Starting up your own small business at home sounds exciting, but when you think about the legal procedures it takes, it flips all your enthusiasm up-side down.
Here is the good news...
I will offer helpful advice on how you can start your small business at home so you don't need to worry about the steps and procedures in starting your business.
I will do the hard work while you focus your energy on developing ideas and strategies to help you grow your business.
Here are the 10 first steps to starting your business...
1. Make Your Business Plan
Many people get drifted by the idea of making money which makes them hassle things up forgetting the first and essential step which is your business plan. A business plan contains the following elements about your company:
- A summary about your business plan including your company's goals, how you came up with your idea and justify its uniqueness in the marketplace.
- A description of your company and what makes it different from other competitors.
- A market research to collect different data about your business domain, targeted categories and competitors.
- A description of the organization and management of your business. Who is in charge of the business, who is on the board, who does what. In brief, you show any potential investor or employee that you really know what you are doing and there is nothing left for chance.
- A review of your product or service to showcase the benefits to your potential customers.
- A definition of your marketing strategy that shows how you are planning to channel your service or product to its targeted clients. Keep in mind that marketing strategies might change to keep up with the ongoing changes in the marketplace.
- A description of your how you are planning to fund your project. A funding request for example if you plan to finance your project from a third party, you need to mention the type of financing, the amount of money and the period over which you'll need it.
2. Choose Your Business Structure
There are a number of different entity types and many factors to consider when determining the right business structure.
The decision to choosing the correct business structure is important because the type of business you create determines the type of applications and forms you will need to file. There’s also very important personal liability and tax implications for each business type.
Depending on which business structure you follow, you'll be subject to different legal and tax implications. Here is a list of different business structures you can choose from.
Sole Proprietorship is the most basic business structure where you are the sole and only owner of the company and you are in charge of all the assets and liabilities.
This is the simplest business structure to implement but also offers no personal liability protection. So if your business is sued, your personal assets also may be in jeopardy.
Filing requirements are minimal, and you simply report your business's earnings on your personal taxes. No other state or federal business filings are required.
Partnership is created automatically when two or more persons engage in a business enterprise for profit.
By default, a business that begins with a verbal agreement or handshake is considered a general partnership. All partners share in both the day-to-day management and business profits.
However, I highly advise using a written Partnership Agreement to form a partnership. A formal, written partnership agreement that lays out all of the partners’ rights and responsibilities is highly recommended as oral partnership agreements are easy ways to set yourself for disputes in the future.
In the partnership agreement, the partners can dictate both the terms of how a partnership is managed and how profits and losses are allocated and distributed.
Limited Liability Company (LLC)
LLC offers liability protection of your personal assets by establishing your business as a separate legal entity — meaning members are not personally responsible for business debts and liabilities.
In other words, if someone sues your business or if your business is liable to debtors, then your personal possessions, such as car or home, can’t be touched by creditors. So the members of an LLC have no personal liability for the obligations of the LLC.
Also, unlike corporations, LLCs enjoy pass-through taxation — meaning all the profits and losses are “passed through” the business to each members of the LLC.
Members report their share of the LLC’s profits and losses on their individual tax returns, and any tax due is paid at the individual level.
Corporation is also an independent legal entity, separate from the people who own, control, and manage it. Corporations can enter into contracts, incur debts, and pay taxes apart from its owners.
In other words, the Corporation itself, not the shareholders who own it, is held legally liability for the actions and debs the business incurs.
However, corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees.
S Corporation is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation.
What makes the S Corporation different from a traditional corporation (C Corporation) is that profits and losses can pass through to your personal tax return. Consequently, the business is not taxed itself. Only the shareholders are taxed.
To be considered an S-Corporation, you must first form a business as a corporation in the state where it is headquartered. S Corporation limits the financial liability for which the owner is responsible.
And unlike LLCs, C-Corporations pays taxes on any profits from the corporate level, and from an individual level.
3. Pick and Register Your Business Name
It is very important to choose a business name to represent your services or products, it is also important to operate your business in a legal way and ask for financial aid from the government.
Go for unique names that represent your brand and could create brand awareness. However, make sure that the name is not already taken so to avoid extra costs.
You can check the US trademark search tool for that. It is also important to check whether the name is available online by checking available domain names.
4. Pick a Business Location and Get Business Equipment
Choosing your business location is important to comply with leasing terms and zoning ordinances. Here are some tips about choosing your business locations:
Do your research and see if your targeted customers live in the area where you want to start up your business. For example if you target young people, say students, it's better to find an area where there are schools around.
Check for competitors. It is important to scan the area to see whether you have competitors out there or there are complementary businesses. As a start up business, you don't want to start by competing with already established businesses.
Check whether you can find local prospective employees and calculate their possible commuting fees.
An area with prospective skilled local employees is always better for your business as well as for the area.
Pick a location that is easy to find, you don't want your suppliers to get lost trying to find your location.
It is important for your clients as well to find you on the spot. So the keyword is EXPOSURE.
Last but not least, your location must be safe and secure. You don't want your employees to feel insecure at or outside work. So it's a good practice to check the crime rate in the area you plan to settle in.
5. Apply for Business Licenses and Permits
In order to do your business legally there are some federal and state licenses and permits you need to get:
Federal Licenses and Permits are required when you are running a business supervised by a federal agency such as selling alcohol, commercial fishing, mining and drilling or firearms.
You may need a state license or permit depending on the type of your business and the state where you are planning to run it in. Don't worry about that, as I said before, we will do the hard work for you, we will take care of all the legal stuff.
6. Educate Yourself with Necessary Business Laws
It is very important to form an idea about different business laws as a start up business as there are different laws and regulations that apply to businesses in the US.
Advertising and Marketing Law
Effective advertising and marketing of your product determines the success or failure of your business. However, your business claims must be truthful and not deceptive otherwise you will break the law.
Employment and Labor Law
Your employees constitute the base and pillars of your business. Therefore, you need to be aware about certain legal issues, such as preventing discrimination and harassment in the workplace, workplace posters, wages and hourly fees and workers' compensation regulations.
To protect small businesses and individuals and guarantee their rights, finance law covers different categories such as antitrust laws, bankruptcy laws and securities laws.
Intellectual Property Laws
You need to protect your unique ideas, logos or designs from being copied illegally that's why there are laws that are made to protect your intellectual property such as filing for patents and trademarks or copyrights. You can also have employees sign non-disclosure agreements if you want to keep your business top secret.
Online Business Law
If you decide to take your business transactions online, then you are subject to different regulating laws. For instance laws concerning collecting taxes from online customers as well as taxes concerning overseas shipping in case you decide to go global and join the global marketplace.
As the owner of your business, your clients put all their trust in you. Therefore, you are totally responsible for their personal data. You cannot disclose your customers' financial data, analysis and personal information. However, in case there was any victims of identity thefts, you may be legally involved. So, it's better to guarantee the safety of your customers data.
These are regulations that make sure that you, as a business, don't contribute in polluting or harming the environment is anyway. On the opposite, you are supposed to have plans and strategies to safely dispose of your waste or pollutants as well as make a positive change and contribution in the protection of the ecosystem.
7. Figure Out Your Business Financials
It is very important to understand your financing needs if you want to guarantee and lead a successful business.
You need to estimate your start up costs in oder to have a clear image about how much cash you will need to get things running.
You must keep track of your personal finances during the first months of running your business, as it takes quite a bit to get profit back that's why it's a good practice to keep a record of your household expenses history.
You need to prepare financial statements as they are considered of paramount importance in directing your business to success.
You need to develop a cash flow analysis. As a start up business, cash constitutes the pumping heart of your business. Therefore, you need to keep track and analysis of incoming and outgoing cash to keep things under control.
8. Finance Your Business (If Necessary)
To make your idea pop out of the paper you need financing, so it's good to know the different sources of financing you can get.
As a start up business you can either take a loan from your bank as long as you discuss rates and guarantees terms with them or you can ask for a loan from non-governmental organizations out there and their rates are way too lower than banks.
There are also grants offered by the federal government, the only problem is that they are given to non-profits as well as educational institutions such as medicine, education, scientific research...
Start up companies that couldn't take a loan from traditional sources such as banks can still look for Venture Capital. There are investors who provide young start up businesses with the financing they need in condition to have shares in the business. This type of financing is a long term one or called "patient capital". They mainly rely on the growth of the company to get their profit back.
9. File and Pay Your Taxes When It's Time
The first step to do is get your Federal Business Tax ID, it is the employer's identification number (EIN), it is mainly used to identify your business entity.
After you get your EIN, you need to determine your federal tax obligations depending on the type of your business. You can learn more about these taxes on the IRS website.
You need also to determine your state tax obligations as you have to pay some state and local taxes, each state has its own local tax obligations.
You need to determine the start of your tax year. Your taxable income is figured on the basis of 'tax year' which is an annual period of accounting and keeping records as well as reporting income and expenses.
You can choose between a Calendar Year (consecutive 12 months starting from January 1 to December 31) or a Fiscal Year (consecutive 12 months that end on the last day of any month except December)
10. Hire and Retain Employees
Well, I think your ready to grow the family and hire some employees! So let's take a look at employment and labor laws not to make any mistakes.
First of all, you need to write an effective job description so that you attract the right job candidates.
Before hiring an employee, you must run a background check on them. For example, you can check their credit reports after you obtain a written consent from the employee.
As a lawyer we can work together the possibility of checking a particular employee's criminal record before making a hiring decision.
Keep in mind that it is prohibited to use lie detector tests by private employers.
You can ask for your employer's medical record to check their ability to perform specific job duties. However, the law prohibits discriminating against employees based on their medical records.
You can ask your employee to provide you with his or her school records such as transcripts, recommendation letters. However, these records are confidential, so you cannot ask for them directly from the school without the consent of the employer.
As a business lawyer, I will do my best to assist you throughout all these steps to fully assist you so that you get on your feet and running your small business at home as smoothly as possible.
Mollaei Law is a law firm specializing in business law serving businesses and entrepreneurs. We provide legal expertise in all stages of business development by drafting and reviewing contracts and agreements, assisting transactions and negotiating, forming LLC's and Corporations, registering trademarks and copyrights, business planning, and answering any legal questions you may have about your business.