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Top 7 Considerations When Legalizing Your Business

By: Paul Medea


deciding on how to legalize your business

When you have your own business, you want to do everything you can to make it successful. However, you also want to take all the proper steps to ensure your business is legal. When you don’t have a lot of experience with the legal requirements of a business, you may set your business up for failure. If you want to remain competitive, you should take the proper steps for your business. This guide contains seven items to consider to ensure your business meets all legal requirements.

Tip #1 – Business Structure

When you create a business structure for your company, you’re creating a legal structure that determines critical items like how you pay taxes. It also determines who owns the company, the distribution of profits, and how you can raise money for your business. When creating your structure, you must answer questions like understanding your business goals. You also determine the service you want to provide. Each business has different types of needs. You can consider some specific business structures when making decisions about creating a business structure.

Sole Proprietor

A significant number of contractors and independent businesses start as sole proprietorships. Sole proprietors are the easiest business to run and operate. You typically only need your Social Security number to run the business. However, applying for a Taxpayer Identification Number (TIN) gives you extra protection. To start this structure, you need a small amount of paperwork. This structure is flexible so you can work as much or as little as you want.

Limited Liability Company (LLC)

An LLC is a structure that is a middle option between a corporation and a sole proprietorship. You have the benefit of pass-through taxation that comes with a sole proprietorship. You also get the limited liability that comes along with an LLC. An LLC is popular because they are simple. You’re able to provide your business with the legal protection of a corporation. These protections extend to your personal assets. You can register for an LLC online, with a fairly simple process.

S Corporation

An S Corporation is often referred to as an S-Corp. This business structure passes the losses and profits to the shareholder’s personal tax return. This means that the business is not taxed. All shareholders must be paid a fair market value. If there is additional profit, it is not subject to self-employment tax.

C Corporation

A C Corporation is also referred to as a C-Corp. With this type of structure, you are the majority shareholder of the company. This business has limited liability, which separates professional and personal assets. This structure is one of the complex business structures.

Tip #2 – Create a Business Name

When you choose to have a sole proprietor, your business defaults to your name or the business owner’s name. When you opt to change the name of your business, even if you just add a word to your own name, you still have to register it as a DBA name. This is the process that tells the local and state government that you are operating a business under that name. When you do this, you are able to brand your business without having to incorporate it. The rules for DBA registration change based on the state.

Tip #3 – Protecting Your Personal Assets

When you create a business, you must protect your personal assets. It’s one of the most important things you can do. While you believe that your business can succeed, you should understand that it may take a while before it becomes profitable. Many things can happen to your business that could cause it to fail. Therefore, you should protect your personal assets from being caught up in the assets of your business. This means when the business fails, it has no impact on your personal finances. One of the best ways to do this is to create a limited liability company. This limits how much you, as a business owner, are liable for any damages. If your company is sued, your personal finances or bank accounts can’t be touched.

Tip #4 – Don’t Overlook Insurance

Part of creating a business is to put as much protection as possible in place. You want to be properly insured to protect yourself personally and professionally. Insurance can also help protect your customers. The proper insurance for your business depends on your business’s size, customers, and industry. However, there are a few common types of insurance you may want to consider.

General Liability Insurance

General liability insurance is typically needed for an independent business owner. This insurance provides coverage for items like claims of libel or slander, accidental damage to a client’s property, and the cost of defending your business.

Errors and Omissions Insurance

Errors and omissions insurance is also referred to as professional liability insurance. This insurance provides you protection when a client is harmed financially because of an error or omission. This usually happens when you don’t do something you should have and don’t fulfill your responsibilities.

Home-based Business Insurance

This insurance is ideal for those that work out of a home office. Most homeowners’ insurance policies do not cover a home office. However, an insurance policy for a home-based business provides the protection you need.

Tip #5 – Trademark Names, Logos, or Slogans

If your business is going to have an online presence, you should get your business name trademarked. Even if you have a DBA name or are incorporated, it doesn’t provide the same protection in the states where your business isn’t registered. There is no legal requirement to have a trademark. But it does provide you with more protection.

On the other side of things, you also want to ensure that the business name you select isn’t already trademarked. It’s a good idea to check with the US Patent Office to see if the business name has already been protected. If not, ensure you take the proper steps to trademark it.

Tip #6 – State and Local Taxes

You should understand your tax obligations. Most likely, you will have to pay taxes other than income tax. For example, many independent contractors are self-employed and are subject to also paying Self-Employment (SE) Tax. SE Tax includes the employer and employee halves of Social Security and Medicare (FICA). You may have to consult a tax professional to have a clear understanding of which taxes you owe.

Tip #7 – Employer Identification Number (EIN) from the IRS

If you are a corporation or partnership, you must have an Employer Identification Number (EIN) from the IRS. You also need an EIN if you have employees. An EIN identifies your business for tax purposes. For example, it can open a bank account for your business, file tax returns, and apply for licenses with an EIN. If your business is a sole proprietorship or single-member LLC, you are not required to obtain an EIN. However, you may still choose to because it helps to create additional separation between business and personal liability. It also shields your social security number on business documents and helps protect against identity theft.

Final Thoughts

You may want to consider getting a good lawyer for your business. This can be someone you can call to ask all your questions or rely on when things go wrong. You want to find someone that can answer all your questions, and you feel strongly that they can defend you and your business if needed. You want to invest time and money in finding the right legal counsel. 

Starting a business may not be easy, but it doesn’t have to be the hardest thing you’ve done. This article gives you a list of items to consider when starting your business. If you check off the items, your business will be in good shape. Keep in mind the items you can’t do or aren’t sure about are the ones you should talk about with your attorney.  

Published: July 12, 2023

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