Starting Your Business Right: A Legal Checklist For New Entrepreneurs
Many people focus on choosing a business structure when starting a new business. However, choosing a business entity is only one step new entrepreneurs need to take when starting a new business. Starting a Maryland business the right way involves many steps.
The nature of your business and other factors dictate the steps and requirements for starting a business. However, many of the basic steps are the same. Our Maryland business attorney discusses the steps for starting a business in this legal checklist for new entrepreneurs and small business owners.
Legal Requirements for Starting a Business: A Checklist
If you want to start a new business, the first few steps involve defining your company’s reason for existing. Then, you must take care of the legal requirements to create a business before moving on to growing your business into a huge success.
1. Define Your Mission
Creating a mission statement for your company helps define its purpose for being created. The mission statement is just one sentence or a short paragraph explaining the company’s core values, ethics, and culture.
Your mission statement answers the question, What do we do?” It clarifies the goals and purpose of the business, allows employees to understand how their work contributes to the company’s success, and explains how the company differs from competitors. If you do not create a mission statement, you miss the opportunity to shape your company’s business culture and organizational identity.
The best mission statements are SMART statements - specific, measurable, achievable, relevant, and time-bound. It is easy to understand, so anyone reading the mission statement will have a clear idea of what your company does and the values it uses.
2. Define Your End Goal
Your end goal consists of the long-term goals for your company. You need not have specific end goals. The objective is to have a broad idea of the company’s intentions. The aim is to understand the company’s overall objectives and align current business practices and values with those objectives. Examples of the topics for end goals include:
● Customer satisfaction
● Efficiency
● Productivity
● Sustainability
● Performance
● Goodwill and reputation
● Profits and revenue
● Employee satisfaction
Defining your long-term goals lets you develop business strategies to meet those goals. It helps you to create a roadmap of short-term goals that ultimately help you achieve your end goal.
3. Define Your “Who”
“Who” are you in business to reach? Your customer base is the people who will purchase your products or services. Understanding your customer base is essential for marketing. Therefore, identify your ideal customer. Who is the person most likely to want and receive value from your product or service? Once you understand your ideal customer, you can focus marketing toward attracting that group of individuals.
4. Define Your “Where”
The “where” of your company is another essential element you must define. The location of your company can impact many aspects of your business, including, but not limited to:
● Real estate costs
● Attracting and retaining quality employees
● Having an adequate customer base
● Local and state taxes
● Proximity of competitors
● Regulations and zoning
● Growth potential
● Security
● Accessibility of customers, resources, and markets
● Distribution sources
Also consider the impact your location may have on your marketing strategy and your brand perception. A company’s location can significantly impact how customers view the brand.
5. Choose Your Business Structure
The business structure you choose for your company influences all aspects of your business, from the daily operations and taxes to the personal liability risk you assume for company debts and how profits are distributed. Choosing the proper business structure provides the best balance of benefits and legal protections.
A Quick Rundown of the Different Business Entities
Choosing the right business entity is crucial. You may structure your company as a:
Sole Proprietorship
A sole proprietorship does not require any formal paperwork or registration to set up. There is no separate legal entity for the company. The owner and the company are the same.
Sole proprietors are responsible for all company debts and liabilities. While it is simple to form a sole proprietorship, the cons may outweigh the simplicity. It can be difficult to obtain funding, and your personal assets could be seized to pay company debts.
General Partnership
A general partnership involves two or more people going into business together. Each partner contributes to business operations and shares in the profits. Like a sole proprietorship, the partners in a general partnership are personally liable for the partnership’s liabilities. Unless a partnership agreement states otherwise, the law presumes the general partners are equally liable for the company's debts.
Limited Partnerships (LPs) and Limited Liability Partnerships (LLPs)
A limited partnership (LP) has only one general partner. The general partner has unlimited liability for business debts. The limited partners have limited liability for business debts, but they also have limited control over the operations of the partnership. The rights and responsibilities are defined in the partnership agreement.
A limited liability partnership (LLP) shields all partners from some liability for partnership debts and legal problems. The partners will not be responsible for the actions of other partners.
Limited Liability Company (LLC)
A limited liability company (LLC) is formed under state law. It has members (i.e., owners) who operate the business based on its operating agreement. LLCs are popular business structures for small to medium-sized companies because they provide limited personal liability for the owners with maximum flexibility. A limited liability company is easy to set up and operate.
Corporation
Corporations provide the most personal liability protection for owners. Owners purchase shares of the company. Shareholders are not personally liable for company debts. However, corporations are the most difficult business entity to create and maintain. The company must follow numerous formalities such as annual shareholder meetings, by-laws, and corporate officers to oversee business operations.
6. Select Your Tax Treatment
In most cases, you select your company's tax treatment when choosing a legal structure. While choosing to be an LLC allows the entity to choose how to be taxed, the Internal Revenue Service (IRS) restricts how other business structures are taxed.
Understand the Tax Treatment for Your Business Entity
When choosing the structure for your company, it is crucial to understand the tax treatment for different types of businesses. Here is a rundown:
Tax Treatment for Sole Proprietorships
A sole proprietorship is a pass-through entity. All the income the business generates “passes through” the business to the sole proprietor. The owner reports the income or loss on their personal income tax return, generally by filing a Schedule C with their tax return. The business income is taxed based on the owners’ personal income tax rate.
Tax Treatment for Partnerships
Partnerships are also pass-through entities for tax purposes. The partnership files an informational partnership tax return with the IRS, but the partnership itself does not pay taxes on the income generated by the company.
Instead, each partner receives a Schedule K-1 from the partnership reporting the partner’s share of the company's profits or losses. The partners must report the income on their personal tax returns and pay taxes based on their individual tax rates.
Tax Treatment for Corporations
Corporations file corporate tax returns and pay taxes on income the company generates at a corporate tax rate. Shareholders receive statements from the company reporting dividends the shareholders received. The shareholders must report the dividends as income and pay taxes on the dividends. Therefore, the profits a corporation earns are taxed twice.
Tax Treatment for Limited Liability Companies (LLCs)
The tax treatment for LLCs is more complicated. By default, a single-member LLC is treated as a sole proprietorship by the IRS for tax purposes and a multi-member LLC is treated as a partnership by the IRS for tax purposes. Therefore, the income would pass through the LLC to the members. The members report the income on their own tax returns and pay income taxes based on their individual rates.
However, an LLC can elect to be taxed as a corporation. If so, the LLC files a corporate tax return and pays corporate taxes on the business profits. Members would pay personal income taxes on profits (dividends) in the year received from the company. However, if the LLC chooses to be taxed as an S-corporation, the LLC does not pay income tax on its profits. Instead, the LLC’s profits are allocated to its members, who must pay income taxes on the profits.
7. Register With Your State
After choosing your business structure, you must register your business with the state. In Maryland, businesses are registered with the Maryland Department of Assessments & Taxation. You can register the business online but you must ensure the paperwork is complete and all fees are paid.
There is no legal requirement to file particular forms in Maryland to start a sole proprietorship or general partnership. However, these business structures must comply with state and local taxation and licensing requirements. Therefore, you must register sole proprietorships and general partnerships with the state to assess business personal property for tax purposes and issue state and local licenses if required.
8. Obtain Your Employer Identification Number (EIN) From the Internal Revenue Service
Most businesses need an Employer Identification Number (EIN) from the IRS. Reasons your company may need a federal tax ID number include:
● Paying federal and state income taxes
● Hiring employees
● Opening a business bank account
● Obtaining a Maryland tax identification number from the Maryland Comptroller’s Office
You can apply for a federal employer identification number for your business entity through the IRS website. If you are unsure whether your company needs an EIN, talk with a Maryland tax attorney before taking further steps. Failing to have an EIN and comply with tax laws could result in a federal tax audit, fines, and other penalties.
9. Apply for Maryland Tax Accounts and Insurance
You may need to apply for Maryland tax and insurance accounts, depending on your business type and business entity. Examples include:
● Sales and use tax license
● Unemployment insurance account
● Employer’s withholding account
● Tire recycling fee account
● Alcohol tax license
● Sales tax permit
● Motor fuel tax account
● Tobacco tax license
● Admissions and amusement tax account
● Transportation network company
● Transient vendor license
As with your federal tax accounts, it is crucial that you set up the correct tax accounts for your company. If you are unsure how to proceed, it is best to seek advice from a tax lawyer to avoid problems.
10. Obtain Licenses and Permits
The government regulates many industries in Maryland. They require permits and licenses to conduct business. Depending on the type of business and the location, you may require state and/or local licenses and permits. At the very least, most businesses in Maryland require a business license to operate.
Also, remember that you and your employees may require professional or occupational licenses, depending on the services you provide. You are responsible for making sure everyone working for the company has a valid professional or occupational license, if required.
11 Open a Separate Business Bank Account
Open a separate business bank account for your company. Depending on the business, you may need more than one type of company bank account. Regardless of the business entity you choose, it is crucial that you keep good records.
Failing to keep accurate books and records can cause several problems. If your company is audited by the IRS, failing to keep good records could lead to additional taxes, fines, and penalties. In the worst-case scenario, you could be accused of tax fraud.
Failing to keep good records could result in personal liability for the debt if your company is sued. Maintaining limited liability for company debts requires maintaining the company’s structure and separate entity. Commingling funds could dissolve the protection. Therefore, keeping personal and business finances separate is vital.
12. Plan Your Funding
You must have a business plan to fund your new business if you want it to succeed. Funding a business can be one of the most challenging elements of starting a new company. How you fund your company could impact your choices for business structure and operations.
First, determine how much funding you will need to open your company. Don’t underestimate your costs. Also, remember to plan for increased costs as your business grows.
Steps to take when creating a funding plan for your company include:
● Understand the types of costs your company will incur, including one-time vs. ongoing costs
● Identify the startup expense for creating the legal entity and getting the doors open for business
● Project your cash flow to determine whether you need to cover expenses until you generate a profit
● Identify financing methods, such as small business loans through the Small Business Administration (SBA), bank loans, crowdfunding, investors, lines of credit, etc.
The money you need to start a business varies considerably based on numerous factors. Opening a brick-and-mortar store can be much more expensive than creating an online company. You may want to consider consulting with a business financial planner if you are unsure what costs are involved in starting and operating a new business and how to estimate those costs.
13. Set Up an Accounting System
An accounting system is an essential element of the financial structure of your new business. There are several accounting systems you can use, so there is no one-fits-all system. However, your accounting system should make sure all financial records are accurate and complete.
You may find using a computer software suite that combines all accounting functions works best. Accounting systems can track and record information related to customers, vendors, employees, inventories, owners, and taxes. The symptoms integrate all financial aspects of the business operation into one software suite.
Choosing an accounting software system that can grow with your business is helpful. Also, look for a company with exceptional customer service if you have questions or problems.
14. Understand Industry-Specific Regulations
Industry-specific regulations are rules and laws that apply to companies within a specific industry. They are developed and enforced by regulatory bodies, external entities, or industry bodies. Industry regulations cover a wide variety of topics including:
● Product safety and quality
● Financial auditing and reporting
● Employment practices and labor laws
● Data security and privacy
● Corruption and anti-bribery
● Environment protection
Failing to understand and comply with industry-specific regulations can result in legal and financial penalties. When companies fail to comply with industry regulations, they may lose the trust of their customers. The company’s reputation could suffer, causing a downturn in business.
15. Protect Your Brand and Intellectual Property with Trademarks and Copyrights
Protecting the brand you create is essential, including protecting your intellectual property and trade secrets. Work with an attorney to file patents, copyrights, and trademarks before you open your business. Create a strategy for protecting intellectual property, including monitoring for infringement activity. Your brand and creative ideas set you apart from companies with similar services and products in a competitive market.
16. Determine Your Liabilities and Insurance Needs
Every company has liabilities it must pay. Liabilities include operation and overhead costs. However, the company may incur unexpected liabilities and expenses. Performing a risk analysis identifies specific threats to the company from all types of sources.
Internal risks include marketing, financial, workforce, and operational risks. External risks may include a changing economy, natural disasters, government regulations, new competitors, and changes in consumer demand.
Companies can use business insurance to protect against liabilities from various risks. Examples of insurance coverage your company may need include:
● Obtain workers’ compensation insurance
● Business interruption insurance
● Vehicle insurance
● Errors and omissions insurance
● Product liability insurance
● Data breach insurance
● Business income insurance
● Property insurance
● Unemployment insurance
● Commercial umbrella insurance
● General liability insurance
● Directors’ and officers' insurance
● Professional liability insurance
You can discuss recommendations for business insurance coverage with your insurance agent. A Maryland business lawyer may suggest additional insurance coverage you need based on the type of business you own and your risk assessment.
17. Set Up Basic Contracts
Before engaging in any business transactions or hiring employees, set up basic contracts for your business. Contracts are the foundation of a successful business. They define the obligations and rights of parties to a transaction. A well-crafted business contract can protect your company from liability and reduce the risk of business litigation.
The types of contracts a small business should discuss with their attorney include:
● Agreement for the Sale of Goods
● Suety Contract
● Bill of Sale
● Employment Agreement
● Limited Warranty/Warranty Agreement
● Non-compete Agreement
● Independent Contractor Agreement
● Non-disclosure Agreement
● Employment Separation Agreement
● Confidentiality Agreement
● Sales Representative Agreement
● Equipment and/or Real Property Lease Agreement
● Covenant Not to Sue
● Indemnity Agreement
● Release and Settlement Agreement
● Partnership Agreement
● Franchise Agreement
● Vendor and Supplier Agreement
This list is not comprehensive. Your business lawyer will advise you on the types of contracts and agreements you need to protect your business.
18. Hire and Classify Your Employees
When you hire employees for your new company, you must comply with Maryland and federal labor laws. If you have never hired employees, it is essential that you work with an attorney to help you establish policies and procedures that comply with laws such as:
● The Fair Labor Standards Act (FLSA)
● The Civil Rights Act of 1964
● The Occupational Safety & Health Act (OSHA)
● The Family and Medical Leave Act (FMLA)
● Maryland Healthy Working Families Act
● Maryland Fair Employment Practices Act
Employment laws protect workers from discrimination and harassment. The laws provide for fair wages, overtime, and safe working conditions. Employment laws also protect workers from on-the-job injuries, violations of their privacy, and being denied the right to engage in collective bargaining.
Make sure your employees are classified correctly as employees or independent contractors. Independent contractors do not have the same rights as employees to benefits and other protections. You also do not pay employment taxes for independent contractors. Misclassifying an employee as an independent contractor to avoid paying taxes or providing benefits could result in substantial fines and other penalties.
Resources for Growing Your Business
You have set up your new business and are ready to open your doors for business. The focus now shifts to growing your business. Tips for growing a successful business include:
Develop an Intellectual Property Strategy
When you create something of value, you need to protect it. IP protection is an essential element of your company’s success. Begin with an IP audit to identify intellectual property and trade secrets. Take the necessary steps to protect IP assets, including filing for copyrights, patents, and trademarks.
Develop a strategy for protecting confidential information and trade secrets, such as non-disclosure agreements and confidentiality agreements. Also, a strategy to monitor and deal with IP infringements must be developed.
Employee Training and Development Programs
The importance of providing sufficient employee training and development programs cannot be overstated. Your company is only as good as your employees’ work. Continued training for job performance, protection of IP assets, legal and compliance issues, and customer service will help your business grow.
Digital Compliance
With growing internet use, companies must comply with ever-changing digital protection laws. Federal laws govern digital privacy, but many states have enacted laws. Maryland’s Personal Information Protection Act is one example.
Companies must identify all digital and data protection laws that apply to their company based on where they conduct business. Companies that do business overseas may be subject to additional laws, such as the EU’s General Data Protection Regulation.
Another component is the technology use and privacy policy of your website. It is crucial that you include legal language on your website defining the private information you collect and how that information is used and stored.
Companies benefit from consulting digital compliance professionals who can help them develop their website policies and other procedures to comply with data protection laws.
Develop a Compliance Calendar
When you identify the various regulations and laws that apply to your company, create a compliance calendar to track important regulatory and legal deadlines. Deadlines could include license renewals, tax filings, and annual reports.
Compliance With Local Zoning Laws
It is easy to overlook local zoning laws and how they impact your business operations. Research the zoning laws for your office’s physical location to ensure you comply with zoning laws. Don’t forget to check for different or additional laws as you branch out and open additional physical locations in other areas.
Regulations for Exporting and Importing Goods
Many new companies are obtaining materials and/or goods from overseas. They may also ship their goods overseas. You are responsible for knowing and understanding the regulations and laws for exporting and importing goods, including required licenses and customs regulations.
Environmental Regulations
The government heavily regulates many businesses because their activities impact the environment, including companies that involve agriculture, manufacturing, and chemicals. Verify whether your company is subject to environmental regulations and how those regulations impact your compliance strategy.
Accessibility Requirements
Companies must comply with all requirements under the Americans with Disabilities Act (ADA). Many business owners focus on making their physical location ADA-compliant. However, don’t forget that you need to ensure digital accessibility for websites.
Emergency Preparedness and Business Continuity Planning
Unexpected situations can cause costly business disruption, such as pandemics and natural disasters. The illness or death of an owner could also throw the company into chaos.
You can minimize the adverse impacts of unexpected situations by developing an emergency plan to address various situations, including a business succession plan, in the event of the owner’s death or illness. You may also want to purchase special insurance that covers losses from unexpected events that disrupt business operations.
Should I Consult Professionals Before Starting a New Business in Maryland?
A Maryland business attorney can help you with numerous aspects of starting a business, from choosing a legal entity and protecting your intellectual property (IP) rights to dealing with tax issues and providing legal advice regarding risk management and regulatory compliance. Your business lawyer can also help you locate other professionals to help with a new business, including accountants, marketing consultants, IT professionals, and human resource consultants.
Contact Our Maryland Business Attorney for More Information
If you are starting a new business in Maryland, contact Thienel Law for a consultation with a business & tax attorney. We provide comprehensive legal services for business owners in Maryland, including fractional general counsel.
