply to your business, but all of these items are important to consider. I've detailed out all of the information below, but you can refer to this handy graphic for at-a-glace requirements:

Legal Aspects of Your Business: Opening and Running a Business

 

Entity Type

Choosing the right entity type for your business depends on many factors: the owner’s assets, the need to attract financing, the likelihood of a lawsuit, and the business’ assets.

  • If you begin operating a business by yourself, you are a sole proprietor.
    Pros: easy to set up, easy to maintain, very little cost to operate
    Cons: unlimited personal liability, difficult to attract traditional investors
  • If you begin operating a business with one or more partners, you are a partnership.
    Pros: easy to set up, easy to maintain, very little cost to operate
    Cons: unlimited personal liability, liability for the partnership debts, difficult to attract traditional investors
  • One or more owners can form a LLC to run and manage a business.
    Pros: limited personal liability, easier to attract traditional investors, no corporate tax, less record-keeping requirements
    Cons: cannot raise capital through issuance of stock, annual reporting requirements
  • One or more shareholders can form a corporation to run a business.
    Pros: limited personal liability, easier to attract traditional investors, raise capital through issuance of stock
    Cons: annual reporting requirements, corporate tax if "C" corporation, stringent record-keeping requirements

Agreements

Now that you've chosen your entity type, you might need to prepare an agreement that will outline how your business is managed and operated. To prepare these documents you could use an Internet form provider, purchase a NOLO Press book, or hire a lawyer.

  • Sole proprietors do not need to prepare an agreement.
  • Partnerships should prepare a partnership agreement outlining: the roles and responsibilities of the partners, how disagreements will be settled, and what happens when you want to split ways.
  • LLCs must prepare an operating agreement.
  • Corporations must prepare Articles of Incorporation and By-laws.

Federal EIN Number

You can apply for a free EIN number through the IRS website.

  • Sole proprietors are not required to obtain and EIN number, but I would strongly recommended getting one. Why? Identity theft. Having an EIN number means that you can provide it rather than your social security number when requested (e.g. bank accounts or PayPal accounts).
  • Partnerships, LLCs and Corporations must obtain an EIN number.

Bank Accounts

  • While sole proprietors and partnerships are not required to have a business bank account having one will make your business books much simpler and make tax time easier.
  • To maintain the limited liability protection provided by LLCs and Corporations, you must open a bank account in the LLC or corporation name and keep your personal expenses separate from the business expenses.

Business Licenses

All entity types must obtain business licenses. The required licenses are highly dependent on your location and the type of business you are running. However, there are some tools to guide you. For those in California, there is a handy site that tells you based on location and business type which licenses you need. If you are not in California, your state may have a similar website or you can use the California site to point you to the right agency in your state.

'Doing Business As' or 'Fictitious Business Name' Statement

  • Sole proprietors need to file a DBA or FBN only if they are doing business as something other than your legal name. For example, I do business as Stahle Law and since my first name is not included in my business name, I had to file a FBN statement.
  • Partnerships must file a DBA or FBN in the name of the partnership.
  • LLCs and Corporations only need to file a DBA or FBN if they are doing business as something other than the LLC or Corporation name.

Seller's Permit/Sales Tax License

  • All entity types must obtain a seller's permit if they are selling tangible items subject to sales tax. The requirements and procedure for obtaining one will vary state by state.
  • In this post I am painting with a pretty broad brush and there may be items applicable to your business not covered here. In the comments below let us know which items seem the most challenging and as a group we can brainstorm how to resolve these challenges. Alternatively, let us know issues you've faced surrounding some of these items, so that others can avoid the same hiccups.

**I'm a lawyer so my insurance carrier likes me to use disclaimers. The information in this post is made available for educational purposes only, not to provide specific legal advice. I am not your attorney and this post is not a substitute for competent legal advice from a licensed attorney in your state.**


Kiffanie Stahle lives in San Francisco and is the founding partner of Stahle Law where she provides copyright and trademark services to creatives of all kinds. She tries to make law a little less scary by giving her clients the tools they need to understand their legal rights and when to get assistance rather than forging ahead on their own. She loves to take photographs and occasionally will show them in public. You can find Kiffanie on Twitter (@kiffaniestahle), on Facebook, and at StahleLaw.com.
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