This is a guest post by Nellie Akalp from CorpNet.com.
Mom entrepreneurs are usually brimming with ideas, energy, and optimism. But they don’t always have a roadmap for the legal aspects involved in starting a business.
In the flurry of drumming up new customers and building out your business, it’s easy to overlook some of the legal and administrative aspects of running a company. As a result, many small business owners commit some common legal mistakes that can have a significant impact on their business. Are you guilty as well?
Here are the top five legal mistakes you can – and should – avoid:
Mistake one: Not checking if you’re legally permitted to use your business name
You thought of the perfect name for your business and brand; but did you check if it’s infringing on the rights of an already existing business? It’s smart to check that a business name is available to use before you order your business cards, as you don’t want to be on the wrong end of a trademark dispute. In most cases, you don’t need an attorney to check if your name is available; you can perform these easy steps on your own:
- Perform a free search online that looks at business names registered with the secretary of state in the state where you’re located
- Take your search to the next level and conduct a free trademark search to make sure your name is available in all 50 states
Mistake two: Choosing the wrong business entity when you incorporate
Forming an LLC or corporation is a critical step to protect your assets from any liability of the company. It can be a relatively quick and easy process, but choosing the wrong business structure can have a significant impact on your business and taxes.
The three most common business structures in the U.S. are the LLC (Limited Liability Company), S Corporation, and C Corporation. The LLC is great for small businesses that want liability protection, but prefer minimal formality and paperwork. The S Corporation is a pass-through entity for federal taxes (like the LLC) and is great for small businesses that can qualify. Lastly, the C Corporation files its own tax report and should be selected by those companies that plan to reinvest profits back into the company or seek funding from a VC.
Here are some of the common mistakes when it comes to business structure:
- A caterer forms a C Corporation and finds herself paying a significant portion of her income in taxes due to ‘double taxation’; her CPA advises her to elect for pass-through S-Corp treatment for next year.
- A freelance web designer forms a Corporation to protect her personal assets and give her business more credibility. However, she soon is overwhelmed with paperwork (like filing meeting minutes and addendums). She should have formed an LLC instead.
Mistake three: Failing to keep your LLC/Corporation compliant
Once you form an LLC or Corporation, your obligations don’t end there. Keeping your LLC or Corporation in compliance is absolutely critical to protecting your assets, building your business credit, and keeping your business in good standing.
Here are the key ways to make sure your business stays in compliance:
- Keep your personal funds separate from those of the business (no commingling: this means keeping a separate bank account and credit card)
- Send in your Annual Statement/Annual Report on time, as required by your state of incorporation
- File for foreign qualification if you’re operating in any state(s) other than your state of incorporation
- Keep the state up to date with any key changes to your business by sending in Articles of Amendment
- Don’t engage in any form of fraud
Mistake four: Not registering a Fictitious Business Name (aka DBA)
You’ve most likely passed over thousands of fictitious business name filings in the classifieds of your local paper. If you have a sole proprietorship/general partnership, a DBA registration must be filed when your company name is different than your own name.
For an LLC or corporation, a DBA must be filed under the Corporation or LLC whenever you conduct business using a name that’s different than your Corporation or LLC name – i.e. if CorpNet, Inc. is doing business as CorpNet.com or CorpNet, then DBA’s need to be filed by CorpNet, Inc. doing business as “CorpNet.com or CorpNet”.
Mistake five: Not obtaining the necessary business permits and licenses
Depending on your business type and physical location, you may be required to have one or more business licenses and/or permits from the state, local or even federal level. These licenses can include: a general business operation license, zoning and land use permits, sales tax license, health department permits, and occupational or professional licenses.
No matter how busy things get, it’s important to take your legal obligations as a business owner seriously. Avoid these five legal pitfalls and if you’ve already committed one of these mistakes, it’s never too late to rectify the situation. Get your business started the right way, and you’ll be set for years to come.
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