Legal Considerations for Starting a New Business

- Cynthia Smith

 

  1. Develop a business plan.  Your business plan is a roadmap for your business that provides both you and your financial backers with key information as to what your business is going to do and how it will operate. Your business plan is a work in progress that should evolve over time and be influenced by outside factors such as the economy. Numerous resources are available to assist you in thinking through and developing your plan, such as the Small Business Administration website, www.sba.gov

  2. Determine the legal structure of your business.  The form of your organization will determine whether you, the business owner, will be personally responsible for its debts and obligations. Corporations, limited liability companies, limited partnerships and other types of limited liability entities all protect owners from obligations they have not personally guaranteed. On the other hand, sole proprietors and partners in general partnerships are personally responsible for the debts and obligations of the business.  In addition, the form of entity will determine how earnings of the business will be taxed.  For example, C corporations are taxed at the entity level and the owners (shareholders) are taxed again on dividends they receive from the corporation. S corporations, limited liability companies and limited partnership are not subject to entity-level tax.  Income from the organization is “passed through” and taxed to the owners individually. 

  3.  Understanding taxes. Your business will be subject to taxes such as income, employment, and sales taxes.  Proper tax planning on a regular basis is necessary to assure proper deposits of employment and income taxes at the federal and state levels.  To report and pay taxes, your business will likely need a federal and state employer tax identification number. Resources to find out more about what taxes you are subject to and when and how to pay them are available from the IRS, www.irs.gov, and Colorado Department of Revenue, www.colorado.gov/revenue. In Colorado, employers are required to carry workers compensation insurance on their employees.  Information on workers compensation can be found at Colorado Department of Labor and Employment.

  4. Select your business name. Check to see if the business name you have selected is available for use. Most business organizations are required to register with the Secretary of State of the state in which they business is located. In Colorado, you can search the business name on-line at the Business Division of the Colorado Secretary of State at www.sos.state.co.us. If you plan to use a name other than the formal legal name of the business you must file a trade name affidavit, or fictitious name affidavit, with the Secretary of State’s Office. The business name should be used on all contracts, government forms, and applications and permits. Depending on how your business name is used in the marketplace, it may be advisable to seek federal trademark protection.

  5. Protect your trademarks. Search the availability of any trademark you want to use in connection with your products or services. Trademark rights are acquired through usage and need not be registered to be enforceable. Registration, particularly federal trademark protection, carries with it enhanced rights for the trademark owner and thus is often desirable if the business’ products or services will be sold regionally or nationwide.  Availability must be searched in a number of places including the United States Patent and Trademark Office, state trademark registries (typically searched through a secretary of state’s office), the Internet and relevant trade publications and the like.  You may hire search services to perform searching. The assistance of a trademark attorney may be desirable in seeking to federally register a trademark.

  6. Memorialize your relationships with other shareholders/members/partners. If you plan to own your business with others, work out the details of the relationship and record them in a written agreement. An LLC operating agreement typically sets forth the rights and obligations of the LLC members (including exit rights) and ideally should be negotiated and executed prior to starting to conduct business. In the corporate context, shareholders will want to work out a shareholders agreement or buy-sell agreement. The assistance of a lawyer can be beneficial during this process.

  7. Contracts: Don’t sign on the dotted line until you understand what you are agreeing to.  Read and understand contracts before signing them. If you don’t understand the contract, seek guidance.  If your business is an entity such as corporation or LLC, be sure to sign the contract in your capacity as an officer or manager of the entity, so as to ensure the obligation is one of the entity and yours personally. For example, ABC Company, By John Doe, President.

  8. Capitalization and access to capital.  Capital includes both debt and equity. Equity is raised by sale of the business ownership interest, such as a share of stock in a corporation or a membership interest in an LLC. Equity does not require repayment.  Debt is typically evidenced by a promissory note under which the debt accrues interest and which must be repaid at the maturity date. You should seek to establish banking and or other financial arrangements early on. If you plan to raise capital from investors, you will need the advice of a securities attorney who can guide you on compliance with federal and state securities law.

  9. Permits and Licenses. Depending on the type of business you plan to engage in, you may need permits and licenses. At a minimum, you will need a business license. In Colorado, a business license may be obtained from the Colorado Department of Revenue, www.colorado.gov/revenue or at www.colorado.gov