You’ve drafted a detailed business plan, chosen a business model and know which funding options are available to finance your business. You are well on your way to starting a small business! However, before you launch, it’s critical that you structure your startup properly and understand which items on your legal checklist must be crossed off.
This list may vary slightly depending on the needs of your business. But, in general, plan to take care of the following 10 items:
- Incorporate as a legal business structure
- File for trademark protection
- Obtain required business licenses
- Apply for an employer identification number (EIN)
- Get a registered agent
- Prepare bylaws
- Prepare an operating agreement
- Register for a “doing business as” name (DBA)
- Order a certificate of good standing
- File an annual report
We look at each in detail below.
1. Incorporate as a legal business structure
Incorporation should be at the top of every legal checklist for a small business. Why? Incorporation puts a small business on the map. By incorporating, you are able to:
- Gain limited liability protection that helps protect your personal assets and keeps them separate from professional assets
- Maximize potential tax deductions (depending on the entity formation you choose)
- Establish a professional identity quickly
- Build credibility much faster
There are a wide range of business structures available. An example: A limited liability company (LLC), which provides flexibility to its members and the ability to elect an S Corporation or C Corporation as your tax entity. Or, you may decide to go into business with a partner, like a family member or friend, and form a partnership where both people are able to operate the business and report its profits and losses together as a team.
What can happen if a business doesn’t incorporate? The most immediate issue the company faces will be a lack of liability protection. Without liability protection, the business is no longer separate from its owner. The owner assumes all responsibilities for the company’s actions, good or bad. An unincorporated business may also struggle to build credibility with consumers and build up business credit because it misses out on additional tax savings that come with incorporating a business.
2. File for trademark protection
Does your small business have a unique name, logo design, phrase or tagline associated with it? You will need to file a trademark application to protect these assets. Federally registering trademarks allow small businesses to safeguard their intellectual property. Your trademark belongs to you and may not be used without your permission.
3. Obtain business licenses
It’s critical that every small business applies for and obtains the necessary business licenses required to operate the business. However, the types of licenses you may apply for will vary depending on your business. Factors like your location and the industry you’re in will determine which business licenses you will need.
If you need extra help, consult with the professionals at MyCorporation. We’ll research all license requirements for you and provide you with the forms necessary to file for business licenses.
4. Apply for an EIN
Many entrepreneurs consider an employer identification number (EIN) to only be necessary when deciding to hire employees. However, applying for an EIN is beneficial to other aspects of running a business. You’ll also need an EIN to open a business bank account and establish business credit.
5. Get a registered agent
Once a business has been incorporated, it needs a registered agent (RA) to serve as the point of contact between the business and the state. Registered agents accept official documents on behalf of the business, organize said paperwork, and privately provide it to the business owner in a timely manner. This allows entrepreneurs to attend to confidential paperwork on their own time and remain in compliance with state law.
When choosing a registered agent for your small business, it’s important to remember there are specific guidelines for designating an RA. Your registered agent must have a physical street address, be a resident of the state you do business in and be available to receive process during general business hours (typically Monday through Friday, from 8:00 a.m. until 5:00 p.m.).
6. Prepare bylaws
Bylaws are the rules and regulations of your corporation. A corporation’s bylaws detail the functions of each corporate office, how meetings are called and conducted, and shareholder voting formalities. It is generally not a requirement by most states for corporations to draft bylaws, but it is helpful to prepare and update this paperwork to protect the corporation.
7. Prepare an operating agreement
Similar to bylaws, an operating agreement should be drafted if you incorporated as an LLC. An operating agreement helps establish a structure for an LLC. It contains information about the members’ rights and responsibilities, ownership rights, allocation of profits and losses, and outlined plans in the event of gaining and losing members as well as the LLC’s dissolution.
It is not always necessary to prepare an operating agreement. However, the absence of this agreement may cause the state to question the validity of the LLC because there is no structure in place for handling issues within the entity. If that happens, it’s possible your LLC could either be run by the state’s de facto LLC rules or lose its status as an LLC.
8. Register for a “doing business as” name (DBA)
Do you plan on doing business under a name that is different from your personal name? If you do, you must register for a doing business as name (DBA). This will allow you to accept payments under an alternate business name, open up a business bank account, and publicly advertise the business under its DBA.
9. Order a certificate of good standing
If you incorporated as an LLC or corporation, ordering a certificate of good standing is physical evidence that your entity is recognized by the state as being in existence. Should anyone question the startup’s legitimacy, you may show them the certificate as proof of your company’s compliance.
10. File an annual report
The last item on your legal checklist is an ongoing item. If you incorporated as an LLC or corporation, you are required to file an annual report. This document records the activities of the business. If anything has changed, such as your business name or registered agent’s address, the changes are noted in the document. These same changes should also be updated accordingly in your bylaws and operating agreement, too.
What happens once the annual report is ready? This document is filed with the Secretary of State, stating the most updated information possible about the business. Filing an annual report on time allows your small business to remain in compliance with the state — which is critical to the success of a just-launched startup!
Once you’ve checked off these legal must-haves, you can breathe a sigh of relief knowing that your startup is ready to go.