3 Legal Questions to Ask Before Starting a Small Business

Written by Kenan on October 5, 2012

Posted in Human Resources

This is a guest post as a part of our Small Business Month. Kenan L. Farrell advises businesses, non-profits, entrepreneurs and artists on business and intellectual property (copyright, trademark, patent) issues. He is on the Board of Directors of the Kurt Vonnegut Memorial Library and is the current president of IDADA. He teaches Art & Museum Law at his alma mater, Indiana University School of Law – Indianapolis. Follow on Twitter @KLFLegal.

In order to be successful, every business, large or small, needs to avoid legal problems. This post will help you understand the legal basics involved with starting a small business so you can focus your time and energy on making your business a success.

1. Have you selected a Business Structure?
When starting a new small business, you must decide early on what form of business entity to establish. There are four basic types of business entities: sole proprietorships, partnerships, limited liability companies and corporations. Each has its advantages, disadvantages and particularities. Among other things, the business form you select will determine the taxes you have to pay, the amount of regulatory paperwork you have to file and your personal liability for activities of your business.

The key features a small business owner should consider are liability protection and desired tax treatment. Some business organizations offer liability protection for the owners while others do not. Some business organizations are taxed as a separate entity, while others are merely conduits and all of the income and expenses flow through to the owners. Your accountant can be a big help with regard to determining your tax consequences.

There is plenty of great information online about selecting a business structure:

  • The very first place you should go (after the Formstack small business blog series) is SBA.gov, the website of the U.S. Small Business Administration. From “Choosing a Business Structure” to “Creating a Business Plan” to “Obtaining Loans, Grants & Funding,” it’s a one-stop shop for nearly all of the important information you’ll need to get started.
  • Check out the new BusinessUSA website (currently in beta). Like SBA.gov, it’s a wealth of information and resources for a business owner.
  • Visit the Secretary of State website for your own state. It will contain the information you need to get started in your particular location. (Here’s my state, Indiana).
  • The Internal Revenue Service (irs.gov) can provide several useful, free publications to help you comply with federal tax laws and acquire a federal employer ID number.

2. Do you have the necessary Licenses and Permits?
Be sure to check federal, state, or local licensing and permit requirements related to your business. You can determine your requirements at SBA.gov. Just enter your zip code and the business type, such as real estate agent or barber shop. Note that not every business will require a license or permit, but check the list to be sure.

3. Are you infringing on someone else’s Intellectual Property?
This is a big one and, unfortunately, something that is often overlooked by new businesses. The United States prides itself on providing strong intellectual property protection (copyright, trademark, patent) for creative works, inventions and business names/logos. If you haven’t done the appropriate “due diligence” searching in advance, you may be using somebody else’s intellectual property without even knowing it. An infringement lawsuit or a forced rebrand can present a great, and unnecessary, burden to a new business.

It will also be important to protect your own intellectual property to prevent competitors from copying your success. Without protection, someone else can use your name, invention, software, etc. – with no compensation to you. As you invest time and money in your business, be prepared to protect these vital assets.

For more information, check out the websites of the U.S. Patent and Trademark Office or U.S. Copyright Office.

A final question, but an important one … do you need an attorney? As I’ve mentioned, there are plenty of great resources on the internet. There are online and offline communities of small business owners that you can tap into for assistance. Nearly any library should have shelves of business books. However, if the topics discussed above make you uncomfortable, you can always hire an attorney to help guide you through some of these decisions. Attorneys have assisted numerous clients in overcoming the same issues that you’re facing and help prevent problems before they occur. A good business attorney will be an immense help over the life of your business, so consider getting them involved at an early stage.