So you have your idea, solidified your product or service, you’ve defined your ideal customer and you’re eager to launch your business. Before you get too far past the idea stage, you really need to take a look at business law for startups to avoid headaches (and potential legal penalties and “clean-up” costs).
You might think of this post as an outline or checklist of items to discuss with your lawyer and accountant before you get started. You can also use it as a DIY roadmap for legal issues to research on your own.
Before we get started: If you’re interested in receiving information from my law firm about these topics (including some DIY resources and online courses I’m developing about specific areas related to business legal issues), sign up here.
This multi-part guide to business law for startups includes sections on these key areas:
- Choosing Your Business Entity: Sole Proprietorships, LLCs, Corporations, Cooperatives, Partnerships
- Business Licenses & Tax Numbers
- Employees vs. Independent Contractors
- Intellectual Property: Trademarks, Patents, Copyright Basics
- Financing Your Business (very brief segment)
- Other Regulatory Issues to Be Aware Of (OSHA, Import/Export, etc.)
I don’t go into great depth on any of these issues in this post because each one has many subparts and complexities, but I am available for consultations on Alabama and federal law related to these issues for business startups. As always, see the full Disclaimers and Disclosures page.
This post covers Parts 1 and 2.
Overview of Business Law for Startups
You’ll get the most value from this outline if you’ve already resolved the following questions about your business idea. Yes, it’s possible to fall in more than one category.
The reason you need to know this before getting too far into this outline is that you must know the industry sector for purposes business licensing. Your industry sector and vision for growing your business can also help shape your choice of business industry.
What Industry Sector is Your Business In?
Are you making and/or selling a tangible product as an artisan, maker, manufacturer, wholesale importer, distributor or retailer, or some combination of these?
Farms and Livestock Ranches fall into this category.
Intangible Products (Digital Products)
Are you creating and selling an intangible product as an artist or digital content producer?
- This category includes musicians, writers, graphic designers, podcast creators, webcast and YouTube show hosts, Snapchat and Instagram stars, blogging for business, online communities,etc.
Are you creating and selling an intangible product like software apps and/or Saas products (software as a service)?
Service Providers (Including Digital Services)
Services can be provided in-person or online (digitally), so you may have a physical presence for delivering your service and/or an online/digital component covered in the previous category.
Business Professional Services: Physicians, Dentists, Other Healthcare Professionals, Lawyers, Accountants, Architects, Engineers
Lifestyle Professional Services & Consultants: Fitness Trainers, Nutritionists, Coaches, Hair Stylists, Fashion Consultants, Massage Therapists
Traditional Business Services: Construction Companies, Plumbers, Auto Repair, Lawn and Garden Services and Landscape Designers, Photographers, Marketing and PR Agencies
How Many Owners Will Your Business Have?
The number of owners will guide your choice of entity, covered next.
You can have one owner (yourself) or multiple owners. If you are a married couple and both spouses are owners then you have at least two owners.
You need to nail down the number of owners you plan to have initially BEFORE you hire a lawyer or form a business entity on a DIY basis. The legal system recognizes that business ownership is fluid, so the entity type and ownership structure can be changed fairly easily.Depending on the plan you have for your business, you might have to reorganize your business after it’s formed if you DIY it and pick the wrong type of entity. Changing your business structure can cost you money out of pocket and have tax consequences.
If you’re working with a lawyer, you can expedite the process if you know before the first consultation how many owners you will have.
Where Is Your Business Located?
Every business exists in at least one physical geographic location, even if it’s an online. Why? Because every business ultimately has at least one human owner who is located somewhere in the physical world (at least right now–AI bots can’t yet own businesses, but that might change some day). Even corporations and LLCs that are subsidiaries of (owned by) other corporations or LLCs, ultimately have at least one human owner.
If you also do business online (through online sales or internet/mobile consultations), you’ll have an e-commerce or digital presence to consider.
Brick-and-mortar businesses can have a business location in a rented or owned structure separate from the home or they can be home-based businesses. The reason this matters relates to both zoning and business licensing.
Business formation issues depend on where your business is located. Every state has specific rules and requirements for forming business entities and d/b/a requirements. You’ll probably also have to content with county and/or city zoning and business licensing laws.
Professional service providers and business service providers have occupational licensing rules to address and, in some cases, bonding and insurance requirements.
Licensing is covered in it’s own section, but you need to know where you’ll be located to get the most value from this outline.
You’ll need some money to get your business started. That’s your initial capital.
Where you get the initial capital is beyond the scope of this outline, although in section 6 I will briefly touch on some of the terminology for business capital and funding options.
Businesses are usually launched one of the following:
- Sole Proprietorships
- General Partnerships
- LLCs or Corporations
- Limited Partnerships
In this outline, I’ll just touch on the different types of business entities. I’ll be covering “choice of entity” in more detail in other posts and online resources, or you can contact me to schedule an initial consultation.
By definition, a sole proprietorship has one owner. If you have more than one owner you cannot have a sole proprietorship.
Sole proprietorships do not offer any shield or protection from legal liability for the actions of the owner or the owner’s employees or contractors.
- In some cases, this might not matter very much, because the owner would be liable anyway due to his/her personal responsibility for some type of negligent act, malicious act, fraud, etc.
- In other situations, you would never want to risk everything by doing business as a sole proprietor. If you have employees or work through other contractors, make products directly or through a contract manufacturer, you probably want to form an LLC, corporation or cooperative for your business.
Your business is a sole proprietorshp, by default, if you have one owner and have never filed any organizational papers with your state.
If your business has more than one owner and you have not formally filed papers with your state to create an LLC, a corporation, limited partnership or cooperative then by definition you are most likely going to be classified as a general partnership, depending on your state’s laws. In my opinion, general partnerships are almost never good thing, due to unlimited liability issues.
LLCs and Corporations
LLCs and Corporations are formal business entities that are considered separate “persons” under the law.
You can have single member LLCs (one-owner) and single shareholder corporations. You can also have multiple member LLCs and corporations.
For tax purposes, most corporations are either S Corporations or C Corporations. S or C refers to the federal tax code. S Corporations have limits on the number of owners and the types of entities or inviduals that can be shareholders.
To create an LLC or Corporation you must file some type of form with the state where you want to exist legally in order to “form” the entity. The details of formation are beyond the scope of this outline.
LLCs and Corporations offer the shield of liability protection for many types of liability, although there may be exceptions for that depending on the type of activity someone engages in. For example, if a lawyer misses a statute of limitations in a personal injury case, the lawyer will most likely be liable for that professional malpractice, even if he/she has an LLC for his/her law practice. Again, the details of liability protection are beyond the scope of this post.