The Legal Pocketbook
Protecting your business with the right legal steps can feel overwhelming. You want to be compliant, and you want your business to be set up for success — but you might not know where to begin. Here, we’ll break down the basics you need to know to build a solid legal foundation for your business.
LICENSES & REGISTRATIONS
The most common licenses and registrations most businesses may need include:
Business License - Most cities require that you register a business license with the city in order for you to legally run your business there. Even if you are freelancing or are just running a digital business from home, your city may require that you register with them, and may require that you pay a local city tax on your business revenue.
Seller’s Permit - If you are selling products, the state may require you to register a seller’s permit with them and pay taxes on your sale of products.
EIN / Federal Tax ID - Most businesses either need or would benefit from a Federal Tax ID number (aka EIN). If you have an LLC or corporation, then you need this number to open a bank account and pay taxes. And if you are a sole proprietor, it’s still usually best to have an EIN so you don’t have to share your social security number with your clients and customers when they ask for your tax information.
DBA - If you are doing business under a name that is different than your legal name, then you may need to register a DBA with your county or state to do business as that different name.
Examples - For example, if you are a sole proprietor named Jane Smith doing business as Wild Abundance, then you may need to register a DBA to do business under that different name. Or, if you have an LLC called Jane Smith Ventures LLC, doing business as Wild Abundance, then you may need to register a DBA to do business under that different name.
PICKING YOUR ENTITY TYPE
In addition to your licenses and permits, you will want figure out which business entity type is the best fit for you to start. For example, you could start off by doing business as an individual sole proprietor, or you may benefit from registering an LLC or corporation. Note, you can always change entity types later as your business grows. Below is a quick overview of the most common business entity types.
Sole Proprietor
At the base level, you can simply do business as yourself as an individual. That’s called being a sole-proprietor, and typically all you need to lawfully do business as a sole proprietor are the licenses and registrations referenced above, as applicable.
However, if you are doing business as a sole proprietor, then there is no distinction between yourself and your business. If the business gets sued, then your personal assets may be at risk, like your home, savings, or other personal assets. Also, as a sole-proprietor you won’t have access to certain tax elections (like an S-Corp election) that might help you save money on taxes.
So overall, this may be a good fit if you want to keep your costs to the bare minimum, aren’t making much money, and don’t mind being personally liable for your business activities.
Perks to LLCs and Corporations
However, there are some big perks to setting up a separate legal entity, like an LLC or corporation, including:
Limited Liability Protection. Generally, if you are running your business through an LLC or corporation, you won’t be personally liable for your business’s debts or damages. This means that if your business runs into problems and becomes liable for for money (like if you get sued by a client, customer or partner), then typically those liabilities are isolated to your LLC or corporation and your personal assets can’t be reached. That way, in the worst case scenario, your LLC or corporation could go bankrupt, but that shouldn’t affect your personal credit, your home, your savings or other personal assets. This is a huge perk to running your business through an LLC or corporation.
Taxation Options - In addition, if you are running your business through an LLC or corporation, you will likely have more taxation options than you would if you were a sole-proprietor. For example, you may have heard that being an “S-Corp” is helpful for taxes. Being an S-Corp means that your LLC or corporation registered to be taxed as an S-Corp with the IRS, and this will change how your business is taxed which can save you money, if your accountant recommends that you file this election.
Other Perks - Beyond that, registering as an LLC or corporation can be helpful if you are working with business partners, taking investments, or just want to look or feel more official.
Downsides - The main downside to having an LLC or corporation is it may cost a bit more to setup and maintain than being a sole proprietor. Costs will vary by state. In California for example, it costs a minimum of $800 per year to
Comparing LLCs and Corporation Types
Next, let’s compare LLCs and different corporation types.
Limited Liability Company (LLC) - This is often our favorite choice for small businesses. It’s easy to set up, easy to maintain, and is flexible with regard to ownership structuring and taxation. With an LLC, you generally won’t be personally liable for your business’s debts, and you can even make an S-Corp election to help with taxes if your accountant recommends.
Corporation taxed as an S-Corp - For a small business, a corporation taxed as an S-Corp can offer a lot of the same perks as an LLC, but may require a bit more upkeep, and may be more rigid with regard to ownership structuring and profit distributions. So, this may be less ideal for companies with multiple owners.
Corporation taxed as a C-Corp - If you are a start-up looking to raise money from venture capital investors, then you may want to register as a Delaware C-Corp to best position yourself for those types of investments.
Non-Profit - This may be a good fit if your business serves a charitable purpose and you want to take tax deductible donations and have reduced tax obligations on your revenue.
Professional Entities - If you plan to provide professionally licensed services through a corporation or LLC (like if you are a registered dietitian, accountant, or lawyer), then you may need to register as a professional corporation or professional LLC in order to provide those services through your company.
When to Register your Business
When is the right time to switch from being a sole proprietor to an LLC or corporation? It might be immediately if you want to secure limited liability protection for your business or are looking to work with business partners or investors. Alternatively, you could test the business out as a sole proprietor to start, and when the revenue or liabilities reach a level where you want limited liability protection or more taxation options, then you could make the switch then. You can of course check with an attorney and an accountant for their opinion on the right timing for your business.
Where to Register your Business
If you are registering your business as an LLC or corporation, then you will need to pick a state to register the entity in. You may have heard that it is best to register your business out of state, like in Delaware or Wyoming.
There may be some perks to registering out of state for certain businesses, but you also will likely need to register your business in your home state. So, for many small businesses primarily operating in one state, it’s typically best to just register your business once in your home state.
However, if you are a start-up looking to raise venture capital investments, then you may want to register your business in Delaware as professional investors typically prefer investing in Delaware entities because Delaware has familiar and friendly corporate laws and courts. In that scenario, you would register in Delaware, but then also register a foreign authorization in your home state where you are running the business, and you would need to pay fees to maintain both registrations.
And there may be other situations when having an out-of-state entity makes sense, but you should check with your lawyer or accountant before deciding to register in a separate state.
I. Register your Business
First, almost every business needs at least a few basic licenses and registrations to legally operate. Also, there may be some big perks to registering your business as an LLC or corporation. Let’s do a quick review of those basic licenses, registrations, and entity options.
II. Protect your Intellectual Property
Next, most businesses have at least some intellectual property assets that you may want to protect. Let’s do a quick review of what those are and how to protect them.
Trademarks
Trademarks protect your brand identity, like your business name, logos, slogans, or unique product names.
You can establish ownership to a trademark simply by using it, but trademarks are best protected with official registration.
When you own a trademark, that means you have exclusive rights to that trademark in connection with your offerings and can stop others from using a similar trademark in connection with similar offerings. So, if you see a similar trademark being used in connection with similar offerings, then you may have rights to stop them.
Copyrights
Copyrights protect your original creative content, like your original photos, videos, e-courses, curriculum, podcasts, books, and other original content.
Ownership can be established simply by making the content, but copyrights are best protected with official registration.
When you own a copyright that means you have exclusive rights to that content and can stop others from using it without your permission.
For example, if you write a book or make an e-course, then we may want to consider registering a copyright for it.
Although you generally own the common law copyright to the content just by making it, you will be in a much better position to enforce your rights with a registration. For example, with a registration you are by default entitled to $750 - $150,000 in damages per infringement, whereas without a registration you have to prove your losses, which can be challenging or limited. Also, you can’t sue for copyright infringement until you have a registration, which can slow down your enforcement.
You can also leverage your copyrighted content by selling or licensing them to others.
Trade Secrets
Trade secrets protect valuable private information, like your e-mail list serve, secret recipe, or secret contacts
There are no registrations for trade secrets.
You can protect trade secrets by keeping them private and only sharing them with your team on a need-to-know basis, and by always using a confidentiality agreement when you are sharing the content.
Once your information becomes known to the public, it may no longer qualify as a trade secret.
Patents
Protect inventions, like an original physical widget or scientific invention.
When you own a patent, that means you have exclusive rights to the invention for the duration of the patent registration.
Patents generally require registration in order to establish ownership.
Publicity Rights
Publicity rights protect each individuals’ rights to control how their persona is used.
This right is generally inherent to you, but you do want to make sure you are careful in how you allow others to use your name and image, like you might not want to sign a contract giving a brand unlimited rights to use your persona to market their brand forever. Instead, you might given them l
On the flip-side, you also generally need permission from people to include their name or image in your business marketing materials. So, if you want to feature someone else in photos, videos, podcasts, or other content related to your business, you should have them sign a consent form confirming those rights.
III. Prepare your Contracts
Almost every business would benefit from having the right contract forms on hand to use when you are engaging with clients, customers, workers, and partners.
COMMON FORMS YOU MAY NEED
Below is a quick summary of common contract forms that may be helpful for your business. It’s best to get legal guidance on what forms you need and have them custom prepared for your business’s specific needs. But once you have your forms established, you can generally re-use them as needed for your re-occurring transactions with clients, customers, workers, or other engagements. Some common contract forms include:
Client Services Agreement - For when you are onboarding a new client for your services. For example, if you provide creative services, wellness coaching, consulting services, or other service offerings this may be one of the most important contract forms you need for your business.
Terms of Use / Privacy Policy - For your website. This will confirm rules about how visitors can use content on your site,
Worker Agreement - For when you are hiring 1099 independent contractors or W2 employees for their services. This will confirm the scope of services, payment terms, confirmation that you own all of their work product, confidentiality terms, and other protections.
NDA - To protect your confidential information when you need to share private information with a prospective partner, investor, client, or other third-party. This is typically used as a stepping stone before you enter into a longer contract.
Media Release - For when you are recording a podcast, video, or other content featuring someone else and need their consent for your usage of the content.
Event Release - For when you are hosting an event and need protections and releases from the participants confirming they won’t hold you liable for any damages they incur at the event.
Licensing Agreement - For when you are licensing something from or to someone else. Like, if you want to use someone else’s content as a component of one of your offerings.
Custom Manufacturing Agreement - For when you are hiring a manufacturer to build your original products.
Affiliate Agreement - For when you are hiring someone to help promote your offerings in exchange for a sales commission.
Brand Ambassador Agreement - For when you are being hired for influencer / brand ambassador services.
DON’T SIGN CONTRACTS WITHOUT SUPPORT
Last, if a company asks you to sign their contract, then you should have that reviewed with professional counsel first to ensure you are protected going into the deal. For example, if you are providing services to a big company, they may ask you to sign their in-house contractor agreement, and those are typically stacked in the favor of the company hiring you, potentially to your detriment. With counsel, you can get guidance on terms terms to ensure it aligns with your intent, and you can typically negotiate adjustments to the agreement to better protect your interests.