Legal Considerations For Starting A Business
Let’s talk about the basic legal issues you need to consider when setting up your business.
You need to setup your business in a way that makes you seem professional, separates your personal life from your business, makes it easy to bring on partners and investors in the future and gives you more protection from potential law suits – all while keeping your finances in order.
Before starting, it’s important to mention that I’m not giving you legal advice. I’m giving you a list of legal issues that you need to consider. I recommend you talk with a legal advisor in your local area before doing any of the things that we’re about to discuss.
Also, although we have customers all over the world, the majority of our customers are in United States so this list mostly relates to people operating a businesses in the United States but the concepts will apply more generally to all locations.
The Best Legal Entity For You
What type of legal entity should you use? If your budget is zero, or close to it, then you probably have no choice but to operate as a sole proprietor which essentially means that there will be no separate legal entity. You are the business.
This means that your personal taxes will be combined with your business taxes and all of the assets of the business we’ll be owned by you directly.
The alternative to doing business as yourself is to establish a corporation of some kind. In the United States this is typically an LLC, C corp or S corp.
In this case, the corporation will own all of the assets of the business, set up its own separate bank account and file it’s own tax return. It will operate as a totally separate entity from you.
There are a lot of advantages and disadvantages to each of these options. In most cases it is much better to setup a corporation that is a separate legal entity from you.
It will always make you seem more professional but a separate legal entity can also be very important if you:
- Plan to have partners or investors: for example, if you want to bring in a partner or investor and give them 20% of your business, it’s pretty difficult to give them 20% of you. However, it much easier to give them 20% of the shares of your company.
- Get sued. It will also be advantageous to have a company if you will be doing something that has a possibility of resulting in a lawsuit. For example, if you provide a service that involves giving advice it’s possible that a client takes your advice and ends up with a terrible outcome that makes their situation worse than it would have been if they had never hired you. And, this could result in your client suing you. Off course, one way to prepare for this problem is to have professional indemnity insurance, setting up your business within a corporate structure will also help. In this case, if you structure and manage your business the right way, the legal exposure should be limited to your company and there should be no exposure to you personally.
However, there are some scenarios where everything I just said will not be correct. The best option for you is completely dependent on your individual circumstances, therefore, it’s impossible for me to suggest anything specific. If you are in any doubt about what to do I strongly suggest you talk with the legal advisor in your local area to discuss the best option for your specific circumstances.
My only objective here was to make you aware of the fact that there are some very different options that can have very significant impact on you personally and on the future of your business. The rules around corporate structure can be very different depending on which state and country you are in.
Finally, if you’re starting a business with a partner or investor it’s critical to make sure that you structure the Articles Of Incorporation and By Laws (or equivalent for other corporate entities or other countries) in a way that reflects how you will work together and how disputes will be resolved. In some cases this will require a shareholder agreement. If none of this makes any sense, talk to your lawyer.
Your business has different names. You will have a brand name and a domain name and, if you set up a company, you will have a company name. So let’s clarify what matters and what doesn’t.
There’s no need to spend too much time figuring out the best company name. In most countries the best company names are already gone. Just select the best available company name and get going.
Your Brand name and your domain name are very important but they don’t have to be the same as your company name. If you want some guidance for your creating your brand name, check our my article/video “How create a brand”.
Now, if you want to maintain some flexibility for your business then you might want to consider selecting a very generic name that’s not associated with any particular service or even any industry. In the meantime, if you do decide to change your name some time down the road, the cost of changing your company name it’s usually not very high and it’s easy. Changing your domain or brand is very difficult.
However, there is one legal issue relating to business names that you need to address and that is trademarks.
You may not need to go the trouble of getting a trademark for your business name or brand name but you probably should search the trademark data base in your country to see if someone else already owns the trademark of the business or brand or product names you plan to use.
If these names (or very similar names) have been trademarked and you still want to use the name or a similar name, then you really need to hire a lawyer to figure out a game plan otherwise you might get sued by the owner of the trademark.
This is something that may be required by the city or state that you are based in. It also might be required for some types of businesses and not required for others. The only way for you to find out is to research it. Search the words ‘business license [insert city or state]’
If you’re planning to setup a business that just sells services then it’s not likely that there will be anything that needs to be patented. If you are creating and selling a proprietary product, talk to a patent lawyer.
In most countries the copyright laws provide some protection of your original content without you needing to register anything – meaning that you automatically own the copyright relating to the content you create as long as it is original. Keep in mind that this will become more grey if an employee or freelancer creates content for you. Therefore, it’s critical to make sure that your employee and freelancer agreements are crystal clear about the fact that “All intellectual property rights relating to any work product created by the [freelancer / employee name] while working [on this project / for (enter business name)] belongs to [business name]”.
On the flip side, you also need to be careful to make that you use copyrighted material from other sources legally. A detailed discussion of copyright law is beyond the scope of this article/video but you need to be clear about the fact that you are not allowed to use any content created by a 3rd party without their express permission.
Many of you are probably thinking that you can in fact use content from 3rd parties if you cite your sources and give them credit. This is literally 100% wrong. If you use 3rd party content without express permission and you give credit you can still be sued and you will lose the law suit.
99% of the time, you will be able to get away with using 3rd party content by giving credit because the owners of most content like the idea of their work being widely enjoyed or widely distributed and referenced as long they are credited as the author of the content.
Just keep in mind that being able to ‘get away with it’ does not make it legal and anytime you use 3rd party content without getting express permission you are breaching copyright law and the owner of content can sue you and they will win.
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