Tired of your boss running your schedule? Unable to get your ideas heard in the executive suite? You’ve got a business idea that has been rattling around in your brain for 10 years and you have been working on a business plan for 6 months? If you answered yes to any of these questions, you are ready to start your own business.
Starting up your own business is exciting and terrifying at the same time. It’s exciting to be your own boss and to manage your own financial destiny. It’s terrifying because the success or failure of your business is completely dependent on your effort. Success or failure is up to you!
Here are three practical legal tips to consider when starting your own business. Follow these tricks of the trade and keep yourself out of legal hot water.
1) Select the Best Business Organization Form.
There are two preferred legal forms for new companies, 1) corporations and , 2) limited liability companies. There are different benefits and tax treatments for each form.
a) C-Corporation. This corporate structure has been around for over 150 years. A corporation provides limited liability for its stockholders, meaning that stockholders are not personally liable for the obligations of the corporation. Also, the number of shareholders is unlimited and the corporation’s stock can be owned by individuals and by business entities. The problem with this structure for small businesses is double taxation. The corporation will pay corporate taxes on its profits and shareholders will pay personal income taxes on any dividends they receive. This structure is most favored by large public corporations with significant numbers of stockholders.
b) S-Corporation. In 1946 Congress created the S-Corporation in order to help small businesses avoid double taxation and still maintain limited liability. The S-Corporation merges a single layer of federal taxation with comprehensive liability protection. However, the number of stockholders of an S-Corporation is limited to 100 and stockholders can only be individuals or certain trusts. This form is favored by many small companies that have a limited amount of stockholders and who are not planning on having institutional stockholders (i.e. venture capital funds).
c) Limited Liability Company. The most recent business entity form in our American jurisprudence is the Limited Liability Company (“LLC”) which first appeared in the state of Wyoming in 1977. The LLC blends the tax benefits and organizational structure of a partnership and the limited liability benefits of the corporation. The LLC does not pay taxes on business income; instead, the LLC owners/members each pay taxes on their share of profits on their personal income tax returns. LLC’s can also have an unlimited number of owners/members and other entities can also be owners/members. The LLC provides the most flexibility for the start-up company.
2) Determine if You are Hiring Employees or Retaining Independent Contractors.
Once you decide on your corporate structure, you need to determine if you will be hiring employees or independent contractors. Upon hiring employees, the employer has an obligation to pay payroll taxes and to also withhold federal and state income taxes out of the employees’ pay checks. Also, depending on the type of employee, exempt or non-exempt, the employer may have an obligation to pay overtime. Employees must be paid on a regular pay schedule. Courts will generally not be persuaded by a contract that states whether a person is an employee or an independent contractor of the company. They will look at the relationship between the two parties. And they will generally look to the following factors to determine if a person is an employee (this list is not conclusive and it does not represent the law of any specific state):
- Does the employer have the right to control when, where and how the person performs the job;
- The work does not require a high level of skill;
- The employer furnishes the tools, materials, and equipment to perform the job;
- The work is performed at the employer’s premises;
- There is a continuing relationship between the worker and the employer;
- The employer has the right to assign additional projects to the employee;
- The employer sets the hours of work and duration of the job;
- The worker is paid by the hour, week, or month rather than the agreed cost of performing a particular job;
- The worker does not hire or pay assistants;
- Work performed by the worker is part of the regular business of the employer;
- The employer is engaged in business;
- The worker is not engaged in his/her own distinct occupation or business;
- The employer provides employee with benefits such as insurance, leave or workers compensation;
- The worker is considered an employee for tax purposes;
- The employer can discharge the worker;
- The worker and the employer believe that they are creating an employer-employee relationship.
Based on your business plan and your initial capital raising, you may be able to afford to hire employees and comply with all of the legal obligations that arise in that relationship. If your initial capital is tight, you may consider retaining only independent contractors until your business becomes more stable.
3) Protect Your Ideas and You Intellectual Property.
Let’s say you have your business up and running and the guy across the street opens up the same business. That is the last thing you want to happen when you launch your new business – someone to steal your idea or copy the names and logos you have created. Follow these steps to be sure your intellectual property is protected:
- Make sure that you get a signed Non-Disclosure Agreement from anyone with whom you share your idea in order to protect your confidential information and ideas;
- Search the database at the Secretary of State office in your state to be sure the corporate name you would like to use is not being used.
- Have an attorney perform a trademark search on the name of your business to be sure no one else is using that name. Consult with the attorney to determine if you should file trademarks, service marks, copyrights and patents to protect your intellectual property. Just because you register your business with the Secretary of State does not mean that you have trademark protection in that name.
- Surround yourself with a group of strong professionals that can help you grow your business and can implement your business plan.. We recommend a strong corporate attorney, a CPA and a marketing person.
*This article it not intend as specific legal advice or tax advice for your particular situation. Please contact our attorneys for legal advice relating to your business. Contact a CPA for additional advice regarding taxes.