Starting off unprepared is one of the leading causes for business failure. Regardless of how small the business it still needs a solid foundation upon which to grow. The business law attorneys at San Luis Obispo’s Toews Law Group, Inc. have a few considerations and tips for new business owners to consider, to avoid common pitfalls of starting a new business.
Starting a business involves more than just putting an “Open” sign on your door. The things to consider before starting might seem overwhelming, but remember, each item can be scaled to fit the size of your start up. Starting a small business in your home requires different considerations than opening a manufacturing or distribution business.
When you are ready to take your first big step, a consultation with experienced business law attorneys at San Luis Obispo’s Toews Law Group, Inc. will make sure you start off in the best possible manner.
Proper planning at the startup stage can help avoid headaches and more serious mistakes as the company grows. We’ve identified certain legal considerations, as well as some other aspects that are often overlooked.
- Legal structure
- Tax-Exempt Status
- Employer Policies
- Business plan
- Accounting and bookkeeping
- Permits, licenses and other legal documents
One of the first major decisions new business owners must make is what legal form to operate the business. The legal structure of a business is important for a number of reasons, including providing tax advantages for the business and owners, reducing or limiting liability and protecting the business owner’s personal assets. Business legal structures include:
- Sole Proprietorship
- General Partnership
- Limited Partnerships (LLP)
- C Corporation
- S Corporations
- LLCs (Limited Liability Company)
Tax Exempt Status
If the business is formed to operate as a private foundation, charity, school, church, or for the public benefits then it will likely benefit to file for tax exempt status. The San Luis Obispo business law attorneys at Toews Law Group, Inc. are highly experienced in helping form nonprofits of all kinds and obtaining tax exempt status.
Before hiring employees, or independent contractors, the business will need to ensure it complies with applicable local, state and federal labor laws. Depending on the size of the business, it may be beneficial to create employee policies and procedures, job descriptions, terms of employment/termination and employee handbooks. Employers are responsible for maintaining safe work environments that are free from certain conditions and behaviors. The everchanging laws and regulations created in response to the Coronavirus only heighten the importance of documenting these expectations.
The business plan is the roadmap for starting and growing your business. A business plan documents current financial information and forecasts future growth estimates which guide all other considerations. A typical business plan includes growth forecasts for up to five years.
Your business plan should include benchmarks for growth factors such as timing for hiring employees or moving to a larger space. The business plan provides a checkpoint that helps you make solid financial decisions if the business is growing faster, or slower, than projected. The long term goal is for the business to survive setbacks and leverage fast growth for a stable financial foundation to continue future growth.
How is the business startup being financed? If the venture is started using personal money is the investment taking the form of a loan or an equity investment? The characterization of the initial business funds can have significant tax and/or legal implications and require appropriate documentation. A promissory note may need to be drafted and executed or equity issued in exchange for the initial investment. If the loan is secured by property owned by the business, then the founder may also seek to record the promissory note and deed of trust.
Accounting and bookkeeping
When starting a business in a corporate, or partnership form it is important to treat the business as distinct entity. Three simple things can assist with this important separation:
- Apply for and obtain a Tax Identification Number (“TIN” also called an Employer Identification Number);
- Open a business bank account using the business tax identification number;
- Establish generally acceptable accounting practices. Consider saving time and headaches by working with a bookkeeping or accounting service rather than doing it yourself.
Keeping the finances of the business separate from your own assets can provide significant support should a creditor seek to enforce a business debt against your personal assets.
Insurance is an important aspect of any new venture. Even home-based businesses need insurance and homeowner’s insurance is unlikely to cover your business liability. If you are leasing business property the property owner is going to require insurance. If you have employees, you are required to carry workers compensation insurance. Vehicles, office equipment, manufacturing equipment, even inventory all need to be insured. Consulting with an insurance broker can give you an idea of what types, and amounts, of insurance coverage you should carry.
Permits, licenses and legal documents
In addition to the above legal and business considerations, each business will require certain unique legal documents. These legal documents may include partnership agreements, vendor contracts, sales and purchasing agreements. In some cases, you may require employment letters and employee agreements for some key staff.
Your attorney can advise on the various legal issues which may arise and give you a better idea of the various documents required. They can also review all lease agreements, loan agreements, even insurance policies to make sure you and your business are protected.
Why planning ahead is smart business
An experienced business law attorney can help you guide your business from start-up to growth, an navigate sales, expansions or legal issues and plan for retirement.
Toews Law Group, Inc. can help you choose the best legal structure or entity for your startup, advise about insurance and liability matters, contracts, agreements and other legal documentation needs and help you review all of the necessary steps to make sure everything is in place to open the doors.
Call today for your appointment.