Step 8 Complete Your Legal Legwork
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From a legal perspective, there's a good deal more to starting your own business than simply coming up with a unique idea and opening your doors. Once you've decided on your business idea and name, composed your business plan, and selected the most appropriate type of workplace, the time has come to take care of all the necessary legal legwork.
Before opening day, you need to find out which of the numerous business-related rules, regulations, licenses, permits and forms are applicable to your venture. Brush up on the specifics of each and complete any required paperwork. Relevant tasks typically include: (1) obtaining a federal Employer Identification Number (EIN); (2) applying for state and city business licenses; (3) obtaining state sales tax and resale tax certificates; (4) investigating zoning regulations; and (5) registering your business name.
Because state, county and local regulations vary dramatically, call around to find out what is--and is not--required in your area. A good place to start is by contacting the Small Business Administration (SBA) office in your state. Inform the SBA that you're planning to launch your own business and would appreciate receiving a start-up information packet. Another helpful resource in most areas is the local chamber of commerce, which often provides all of the regulation and application information in one convenient bundle.
Keep in mind, too, that the applicable regulations and licenses vary according to the type of business you are starting. That's why you should also talk to entrepreneurs who are already operating the kind of business you're planning to open, just to ensure you've got all the legal bases covered. To provide some sense of just how business-specific the legal legwork process can be, our Starting Smart entrepreneurs are back to share their recollections.
Marian Fletcher, Lets Go Party
"I found out that I couldn't work legally out of my apartment, and I had to apply for all sorts of licenses and pass a test given by the Health Department," explains Marian Fletcher, 55, whose Baltimore-based party-planning and catering service recently celebrated its second anniversary.
"Although local zoning restrictions didn't prohibit me from running my business out of my apartment, required Health Department modifications made it virtually impossible," says Fletcher, referring to the renovations officials required that she make to her kitchen area if she wanted to work from home. "Health Department inspectors said I had to have certain things installed in my apartment, such as double sinks, and they complained that my overall kitchen capacity was too small. It didn't take me long to realize that I needed to set things up in a different way."
As a result of these requirements, Fletcher ended up renting space in a commercial cooking facility, located 10 minutes by car from her apartment. The facility was already fully licensed and approved, and it contained all the equipment she needed. However, before she could start whipping up edible creations for her clients, Fletcher needed to fulfill additional Health Department demands. "I had to provide proof that I'd taken classes to learn about food preparation, and I had to pass the Health Department's test covering cleanliness standards, food-preparation guidelines, and the like. I received a certificate from the Health Department after fulfilling all of their requirements."
In addition to Health Department requirements, Fletcher had to apply for numerous licenses. "I needed everything from a trader's license--which allows me to offer my services at seminars and other group settings--to sales tax and resale tax licenses," she says. "I also had to file a DBA (doing business as) application with the Baltimore Department of Licensing to secure my business name."
Vic & Suzette Brounsuzian, Meg-A-Nut Inc.
"From a legal standpoint, the first thing I did was register my company name. Then I registered the business with the Illinois Department of Revenue, and applied for my federal Employer Identification Number," explains Vic Brounsuzian, 44, who runs a small shop selling nuts and fine chocolates with his wife, Suzette. In the fall of 1995, the Brounsuzians set up shop in a plaza located in the village of Streamwood, Illinois.
"I had a booklet from the SBA that identified everything we needed to do, so I followed it step by step," Vic says. "Since this wasn't going to be a homebased business, the next big thing we had to do involved working out an acceptable lease agreement with the shopping plaza. That, of course, was handled through our attorney. In the end, we settled on a three-plus-four lease, which means we have a three-year commitment on our original lease, and the option to carry on with an additional four-year lease if we decide to stay. The figures for the additional four years are already worked out, so all we have to do is notify the plaza six months in advance to let them know if we're planning to continue on for the remaining four years."
Prior to their grand opening, the Brounsuzians faced a series of inspections and requests for renovations. "Here, everyone does their own inspection--the village of Streamwood does an inspection, the fire department does an inspection, and the Health Department does an inspection," Vic states. "Reviewing preliminary plans, the inspectors say things like, `You need a three-compartment sink here, you need special wall outlets with their own circuit breakers there.' Once you finish everything up and they see something they overlooked, they tell you that you've got one week's time to change it; then they come and inspect the place again. In order to get into business, you just go and do whatever it is they want you to do."
Like Marian Fletcher, the Brounsuzians were surprised by some of the requests made by Health Department officials before their premises could be approved. "When you get into a business like this, the Health Department is very, very fussy. In our case, they even required that the scoop holders for our nut scoopers be a certain length, so that if customers ever leave the scoops dangling, they will not touch the bins below," Vic says. "Believe it or not, they came in with a tape measure and measured every single one of them. And we've got over 120 bins in the store."
Judy Proudfoot, Proudfoot Wearable Art
"To find out what I needed to do legally, I spent a lot of time talking to other crafters about what they did to get started in their businesses," says Judy Proudfoot, 45, who has been designing and selling handpainted T-shirts and other clothing items at craft shows and shops since May, 1995. Working out of her Alexandria, Minnesota, home, Proudfoot uses a unique watercolor method with acrylic paints to create wearable works of art.
For entrepreneurs like Judy Proudfoot, who sell clothing items at both retail (to customers) and wholesale (to shop owners), state sales tax certificates and resale tax certificates are especially important. Anytime a clothing item is sold to the public in a state that collects sales tax, the seller is responsible for collecting and submitting the applicable sales tax to the state. The state sales tax certificate enables these accurate transactions to occur. However, when selling a clothing item wholesale to a shop owner, no sales tax is charged, because it is the shop's responsibility to collect the tax from the ultimate customer.
For example, if a fabric store sells a bolt of cloth to a customer, sales tax must be collected and paid to the state; if that same bolt of cloth is sold, at wholesale, to a manufacturer of children's outfits, the sales tax will be collected when those outfits are finally sold at retail to the public.
The resale tax certificate protects the entrepreneur from having to pay sales tax to the state for such transactions. It also shields the entrepreneur from having to pay sales tax to any supplier from whom raw materials are originally purchased.
In terms of legal legwork, Proudfoot says she had it relatively easy when she was first starting out. "As a sole proprietor, I was able to use my Social Security number rather than get an EIN. I didn't need to register my business name because it contained my legal name. I didn't have any zoning problems because customers would not be coming to my home.
"There are significant advantages to having a private, homebased business," Proudfoot explains. "There are just a lot of things you don't have to deal with."
Although legal requirements vary geographically and by type of business, some of the most common start-up essentials include:
(1) Obtaining a federal Employer Identification Number (EIN). The EIN allows the federal government to keep track of an employer's tax withholding amounts for employees and any funds paid to independent contractors. Although a sole proprietor is free to use his or her Social Security number instead, many business forms require an EIN, so all business owners should consider applying for one. To get one, simply file IRS Form SS-4.
(2) Applying for state and city business licenses. Contact the business license bureau in your city or county to find out what kind of business license, if any, you need to purchase. Also, check with any local or state agencies that may have jurisdiction over occupational licenses related to your type of business. Failure to obtain all necessary licenses and permits in advance of opening day may result in significant fines or ultimate business closure.
(3) Obtaining state sales tax and resale tax certificates. If you will be selling goods directly to the public, you'll need a state sales tax certificate so that you can submit sales tax payments to the state for every item you sell. If you will be buying raw materials wholesale from distributors, or will be selling goods wholesale to shops and other distributors, you'll need a resale tax certificate so that no sales taxes will be collected for such transactions. To obtain these certificates, or to find out if your particular business requires one, contact the agency that is responsible for sales tax collection in your state.
(4) Investigating zoning restrictions. Zoning laws may affect you when establishing your new business, especially if you live in an urban setting or wish to operate your business legally from home. Because zoning laws are typically used to protect neighborhoods from intrusive businesses, you need to investigate all applicable ordinances in your area before cementing plans for the type of workplace you desire. In most areas, you should contact your local city hall to learn about zoning laws in your community.
(5) Registering your business name. If you are including your full legal name as part of your selected business name, you can skip this step in most states. However, if you will be conducting your business using a fictitious name (that is, any business name that does not contain your full legal name as part of it), you will be expected to file a DBA ("doing business as"), also commonly known as a fictitious name statement. DBAs exist to inform the public that you are launching a business using a name other than your own. Filing the DBA generally takes place at the county clerk's office.
A business writer for the past eight years, Kylo-Patrick Hart has run a successful homebased consulting business since 1989.