8 Legal Requirements When You Start A Business Here's what entrepreneurs need to do to avoid costly mistakes down the line.
By Chris Porteous Edited by Jessica Thomas
Opinions expressed by Entrepreneur contributors are their own.
Many people aspire to start their own business, but succeeding in the commercial marketplace is easier said than done. Companies led by inexperienced people unfamiliar with the legal requirements they need to fulfill are particularly susceptible to failure. Nevertheless, many business owners jump into the competitive marketplace without doing enough research when it comes to covering their legal bases.
Don't start a business without first thoroughly preparing yourself. Here are eight legal requirements you need to fulfill when you start a business, and the costs associated with letting these important concerns fall by the wayside.
1. Protect your personal assets
The most important thing to consider when launching your own business is how you intend to protect your personal assets. No budding business owner wants to think about failure, but the truth of the matter is that many new companies struggle to earn a profit and collapse. Even those that are successful might find themselves the victim of an unjust lawsuit that eats up time, money and energy.
To avoid a lawsuit being the end of not only your business but also your personal financial security, it's imperative to protect your assets by forming an LLC. A limited liability company, as the name implies, limits the degree to which you as the business owner are liable for damages incurred by customers. Thus, a customer who sues your company after receiving a faulty product or inadequate service won't be able to touch your personal finances or bank account.
Related: Nine Common Legal Mistakes Small Business Owners Make
Take plenty of time to research forming an LLC, as this is a lengthy process but an essential one that must be done by the books.
2. Check if you must publicize your company
Depending on where you live and where you intend to open your business, you may face extra hurdles when forming an LLC or similar legal entity. Some states and cities require that you publicize news that you've formed a company by posting a statement in a local newspaper, for instance. Failing to take this step could result in a stiff fine or a refusal on behalf of state authorities to recognize your new business.
At least three states have newspaper publication requirements: Arizona, Nebraska and New York. Residents of those states should pay special attention to the rules.
3. Understand you must insure your workers
In most states, business owners (particularly those with more than five employees) are legally required to insure their workers in a number of ways. Offering worker's compensation insurance to those who are injured on the job and incapable of providing for themselves, for instance, is required in most of the United States. Many amateur business owners attempt to cut down on the costs associated with running a company by mitigating their insurance rates, but understand that skimping out on worker's comp could seriously backfire and cost you dearly.
Related: The Top 7 Legal Documents for Every Startup
Wise entrepreneurs would do well to check out a state-by-state comparison of worker's compensation requirements and should not delegate this responsibility to someone else. Some small businesses may be exempt, but when you start growing, keep in mind that you'll need to think about worker's compensation soon.
4. Don't skimp out on general liability insurance
If you thought worker's compensation claims would be the only thing you needed insurance for, think again. General liability insurance is perhaps the most important time of insurance coverage any business can have, as it keeps you safe from generic claims of wrongdoing and will ensure you can keep the lights on should you be sued.
If a customer is walking between the aisles of your store before slipping and injuring their back, your general liability insurance is going to be what kicks in to protect you after they sue you for damages. Similarly, if one of your products is defective and harms the user, general liability insurance will guarantee that your business doesn't have to close its doors while reworking its entire manufacturing and logistics process.
5. Ensure you're not violating trademarks
Trademark and copyright violations aren't something that can or should be shrugged off, so every budding entrepreneur should take time to ensure that the name they've chosen for their business isn't already trademarked. If you launch a new company and begin advertising your operations without checking if your name is already taken, you could receive a cease and desist form or even a subpoena in the mail.
Formally register your name with the U.S. Patent and Trademark Office if you want to sleep soundly at night, convinced that your business' name is yours and yours alone.
6. Don't forget about federal taxes
Now that you've clarified that your name is permitted and you've purchased expensive insurance, it seems only natural that you should get down to business. Before you can open your doors, however, you need to address the issue of how you'll be paying federal taxes. Unless you want the IRS knocking on your door, you'll need to apply for an Employer Identification Number online via a holding company, which will allow the U.S. government to differentiate between your business and others when collecting what it's owed.
Take some time to browse the EIN page on the IRS website if you've not taken care of this already.
7. Check if your industry needs licensing
These days, there are few generic businesses left, as specialization is the key to success in the modern economy. Certain industries require you to attain a license before opening your doors, however, so don't think you can leap straight into a specialized area without doing your homework beforehand.
Related: How to Choose the Best Legal Structure for Your Startup
Check out a list of professions that require licensing across the United States and ensure that your documents are up to date if you want to avoid legal trouble. Medical professionals, legal experts and other professionals in important industries should take special precautions when checking their licensing requirements. Malpractice lawsuits can be ludicrously expensive, so don't skip this step.
8. Hire a good lawyer
Finally, every business needs a good lawyer to call upon when things inevitably go wrong. In this day and age, it's only a matter of time until you're dealing with a lawsuit, and when the subpoenas arrive you're going to want solid legal expertise to rely on. Thoroughly vet the lawyers in your area and don't be afraid to ask them why they're the best choice for your business.
Always remember that lawyers who can't answer your questions in a satisfactory manner won't be capable of seriously defending your business. Invest plenty of time, energy and money in finding the right legal experts to help protect your business, and your new company will be up and running in no time.
