When starting a new business, you’re so busy with building your product and finding clients that the never-ending list of legal formalities comes last, or never gets done. I’m a lawyer, and I even forget some important to-do’s, like when I accidentally forgot to get my business license on my new law firm until I received a bill from the City of Sunnyvale (with back penalties and interest!) in my mailbox.
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To prevent that problem, here are seven straightforward legal items that are important for every small business to do on day one, to save you the cost and headache of cleaning up a mess later.
1. Create a co-founder or partnership agreement
Even if you have zero product, revenue, and funding, you need a written agreement with your co-founders. Write down who will contribute what money and labor, who gets paid how much, and who owns how much of the company. It’ll reduce misunderstandings and make it much less likely you’ll all sue each other if it fails, or if it succeeds.
2. Decide on a business entity (at least to start)
If you’re a one-person business with no employees and minimal revenue, it can make sense to just stay a sole proprietorship. But if your business has multiple owners and/or workers, you need to form an entity both to protect you from being personally liable from anyone else’s mistakes, and to set your company up for the future.
Whether you need to be a Corporation or a Limited Liability Company depends upon your tax situation, the state where you’re incorporating, and your future plans (such as whether you need to offer multiple classes of stock to investors). Make sure to review the options with your tax advisor as well as your legal advisor.
3. Vet your business/domain/product name
Maybe you don’t have the cash to register a trademark yet. But, you need to make sure you’re not violating someone else’s trademark. At the minimum, search the U.S. Patent & Trademark Office trademark database for registered trademarks, and search on Google.com for common law trademarks and common usage of the name.
4. Get your business license (yes, even if you’re a virtual business)
It’s easy to forget that even if you are a virtual company, with everyone working at home and selling products online, you’re still humans in a physical location! If your state, county, or city requires a business license, when they sync their records with tax or business registration databases, they will send you a bill for back fees, interest, and penalties (like they did with me).
5. Maximize your retirement contributions.
Regardless of the size of your startup, you need to set up some basic business financial systems to track your income and expenses for taxes and your own planning. All businesses (even sole proprietors) need a separate business bank account and a bookkeeping system, to avoid commingling personal and business money. If you accept payments, you need a merchant account such as Square or business PayPal (don’t use your personal PayPal account!).
If you have employees—if your business is a S-Corporation, this includes the owner/officer—you need a payroll system such as Gusto to make sure you’re making correct calculations and filing the right forms. Back when I calculated payroll myself, I regularly received random bills (with penalty/interest) from the IRS, because it’s so difficult to get it right. As a business owner, you are personally liable for payroll errors and unpaid payroll taxes even if your business is incorporated. This is one area where you don’t want to do it yourself.
7. Create written agreements with clients, customers and contractors
You need written contracts with all the people with whom you’re doing business, whether they are working for you, or you are working for them. With your vendors and independent contractors, the agreement needs to maintain their contractor status, manage who owns the intellectual property, create a Non-Disclosure Agreement, and set forth the general understanding of your arrangement. With clients and customers, you need to have a contract for the same reasons as you need a contract with your co-founders—to minimize misunderstandings by writing down your assumptions, for everyone to read and sign. This is not just so you can enforce your fee agreement and protect yourself in case of a lawsuit—but also so you can have happy long-term clients and many referrals.
Remember, just as it takes a few years to get a business off the ground, it will take you a few months or years to get your entire small business legal to-do list completed. The best strategy is to start with the most important items, and grow your legal foundation as you grow your new company.