Legal Guide for Starting & Running a Small Business

1. Choose the Right Legal Structure for Your Small Business

There's no right or wrong choice that fits everyone.

Evaluate business structures. The main options for small businesses are sole proprietorship, partnership, corporation, and limited liability company (LLC). Each has different implications for taxes, personal liability, and operational complexity.

• Sole proprietorship: Simplest structure, but no personal liability protection
• Partnership: Shared ownership and control, but partners have personal liability
• Corporation: Limited personal liability, but more complex and costly to set up
• LLC: Combines liability protection of a corporation with tax benefits of a partnership

Consider factors like the nature of your business, number of owners, liability risks, and tax implications when choosing. Consult with a lawyer or accountant to determine the best fit for your specific situation.

2. Protect Your Personal Assets with Limited Liability

If you're concerned about limiting your personal liability for business debts, you'll want to consider organizing your business as either an LLC or a corporation.

Understand liability protection. Limited liability structures (corporations and LLCs) create a legal separation between your personal assets and business debts. This means creditors generally can't go after your personal savings or property to satisfy business obligations.

• Benefits: Protects personal assets, adds credibility to your business
• Drawbacks: More paperwork, higher setup and maintenance costs
• Key point: Limited liability isn't absolute; you can still be held personally liable in cases of fraud or personal guarantees

To maintain liability protection, follow corporate formalities like holding regular meetings, keeping separate financial records, and not commingling personal and business funds.

3. Develop a Comprehensive Business Plan

Never rely on the seller's promises.

Create a roadmap for success. A well-crafted business plan serves as a guide for your operations and a tool for attracting investors or securing loans. It forces you to think through all aspects of your business and anticipate potential challenges.

Key components of a business plan:

• Executive summary
• Company description
• Market analysis
• Organization and management structure
• Product or service line
• Marketing and sales strategy
• Financial projections

Be realistic in your projections and thorough in your research. Update your plan regularly as your business evolves. Remember, a business plan is not just for startups; established businesses benefit from periodic strategic planning as well.

4. Secure Adequate Funding and Insurance

Don't rely on a broker—who gets paid only if the deal goes through—for advice about the quality of the business or the fairness of its price.

Financial foundation is crucial. Ensure you have sufficient capital to start and operate your business. Explore various funding sources such as personal savings, loans, investors, or crowdfunding. Be cautious about risking all your personal assets or relying too heavily on credit cards.

Insurance considerations:

• Property coverage: Protects physical assets
• Liability insurance: Covers legal claims against your business
• Workers' compensation: Required if you have employees
• Business interruption insurance: Covers lost income during disasters

Assess your specific risks and consult with an insurance agent to develop a comprehensive, cost-effective coverage plan. Don't skimp on essential coverage, but also avoid over-insuring for unlikely scenarios.

5. Navigate Licensing, Permits, and Regulatory Requirements

You'll probably need a license or permit—maybe several—for your business.

Comply with legal obligations. Research and obtain all necessary licenses and permits at the federal, state, and local levels. Failure to do so can result in fines or even forced closure of your business.

Common requirements:

• Business license
• Professional licenses
• Health department permits
• Zoning permits
• Sales tax permits
• Employer identification number (EIN)

Contact your local Small Business Administration (SBA) office or chamber of commerce for guidance on specific requirements in your area. Stay current with changing regulations and renew permits as required.

6. Negotiate Favorable Commercial Leases

In theory, all terms of a lease are negotiable.

Secure advantageous terms. When leasing commercial space, don't accept the landlord's initial offer. Negotiate key terms such as rent, lease duration, improvements, and options to renew or expand.

Lease negotiation tips:

• Research market rates and terms
• Prioritize your needs (e.g., lower rent vs. more improvements)
• Consider the total cost, including utilities and maintenance
• Seek flexibility for future growth or downsizing
• Understand and negotiate key clauses (e.g., personal guarantees, subletting rights)

Have a lawyer review the lease before signing, especially for long-term or high-value agreements. Remember, your ability to negotiate depends on market conditions and the landlord's situation.

7. Understand and Comply with Employment Laws

As an employer, you might have to register with your state's department of labor or with agencies administering the laws on unemployment compensation and workers' compensation.

Navigate employment regulations. Familiarize yourself with federal and state employment laws to avoid legal issues and create a fair workplace. Key areas include hiring practices, wage and hour laws, workplace safety, and anti-discrimination policies.

Important employment considerations:

• Properly classify workers (employee vs. independent contractor)
• Comply with minimum wage and overtime rules
• Maintain required employee records
• Provide mandatory benefits (e.g., workers' compensation)
• Implement clear policies on harassment and discrimination

Consider consulting with an employment lawyer or HR professional to ensure compliance, especially as your business grows and employment laws change.

8. Implement Effective Marketing and Customer Relations Strategies

Word of mouth is the best way for a business to build a loyal following, but that takes time.

Build your brand and customer base. Develop a marketing plan that aligns with your business goals and target audience. Utilize a mix of traditional and digital marketing channels to reach potential customers.

Marketing strategies to consider:

• Strong online presence (website, social media)
• Content marketing (blogs, videos, podcasts)
• Email marketing campaigns
• Networking and community involvement
• Customer referral programs

Focus on delivering excellent customer service to build loyalty and generate positive word-of-mouth. Regularly gather and act on customer feedback to improve your products or services.

9. Maintain Proper Financial Records and Tax Compliance

It's important to realize that if you improperly use your mark, you might find it harder to register or to stop others from using it.

Keep organized finances. Establish a robust system for tracking income, expenses, and tax obligations. Accurate financial records are crucial for making informed business decisions, securing loans, and complying with tax laws.

Financial management tips:

• Separate business and personal finances
• Use accounting software to track transactions
• Keep detailed records of all business expenses
• Understand and meet tax filing deadlines
• Consider hiring a professional accountant or bookkeeper

Stay informed about tax deductions relevant to your business. Consider consulting with a tax professional to ensure you're taking advantage of all available deductions and credits while remaining compliant with tax laws.

Last updated: August 9, 2024