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Starting a business is a challenging pursuit—and that’s without the complicated legal ramifications that you want to protect you and your business against.
As a business owner, you want to make sure you have covered all your legal bases to avoid any hefty fines, headaches, or—worst case—even jail time.
Fortunately, there are plenty of resources available to small businesses both online and through hired legal counsel. Use this list as a jumping off point for your startup legal checklist—and make sure you resolve any lingering issues before you get in too deep with your business.
First things first. Choose the proper business entity or structure for your startup. This is crucial because it affects your personal liability, what you pay in taxes, and your fundraising ability. Possible structures include sole proprietorship, general and limited partnership, C-corporation, S-corporation, and Limited Liability Company. Once you decide which structure is best for your company, you need to officially designate it through your secretary of state.
If you’re struggling on which to choose, fortunately we have a comprehensive breakdown here.
Depending on your type of business and where it’s located, you might need specific business licenses and permits from your country, state, county, or city.
Licenses, permits, and registrations come in many variations. Examples include local business licenses, building permits, health safety-related permits, permits for home-based businesses, fire permits, industry-related permits (like running a legal practice, hospitality, construction, or manufacturing business), liquor licenses, and more. The possibilities are endless, so make sure to do thorough research—perhaps with the help of your counsel—on what you need to be compliant with the law in your area.
Taxes are the law, and depending on your business entity structure, the type of business you run and where you are located, you might need to register and file for a multitude of taxes. It may be wise to hire an accountant or tax advisor to make sure you are compliant with all tax laws. It’s certain that you need to register your company with tax authorities in your area and file annual business income tax returns.
In most places, you are obligated by law to record all business transactions and keep all business documentation in certain formats for a minimum time period. See what’s required of you for you industry and location in terms of record-keeping obligations and set up a proper filing and bookkeeping system for all documents and transactions. This will greatly help you down the line in doing taxes or if you ever run into other legal troubles.
If your business operates with multiple business owners, it’s important to make sure that each person knows and understands their rights and responsibilities in relation to the business. How this comes about depends on your business structure. If you form a corporation, you need a proper shareholder agreement and articles of incorporation. You also need designated legal counsel to make sure the agreements and articles are sound.
This is a practical measure many startups often overlook when they’re just starting out and excited about getting off the ground. But this will protect your business down the line and ensure a certain level of commitment each founder or early employee brings to the table.
Creating a vesting schedule upon incorporation states that stock ownership will vest over time, preventing any one person from essentially dining and ditching with all their stock whenever they please. Note that most investors require this measure before they’ll make any initial investments.
This may seem obvious, but in order to open a corporate bank account and to properly file your business tax returns, you need an Employer Identification Number (EIN). You can easily request one from the IRS over the phone or by using an online application on the IRS website.
You need the social security number of the person completing the form for the company (usually the president or CEO). Include information on your business entity and date of incorporation. Make sure to keep a signed copy of this application in your files.
Intellectual property is the bread and butter of many businesses. IP includes patents, copyrights, trademarks, and trade secrets as well. Be sure to file any patents as soon as possible—a process that can take more than five years. Having your intellectual property protected will be attractive to investors—but it will also help you sleep easier at night. Having exclusive rights to reproduce and display your work will make your life much, much easier down the line and ensure that no one tries to rip any IP rugs out from under you.
IP can be vastly complicated from a legal standpoint, so it might be wise to consult an experienced IP attorney who can help you through the process and provide you the utmost protection.
Many startups often misclassify their early employees. It’s important to know what kind of worker you’re hiring—essentially, the difference between an employee and an independent contractor. This is important for tax reasons for both you and the employee and will help clarify what is and isn’t expected from you and the employee. This will only help to legally protect you down the line.
Founders and investors of LLCs, C-corporations, and partnerships are subject to federal and state securities laws. These laws were made to require companies to provide reliable and accurate information about their businesses to enable a fair market. They also protect from insider trading and trading fraud.
Failure to comply with these laws can result in the startup having to repurchase all of its shares at the issuance price, even if the company has lost all of its money.
If you have international clients, it’s a good idea to investigate the implications of doing business in the specific countries you work with. For instance, you might be obligated to register and file for taxes in those foreign countries as well as be subject to other compliance structures like privacy and IP law. Do the research or consult an international business lawyer.
Email marketing is a huge part of many businesses. When you send emails to your customers or when you are targeting potential customers via email campaigns, you need to find out what the applicable email regulations are. Note that each country has its own set of rules.
Aspects covered by these rules generally include opt-in versus opt-out, B2B or B2C emails, unsubscribe rules, and minimum information to be included in your emails. You can check out a comprehensive guide here.
The current definition of an accredited investor under the Securities and Exchange Commission rules includes eight categories of investors, but the most general investor accreditation means that the person:
The SEC has guidelines for what constitutes “reasonable efforts” on these accounts. For a comprehensive guide, you can check out this article. It’s possible to raise funds outside the narrow limitation of accredited investors, but it will open up a Pandora’s box in terms of securities and compliance enforcement. So, if you want to be the most legally sound you can possibly be, go through accredited investors.
In case this hasn’t been clear throughout, work with lawyers on these complicated legal issues from the start. Startups are often so concerned about expenses that they overlook the importance of sound legal advice that could save them thousands, if not millions, down the line. You really can’t put a price on having the right attorneys on your side.
Ideally, you’ll have experienced legal counsel on employment law, contract law, securities law, and intellectual property law. You could hire a “general counsel” on your staff at some point, but it’s common for the work to be spread out between different firms and attorneys. The cost is worth avoiding any legal trouble.
Once you have all the legal headaches sorted out and sounded, make sure everyone in the company is aware and understands your company’s legal liabilities just as well as you do—as a business owner, you could be liable for anything your employees do while representing your organization.
Company or employee handbooks are a great way to instill the values and legal boundaries of your company. It can also help to establish what is and isn’t appropriate behavior internally and externally. Have your legal counsel look this over well or even help you write it, and then get the company together to go over the material.
Starting a business is hard—don’t let anyone tell you otherwise. But if you are meticulous about getting your startup legal checklist in order, you’ll save yourself from some serious headaches.