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8 Legal Tips You Should Know Before Starting a Business

If you’re thinking of starting your own small business, it’s worth your time to read this helpful info from Gregory Schrage, a partner at the law firm Church Church Hittle + Antrim, about what steps you should take before getting your company off the ground.
Starting a Business

This story was created in partnership with Church Church Hittle + Antrim (CCHA)

Gregory Schrage partner at CCHAGot a business idea that you’re excited about? Awesome! To help you hit the ground running, here are some answers to important small business legal questions from Gregory Schrage, a partner at Church Church Hittle + Antrim.  

Church Church Hittle + Antrim is the oldest law firm in Hamilton County, and serves clients throughout the state of Indiana, with offices in Fishers, Fort Wayne, Merrillville, Noblesville, Tipton, and Westfield. While it is always advisable to seek your own legal counsel before starting a small business, the answers to these questions can hopefully help you start thinking about some decisions you want to make before engaging in your new enterprise. 

It may seem like a lot to take in, but the little steps you take in the beginning could protect you personally and financially down the line.

What type of business structure should I choose? For example, what are the differences between a sole proprietorship, a limited liability company (LLC), a limited liability partnership (LLP), and an S-corporation?

Sole proprietorships are the easiest method of being a business, because you do nothing except for just doing your business, and you don’t have to do anything legally to operate. However, I would stress the importance of protecting your own assets: In my opinion it is completely and utterly worth it to take the time to create a business structure. If something goes wrong and you’re a sole proprietor, your personal assets including your personal bank account—and possibly your children’s college fund—are not protected. But, by taking the time to create a business structure, like a Limited Liability Company or an S-Corporation, you’re creating a new person in the eyes of the law. Once you create this new entity, it technically becomes an entirely different person, and if you abide by the corporate form, you will not be individually liable for the corporation’s debts.

So with that being said, when people ask, “What kind of business structure should I choose?” the answer depends on your situation. Is your business currently one person, or do you have a business partner? If you have a partner, you technically have a business partnership, and you might want to consider creating a Limited Liability Partnership (LLP).

I am not an accountant and cannot give financial or tax advice, but if your business is currently just you as a single person, if you want to protect your own individual assets, your best options as an individual are either the Limited Liability Company (LLC) or incorporating as a corporate entity (S-corporation). The main difference between an LLC and an S-corporation is how they are taxed. With an LLC, there is something called “flow-through taxation,” where when the LLC makes money, that money goes straight through the LLC’s books to your personal books, and when you file your taxes, you just attach the income from the LLC to your income taxes as a source of income.

On the other hand, an S-corporation is taxed as itself, and you would only be taxed by how much money actually came to you, if you paid yourself through the company. The downside of the S-Corporation is that all the money you get is doubly taxed, but the upside is that you can avoid those taxes by not paying yourself and keeping the money in your business. An LLC can also do an election with the IRS to be taxed like an S-Corporation, but you have to make the choice to do that.

 
 
 
 
 
 
How do I register the name of my business, and how do I figure out if my chosen name is available and suitable to use?

Actually that’s one of the easiest parts of all of this; you can go the Secretary of State’s website, INBiz, and it’s actually very simple to set up whatever kind of entity that you want. The website asks you questions and you select the type of business you want to select, and you type in what you want your name to be, and they do a preliminary check to see if the name is available.

You also need to select a registered agent who is responsible for the official paperwork of your company as part of the application process. Most people choose themselves, but there are professional corporations that exist to be registered agents. Once you fill out those things, the website will give you your articles of incorporation, and it legally creates the company. You then pay a fee (it is roughly $300 depending on what you select), and almost immediately you get an email saying you are registered, and about a day later you get an email stating that you are an official company.

How do I figure out what sort of business licenses and permits I will need?

You will need to fill out forms with the state of Indiana in order to collect and remit sales tax, there’s a Retail Merchants Certificate (called a BT-1 Form) if you’re going to sell any items, and you also file with the Indiana Department of Revenue, and they can help guide you. If you run into questions, you can always call or look at the Department of Revenue’s website.

The permits that you need will depend on what you’re doing and where you’re doing it, but you may be able to do an online search of “What sort of licenses do I need to operate” your specific type of business in your city and state.

If you’re running your business out of your house, where you live matters. You may have local city or town ordinances or rules relating to whether or how you can run a business out of your home, so you will want to look into that, and you should also check your homeowner’s association rules and regulations if you have one.

Should I set up a separate bank account for my small business?

You should absolutely set up your own separate corporate bank account, it’s the first thing you should do after registering your company. After you register your company with the Secretary of State’s office, you can get an EIN number from the IRS, which is like a corporation’s social security number, and you should use that to set up a bank account.

You don’t want to pay off your corporate debts with your own personal money, and you don’t want to commingle your and the company’s funds. Even if it is a legitimate expense, even if you are 100% the owner of the company, at any time you can just pay yourself, but you need to take the money from the corporate bank account and put it in your personal bank account before you pay your own bills. Most of the time it’s things like buying groceries, that are clearly personal, that get you in trouble. It’s just two extra seconds: Transfer the money to your own account so you can pay any personal expenses with your own personal bank account funds.

What is intellectual property and how do I protect mine?

Trademarks, patents, copyrights, and trade secrets are all considered intellectual property. Also, any words, names, symbols, devices or any combination of those that are used, or intended to be used, to distinguish your goods and services, or to indicate their source, are intellectual property.

The point of a trademark is to distinguish the source of your goods. Registering for a trademark can be an expensive and time consuming process, but if you are operating your business and you are starting to gain notoriety, there are certain protections that you get in the trademark arena that are earned when you build your reputation, so you do have some general protection without even filing anything. Because of this, my general advice is to get your business going first, and then apply for a trademark. 

You can apply to the United States Patent and Trademark Office (USPTO) for an anticipatory trademark before you start your business, and then the office will let you know if your name is available so you can lock it in, but you need to prove that you’re using the name within a certain amount of time—usually one year. If you really want to do it, you can, but I would advise that you talk to an attorney about the specific trademark you want to get, and what the plusses and minuses can be.

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How can I try to minimize my personal risks as a small business owner?

The entire purpose of incorporating your company is to protect your assets from the company’s liability. So just having a corporate entity protects you individually, as long as you do what you need to do to follow a corporate structure. After you set up your company, you still have to run it like it’s a different entity from your personal finances. In Indiana there is a factor test for “piercing the corporate veil,” which basically means, if a person has a company and they are using it for their own personal gain, the court can “pierce the veil” and hold the person responsible.

In Indiana, there are currently eight factors of consideration for veil piercing, so these are the things you want to avoid doing:

  1. Undercapitalization (generally, when a company doesn’t have enough money to conduct normal business)
  2. The absence of corporate records
  3. Fraudulent representations by corporation shareholders or directors
  4. Using the corporation to promote fraud, injustice or illegal actions (breaking the law or creating a Ponzi scheme of some sort)
  5. Paying your individual expenses with company accounts
  6. Commingling funds
  7. Failure to observe required corporate formalities (for example, if you don’t have corporate records and hold meetings)
  8. Any other acts ignoring the corporate formation

In terms of corporate formality, every year you need to hold an annual meeting and take formal minutes of that meeting. But, that can be as simple as you saying to yourself, “I’m holding an annual meeting with myself, and I approve all of my actions.” Then you type up a one-page document that will serve as your official meeting minutes and print it out, sign it and put it in your corporate record book.

Should I create an operating agreement or bylaws, and if so, what should be in them?

Now that your company exists, you need to figure out how to govern it and what should happen, so yes, you should create a governing structure. If you select an LLC, you should create an operating agreement, which details how it will operate. An S-corporation has bylaws, which is effectively the same thing, the rules of how the corporation will operate. 

It is very important to set up formal agreements when you have more than one owner. The biggest thing I’ve seen in litigation that takes a lot of time and money is when people in partnerships don’t have agreements on what will happen when disagreements take place, or something tragic occurs. For example, if one of you dies, what happens? If one of you wants to sell, how will you do that? What restrictions do you want to put on the transfer of ownership? Your bylaws should map out who owns what percentage of the business and what will happen if someone wants to sell the business or certain events occur. You can give a right of first refusal for the company to buy your shares, or the other shareholders can buy your shares. You can also map out how to value the company.

Another thing to consider is: Are you going to hire a manager, or are you running the business yourself? If you do hire a manager, they will also have some authority, so you want to detail what those responsibilities are in as much detail as you can.

Generally, you can also set up a board of directors, but if the business is only you at the moment, you can actually hold all the spots as the president, secretary, and treasurer yourself, and that’s totally fine. This gives you room to grow in case you do need to hire additional people for your board of directors down the line. 

From a legal standpoint, is there anything else I should consider when starting my business?

If you are running your business and it is a brick and mortar, you would benefit from having an attorney review the lease and understand your roles and obligations as a tenant. For example, what you would be responsible to fix and what the landlord is responsible to fix, and what would happen in a catastrophic incident, like a fire for example, before you are out of your lease? Do yourself a favor by having an attorney just look at the lease and help negotiate that.

In reality, starting a small business may seem cumbersome at the beginning, but it’s actually pretty simple. You will be really happy that you took the time to do these things at the outset that can help protect you in the future.

You can learn more about CCHA’s full-service legal offerings on their website and on Facebook & Twitter

Stephanie Groves is an Indy-based freelance writer who was once a lawyer, but now just watches Law & Order reruns.

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