Starting a business is a thrilling experience; the excitement of making your dreams comes true and executing your wonderfully laid out business plan. Nevertheless, this vision could fall apart despite the perfect planning and the thoroughly-mapped out marketing plan if you lose one liability lawsuit. This is why you shouldn’t dismiss your legal obligations and establish the liabilities for your startup before you embark on your business adventure. So, without further ado, let’s get to the legal requirements you should meet to start your business.
Understanding Legal Liabilities
Before we delve into the necessary legal liabilities for entrepreneurs, let’s take you step by step to help you get a grip around what is considered a liability and whatnot. Being liable for something means that you will be financially held accountable for any mishappenings occurring to your business. Whether it was by sheer accident or because you failed to meet a requirement of your client or because you did something you weren’t supposed to do. Everything has a legal consequence, and therefore, it is best to know your legalities to avoid trouble.
How Can I Establish Legal Liability?
1. Choose A Business Structure
The first step you should take toward meeting your legal obligations is determining your business structure. Luckily, there are a variety of options to choose from according to your needs. However, everything has pros and cons; hence, good research is key in determining the disadvantages you can afford. Let’s delve into the different business structure options available.
We first have LLC (Limited Liability Company), which protects you as an individual from legal liabilities. Meaning that if your business declares bankruptcy or is sued by another individual or entity, your personal assets remain unharmed. So, you needn’t worry about your car or home. C-Corp (C Corporation) is also another option for self-protection. It is simply a company that is considered a legally separated entity from you- the business owner. With a C-Corp, the owners of the company are considered shareholders. If you were to be the only owner, you’re then considered the majority shareholder.
Nevertheless, forming a C-Corp is more complex; the differences between an LLC and a C Corporation mainly lie in the taxation system. To the IRS (Internal Revenue Service), a C-Corp is an individual taxpayer and since the income doesn’t pass through the shareholders, the corporation files the income taxes separately. On the other hand, as a member of an LLC, you are subject to self-employment taxation and your business income taxes are filed as part of your personal income tax.
2. Register A Business Name For Your Startup
After you’ve chosen the business structure that works best for you, you then need to register a name for your company. Make sure that the name is not claimed and represents who you are and your objectives. This can be done in different ways; you can either choose between an entity name, a trademark, a DBA (Doing Business As), or a domain name. The fundamental difference between the first two is that an entity name provides legal state protection for your business, whereas a trademark protects your business legally at the federal level. As per the DBA, also referred to as FBN (Fictitious Business Name), allows you to operate your business and brand it, but doesn’t provide legal protection. Finally, a domain name, in simple words, is an identification string that allows you to claim a website’s address on the internet for your business.
It’s also important to note that if you’re a sole proprietor and don’t register for a DBA, the business name will fall under your legal one. For example, if your name is “John Smith”, your business will be branded as “John Smith” by default instead of “John Smith Inc.”.
3. Protect Your Business With Insurance
Anything can happen in the world of business, so you need to prepare yourself for the worst-case scenarios and have good coverage for any possible losses. Business insurance will protect your business as well as your personal assets. By law, you are obligated to have certain types of insurance, such as disability and unemployment insurance. So, let’s talk about some insurance option plans. General Liability insurance protects against a multitude of financial losses, such as lawsuit settlements, injury, property damage, medical issues, and more. Product Liability Insurance is for businesses that provide products to the market; it helps protect you from any complaints in case your product is defective or has harmed someone. Commercial Property Insurance will help you get through the tough times of natural disasters and such in case your business property is damaged.
We cannot possibly sum up every precautionary measure you should take to keep your business and yourself safe. Therefore, it’s important to do a lot of research and highlight everything experts advise to keep in mind. It’s also important that you don’t make haphazard decisions without thorough research and planning. So, look for professional consultants and business advisors to guide you through the process and help you settle on the best liability plans according to your needs.