6 legal items to check off your startup’s to-do list
Planning to start a business in the New Year? Chances are, you’ve likely completed your prep homework. You’ve determined what your unique selling proposition (USP) is, and defined your business model. Your business likely has a business plan that takes an in-depth look at your competition, target market, and financial plans for future profitability. Before your new venture is fully off to the races, don’t forget to check these startup legal items off your to-do list.
6 legal issues for startups
- Determine which business formation structure is best.
- File for trademark protection.
- Register for necessary licenses and/or permits.
- Obtain an employer identification number (EIN).
- Get a registered agent.
- Complete annual filing maintenance.
Let’s take a look at each item in more detail.
1. Determine which business formation structure is best
Some startups may prefer to stay small and maintain flexibility. Others may be on a fast track for major growth and expansion.
Once an entrepreneur understands which type of business they plan to run, they may incorporate it as one of these common business entities.
Limited liability company (LLC)
Aside from establishing credibility and providing a flexible business structure, incorporating as an LLC provides entrepreneurs with liability protection.
Should something unforeseen impact the business, the owner’s personal belongings (like a house or car) would not be affected. Forming an LLC also provides entrepreneurs with a pass-through tax structure. This allows entrepreneurs to choose how they would like to be taxed, typically as a partnership or S Corporation election.
Much like LLCs, corporations also provide entrepreneurs with liability protection. However, a corporation is much less flexible than an LLC.
The structured nature of the entity makes it possible for a startup to issue shares of stock and work alongside investors. This allows the company to significantly expand and even go public with an IPO.
Many entrepreneurs choose this entity if they decide to go into business with one another. Profits and losses are split between partners in a general partnership. Additionally, partners are also held personally liable for their business debts.
Related: Know your business entity options
2. Protect your original marks with a trademark
Chances are highly likely that your startup has a creative mark associated with the company. This may be a business name, design, logo or tagline. These are trademarks, which work to distinguish your business and its originality to the world.
What happens if you do not protect these unique assets? In the worst-case scenario, a competitor may attempt to copy and pass these ideas off as their own. Your business would be helpless to stop them because the marks had not properly been trademarked.
The good news is that you can protect these assets through trademark registration. Even better news? It’s a relatively simple two-step process.
Conduct a name search. Before you file for a trademark, you need to make sure that the mark is available.
The United States Patent and Trademark Office (USPTO) provides startups with a trademark database. This tool will show you if there are any registered and/or pending applications for your specific trademark. If you find there are not, you may move forward and file a trademark application.
File a trademark application. Now that you know the trademark is available for use, file a trademark application and pay a filing fee to register it.
You may monitor the application with the USPTO’s Trademark Status and Document Retrieval (TSDR) system. Once your paperwork has been approved, you officially have exclusive rights to use the mark in all aspects of your business.
3. Register for required business licenses and permits
The types of licenses and permits your business needs will vary depending on industry and location.
It is generally advised that entrepreneurs check in with their local Secretary of State before beginning the application process. The Secretary of State may provide a list of business licenses and permits your startup is required to have, based on the field your business is in and the state.
This ensures you will be able to apply for the proper licenses and permits as needed.
Related: How to get a business license
4. Obtain an employer identification number (EIN)
What is an EIN? An employer identification number is also referred to as a federal tax ID.
EINs are a nine-digit number issued by the IRS in order to identify a business entity.
The IRS is able to track the activities of the business through its EIN. Some aspects tracked include ensuring the company collects payroll tax and stays compliant with state laws.
Why would your business need to file for an EIN? Let’s take a quick look at why EINs are so frequently obtained by startups.
- Hire employees. Filing for an EIN is a requirement for any startup that plans to hire and pay employees.
- Open a business bank account. Many banks require EIN paperwork before a bank account may be opened under a business name.
- Establish a credit profile. This will be your business credit profile, which is separate from your personal credit profile.
- File annual tax returns.
- Form an LLC or corporation. EINs should be obtained if you incorporated the startup as an LLC or corporation. (Partnerships also fall under this category.) Once the company has been incorporated, you are technically considered to be an “employee” — even if you do not hire any employees. As such, an EIN helps track your activities.
- Plans to change organizational structures. Let’s say you initially incorporate as one entity and decide to switch to a different one. You will need to obtain an EIN because of the change in organizational leadership.
Another benefit of EINs is that this tax ID number is less sensitive than a Social Security number (SSN). Many entrepreneurs use SSNs to identify their startup on legal paperwork and documents. Using an EIN may help safeguard against identity theft, and is often used in lieu of an SSN.
5. Designate a registered agent
Entrepreneurs have a choice when it comes to designating their registered agent (RA).
RAs act as the point of contact between the startup and the state. A designated registered agent may be either an individual or a third-party service.
What’s the difference between acting as an RA and working with a third-party registered agent?
It is completely acceptable for an entrepreneur to designate themselves as their own registered agent. However, you should be prepared for the role and its requirements.
Registered agents must be available during general business hours — from 9 a.m. until 5 p.m., Monday through Friday.
They must have a physical street address and be a resident of the state to accept service of process.
Registered agents should also be highly organized, as they will need to stay on top of various bits of paperwork and their associated deadlines.
If you find that you are unable to act as your own registered agent, that’s perfectly fine. You may enlist the help of a third-party RA.
Third-party registered agent
If you work alongside a third-party RA service, you can be assured that they have been carefully vetted to meet the requirements listed above.
Third-party registered agents are physically available and highly organized. Additionally, they are highly discrete.
The downside to designating yourself as your own RA is that businesses might receive a negative service of process, like lawsuit paperwork, in a public space. This can be embarrassing for entrepreneurs and customers to witness.
Third-party registered agents act as an impartial receiver of this kind of paperwork. They do not judge what arrives in the mail. Instead, they collect the documents, organize them, and privately deliver them to the entrepreneur.
This gives startups peace of mind in knowing the third-party RA will manage their paperwork for them so they may focus on their work.
6. File an annual report
Did you incorporate as an LLC or corporation? If so, you will need to file an annual report to stay in compliance with the state.
This report is not too difficult to file or fill out.
Inside every annual report is basic information about the startup. This includes the name of the business, its address, and its registered agent.
If any changes have been made to the business throughout the year, they must be documented in the annual report. These changes must also be recorded in the LLC’s operating agreement and the corporation’s bylaws.
If not, the business may face involuntary dissolution from the Secretary of State. Keep in mind when filing your annual report that deadlines vary depending on the state of filing and the startup’s entity.
Let’s see what the deadlines look like for a few states and their business formations.
Florida requires all corporations, LLCs, limited partnerships (LPs) and limited liability partnerships (LLPs) to file annual reports on an annual basis. The filing deadline with the Florida Secretary of State is May 1.
This is also true of the state of Georgia, with the exception of the filing deadline. In Georgia, the filing deadline for annual reports is April 1.
The same goes for Maine, which has a filing deadline of June 1 for all annual reports for corporations, LLCs, LPs, and LLPs, which are all due on an annual basis.
Minnesota requires corporations, LLCs and LLPs to file on an annual basis. The filing deadline with the Minnesota Secretary of State is December 31.
Iowa annual report deadlines are very specific. For corporations, their annual reports are due biennially — on even-numbered years. LLCs have their reports due biennially as well but on odd-numbered years. April 1 is the deadline for annual reports, and if you are unsure as to which year to file you may contact the Iowa Secretary of State to find out more information.
New York has a very specific set of annual report filing rules with their Secretary of State. Corporations and LLCs must file on a biennial basis. LPs do not need to file an annual report. LLPs must file an annual report every five years. The due dates for filing are based on the company’s anniversary.
Annual filing rules are also somewhat similar in the state of California. Corporations and LLPs have annual reports due on an annual basis. LLCs must file biennially while LPs do not need to file their reports. These documents also have due dates based on the company’s filing anniversary.
Some states do not have annual reports filed through the Secretary of State. For example, annual reports filed in Alabama are filed through their Department of Revenue.
In the state of Texas, filings are completed through the Texas Franchise Tax Department.
Washington state requires annual report filings to be submitted through its Department of Licensing.
Do not presume that all filings go through the Secretary of State, but do ask the Secretary of State if you have any questions or are unsure as to where your filings should go next.
It’s easy to get these deadlines mixed up, so it’s always a good idea to check in with your local Secretary of State before filing if you have any questions.
Once you’ve completed the above checklist, you can confidently start 2020 off with a bang. You’re ready to take on the New Year and decade with a booming business!
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Image by: Maarten van den Heuvel on Unsplash