By Andy Tiwari
If you are searching for a house, you typically will seek out a trained real estate agent. If you need help with your taxes, your best investment is often a certified public accountant. So why not contract with an attorney who specializes in business startups when creating a new business?
It’s a significant question since roughly 8 out of every 10 businesses in the United States are launched as start-ups by their founders, according to the US Census Bureau.
Just last month, I had a few cases walk through my door where business owners were quarreling over issues that could have been prevented if the business had been set up by an experienced business attorney.
Here are three areas that are critical when starting a business; and that can benefit dramatically from the advice of a qualified attorney:
Business Structure – You need the right business structure before you start.
There are several different business structures that give owners varying degrees of liability protection. Most business owners decide to incorporate because someone told them about ‘asset protection’ and it seems like the professional thing to do. In some cases, however, we have advised clients to continue operating as a sole proprietor (no asset separation between business and the owner). Why? Well, it made sense in those specific cases when analyzing the risks and benefits of the different options (something you really can’t do by just researching data on the internet – it takes some experience and legal knowledge).
When you do form a corporate entity – such as a Limited Liability Company, Limited Partnership, or Corporation, or S Corporation** – it’s better to establish the entity before you begin conducting business. Sometimes business owners come to me to establish an entity after they’ve been in business for years and their lease, equipment, accounts, loans, and other assets and liabilities are in their names personally. I’m then tasked with doing far more work for the client, and the transfer of liability protection to the entity is less certain and the work is more expensive.
At other times, I’m perplexed because a new client has a corporation when that they setup online whereas they should have used a limited partnership for their needs. Each entity has different tax implications and rules that determine how owners can divide profits and resolve disputes. Setting up a business in the wrong structure could hamper future business decisions or plans or worse, result in unnecessary extra taxation.
Business Regulations & Law – You need to protect your idea…if it’s actually unique.
I frequently have to break the bad news to new clients that the business name they spent weeks working on and brand new logo… in fact violate someone else’s trademark or existing business name. Google, while wonderfully powerful, can’t find everything you need to research before investing the time and money of preparing a new business.
If you do have a unique logo, invention or idea that was created through your new business, it can be jeopardized if you don’t protect it. Understanding intellectual property law is a necessity when trying to register your trademark or stop another business from using your logo without proper authorization. Beyond this, however, is knowing when to use Federal trademark registration or state-level registration and whether those registrations are even possible. If someone copies information from your website and you ignore it, it could lead to you losing the right to complain about it later.
Even if you’re not trademarking something, you may need to protect your business with non-disclosure agreements, confidentiality agreements, or even non-competition agreements. This is especially true for businesses that sell instruction or teach classes on how to do something. When you’re training your employees in your methods, you could be training your competitor too.
Licensing and Permits – You need to know what you have to comply with.
Depending on what your business entails, you may have to carry state or federal licenses and permits. For instance, if you plan to sell alcohol, you may need to comply with rules from the Texas Alcoholic and Beverage Commission or U.S. Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB), and your employees will need to follow certain guidelines when it comes to handling alcohol. Maybe that sounds obvious, but what if you restore and sell a few cars, cut hair, or want to operate a daycare? As you probably guessed, each of those businesses is subject to separate licensing and compliance. Staying abreast of these regulations and rules could prevent future lawsuits, hefty penalties or even closure by government regulators.
While starting a business can be an exciting time, doing it right in the beginning with guidance from a skilled business attorney can make the difference between success and failure.
If you need legal advice, schedule a meeting with Tiwari + Bell PLLC through our website or by calling (210) 417-4167
**Notes: S Corporations are not actually a separate type of corporate entity. I’ve included the name in this list because the number one question we get from startups is about forming “S Corporations.” As explained on our website, the “S” refers to an election under the Internal Revenue Code to treat the entity differently from its default tax method. As such, both a Limited Liability Company and Corporation may qualify to be “S Corporations” for tax purposes without changing how they operate for liability purposes under state law.