Legal Basics Before Getting Started

Spark & Hustle Q&A with Rocket Lawyer, the fastest growing online legal service for individuals and small business owners.

Spark & Hustle: Plenty of people plan to start a business so they incorporate, secure a federal tax ID number, open a business account and so on—all before testing their concept and determining if there’s truly any money to be made. What’s a good rule of thumb for when it’s ok to generate some sales without forming an official business entity vs. when it’s time to formalize things?

Rocket Lawyer: By default, you already have a business structure—a sole proprietorship. Whether or not you incorporate the company as a corporation or an LLC, you’ll need a tax ID number as soon as you start generating sales, for tax reasons.  For example, if you’re a freelancer and you’ve accepted a paying job, the other party will ask you to complete a 1099-misc, which is a formal request for your tax ID number (the other company is required to report the income they pay to you on their tax return). You can use your social security number instead, but many people prefer to keep their social security number private.

You’ll also need a tax ID number when you set up a business bank account or hire employees. Remember, it’s better to keep your business assets and your personal assets as separate as possible to keep your taxes in order.  You can get a tax id number in a few minutes at the IRS website, and start using it immediately, whether or not you’ve formed a corporation, LLC, or non profit.

Deciding when to incorporate is different for every business owner, and there are companies who do business as a sole proprietorship for the life of the company.  However, it’s usually better to incorporate sooner than later.  The bottom line is that you should incorporate as soon as you feel like your business could expose you to personal liability. For example, if there’s any possibility that someone could sue the business, it’s best to incorporate in order to separate your business and personal assets.  You don’t want to lose your family home if someone slips in your store and sues you, for example.

Setting up a corporate structure at the very beginning can also help you if the company fails, so it’s best to do it before you know whether you’ll make money.  When you’re a sole proprietorship, you and the company are inseparable, meaning that your assets (and debts) are also in the same pot.  Forming a separate legal entity (like a corporation, LLC, or non profit) helps reduce your personal liability in case the business doesn’t turn out to be the profit-machine you’d hoped.

Finally, incorporating can help build your business’s reputation.  Creating a separate legal entity for your business communicates credibility for your brand, and shows that you intend to be around for a while, which can actually help you make money.  Incorporating is just one tool in your arsenal that can give you a competitive advantage, and help you become a profitable business, so the sooner the better!

Spark & Hustle: What kind of business should invest in trademarking its name–is this something every business should do? What are the general parameters of who shouldn’t bother?

Rocket Lawyer: Every business should take steps to trademark their name.  There are levels of trademark protection, and there are several initial steps that any business can take to claim trademark protections without a lot of work or money.  Registering your trademark, which is not required, does cost money, and can take several years, although it gives you additional protection.

So what is a trademark, anyway? A trademark is defined as either a symbol, word, or words legally registered or established by use as representing a company or product.

The key phrase is “established by use.”  That means that you can claim trademark protection simply by using your name in commerce, and you can communicate to other companies that you’re claiming trademark protection simply by adding the ™ symbol after your brand name.

That said, you must first establish a unique name, since you can’t trademark someone else’s brand or something that is too general.  If you have the perfect name in mind, do some research to see who is already doing work in that space, and how they are different.  The key is to avoid confusion.  If there is someone else in your space with a similar name, it’s best to pick a different name to avoid legal issues down the road.

Once you have your unique name, incorporating your business is a smart move because it establishes your company name with an incorporation date.  In addition, you’ll want to use the ™ symbol whenever your name is in writing can help you establish your trademark.

Although it’s not necessary, it’s best to apply for trademark registration with the USPTO as soon as you can.  A registered trademark is easier to defend from unauthorized use.  Weigh the benefits to your company, and the costs.  There are filing fees and it can take several years to register your trademark.  You’ll also need to make sure no one else has already registered your trademark before you apply. It would be a waste of money to file and have your registration refused because another trademark exists or is pending, so conduct a thorough search for existing trademarks before filing a trademark on the USPTO’s website.   To that point, after you’ve filed your application, the USPTO will also conduct an investigation for similar marks before making a decision on your trademark.

Spark & Hustle: For someone starting a small cupcake business, what kind of legal protections should she consider?

Rocket Lawyer: Incorporate. Although it’s not fun to think about, what happens if the cupcake business isn’t successful?  Incorporating separates the owner’s assets from those of the business.  If the business goes broke, creditors have a much harder time coming after the owner’s house, for example, to pay the debts of the business.  Incorporating also gives the owner tax flexibility which can save money in the long run.

Get a unique name, and take steps to trademark it.  There are a lot of cupcake shops out there, and you need to stand out. The more unique your brand, the more you’ll stand out from the crowd.

Get contracts in writing.  If you get a contract to supply cupcakes to a local cafe, make sure to create a contract.  Putting the agreement in writing protects everyone’s interests and defines expectations of both parties.

Keep your trade secrets. Don’t let your secret recipe become common knowledge — have your vendors or employees sign a non-disclosure agreement to protect your unique recipe from copycats.

Get insurance.  If you’re opening a storefront, you’ll need liability insurance in case a customer slips and falls on some spilled frosting.  You’ll also need workers’ comp if you have employees.

Create employment agreements.  If the cupcake business expands and you need to hire employees, it’s important to have employment contracts in place to protect you from a lawsuit.

Spark & Hustle: If the domain name I want for my business is taken, how can I go about getting it — or should I give up and pick another name?

Rocket Lawyer: If your domain name is already taken, it’s probably easier to pick a new one that is available.  There’s no guarantee that the current owner will give it up, and if the current owner does want to sell, it could still cost you a pretty penny — and that’s not a cost most small business owners want to incur when they’re just starting out.

If you have your heart set on a particular domain name that’s not available, you can use a site like Whois.com to find the information on the domain. You can make an offer to the current owner and hope that they will negotiate with you.  If the current owner is unwilling to part with their domain, you will have no choice but to pick a modified version of that name (if available), or choose a new name altogether.

Spark & Hustle: Are there any situations where verbal agreements are suitable, or must everything be documented in writing when starting a business?

Rocket Lawyer: When in doubt, you should put it in writing.  It is difficult to prove the terms of a verbal agreement, and can lead to a ‘he said, she said’ argument that won’t stand up in court.

Remember that putting an agreement in writing is beneficial to both parties.  The expectations are clear from the beginning, and it can not only prevent legal battles, but simple misunderstandings, too.  A simple rule: anytime you establish an ongoing business relationship or there’s money exchanged for services, think about an agreement.

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