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Start a Small Business

1. BUSINESS NAME

NAME SELECTION: DOING IT WRONG CAN COST YOU THOUSANDS!

A business name is a trademark. A trademark is a source identifier and communicates to the consuming public the source of the goods and/or services. A business name is a source identifier. A business name communicates to the public the source of the goods and/or services.

Because a business name is a trademark, naming a business requires due diligence to ensure your business name will not infringe on another’s trademark.

Trademark Infringement

Trademark infringement occurs when you use someone’s trademark without their permission.

Knowledge of another’s trademark is not required. It does not matter if you started using a business name without knowledge that it belonged to someone else. Use is enough.

Trademark infringement can lead to:

  1. Cease and desist letters and substantial legal fees
  2. Complete rebranding of your business
  3. Loss of domain name. Your domain name may be revoked and assigned to the trademark owner
  4. Products and services removed for websites

The only way to avoid trademark infringement is to own your business name through trademark registration. Here are some tips to help avoid trademark infringement before you register your trademark.

  1. Do NOT use someone’s exact business name This is likely trademark infringement
  2. Do NOT use a business name similar to another business. This is may be trademark infringement
  3. DO research your intended business name prior to use or hire an attorney to assist

REDUCE TRADEMARK INFRINGEMENT RISK

Clearance Search

A business name clearance search is part of the trademark registration process. If you are unable to register your trademark, it is a good idea to clear your business name. However, this is a temporary solution. The report generated as part of the clearance search ages quickly. 30-day life span, at the most. It is best to submit a trademark application ASAP.

2. BUSINESS ENTITY

SELECT A LEGAL BUSINESS ENTITY: RESEARCH AND FIND WHAT’S BEST FOR YOUR BUSINESS

After selecting a business name it is time to select your legal entity (aka business structure). Choosing a business structure is an important decision and should not be rushed. Your business structure will influence every aspect of your business. Including day-to-day operations, taxes, personal liability, ability to raise capital and if your business survives after your death. Thus, it is a decision you should make only after spending considerable time learning about the different types of business structures.

Further, your choice of business structure will determine what documents must be filed to form your legal entity. The following pages discuss common business structures and personal liability. Use this as an introduction to business structures. This ebook only discusses common structures. There are many more.

WHAT STRUCTURE IS BEST FOR ME?

Business Specific

There are many business structures to select from. It’s best to select the structure that works best for YOUR business. View the different types of business structures on the next page. Identify which legal structure(s) is suitable for your business and research each structure in depth before making your selection.

Common Business Entities

1. Sole Proprietorship

Default business structure. If you engage in business without forming a legal entity, then, by default, your business structure is a sole proprietorship. Liability: Unlimited personal liability for business debts and obligations

2. General Partnership

Two or more co-owners who share who share in management and profits. Liability: Each Partner has unlimited personal liability for business debts and obligations.

3. Limited Liability Company

Combines the limited personal liability feature of a corporation with the single taxation feature of a partnership or sole-proprietorship. Liability: Owners are not personally liable for the company’s debts or liabilities

4. Corporation

An entity that meets certain legal requirements to be recognized as having a legal existence, as an entity separate and distinct from its owners. Liability: Owners are limited in their liability to the creditors and other obligors only up to the resources of the firm, unless the owners give personal-guaranties.

 

3. FORM BUSINESS ENTITY

FORM A LEGAL BUSINESS ENTITY: FAILURE TO DO SO PLACES YOUR PERSONAL ASSETS IN JEOPARDY

After finalizing your business name and selecting the appropriate business structure it is time to form your legal entity.

1. SECRETARY OF STATE

Form your legal entity by filing the appropriate paperwork with your state’s SOS. Many states have an online filing option and you may be able to file your documents online. For some structures you must go to your county’s Register of Deeds.

2. DOCUMENTS TO FILE

The documents necessary to form your legal entity depend on your legal structure. You may need to file Articles of Incorporation (for a Corp.) or Articles of Organization (for an LLC), etc.

3. YEARLY REPORTING

You may be required to submit yearly filings with the SOS. It is important to respond to all communications from the SOS as failure to do so may result in the administrative dissolution of your entity.

4. TAX ID NUMBERS

FEDERAL AND STATE: DEPENDING ON YOUR BUSINESS, YOU MAY NEED BOTH
Federal Tax ID Number

Commonly referred to as an employer identification number (EIN), is used to perform important tasks such as paying federal taxes, opening a business bank account, applying for business licenses and permits and hiring employees. An EIN is free and can be obtained instantly.

Visit www.irs.gov to apply. Make sure you visit www.irs.gov to obtain your EIN as some non-government websites charge a fee.

State Tax ID Number

In addition to an EIN, you may need to obtain a state tax identification number. In general, state tax ID numbers are required when your business is providing something other than a service (selling products) or your business has employees.

Tax obligations vary from state to state. It is best to research your state tax requirements to determine if your business must register to pay state and local taxes. Some helpful resources you can utilize are:

  1. your state’s Department of Revenue website;

  2. your state’s tax laws;

  3. your county’s website; and

  4. your city’s website.

5. DETERMINE TAX LIABILITY

Business taxes can be complicated. It is important to fully understand your business’ tax obligations prior to launching your business. If you fully understand your business’ tax obligations you should be able to answer the following questions:

1. At what level(s) will I have a tax liability (federal, state, local)?

There are three tax levels. Federal, state and local (county and city). All businesses are required to pay federal taxes. State and local taxes vary by business type. It is best to contact your state and local officials to determine your state and local tax obligations.

2. What type of taxes will I have to pay?

View the chart on the next page of common federal and state taxes. Remember, your business function and location will determine what taxes you will need to pay.

Common Types of Taxes:

FEDERAL

Income Tax

ALL businesses must pay tax on the profits of their business. How that tax is paid depends on the form of the business.

Self-Employment Tax

Business owners are not employees, there is no pay to withhold these taxes from, so self-employment tax is the alternative.

Employer Tax

Employment taxes are those paid by the owner of a business for several types of taxes based on the gross pay of employees. These include taxes for Social Security and Medicare, federal and state unemployment, and federal and state workers compensation taxes. Some of these taxes (unemployment tax, for example) are not collected from employees, and they must be paid completely by the employer.

Estimated Tax

Because you are the owner of a business, no one withholds income tax and self-employment tax from the money you take out of the business. (You don’t get a paycheck, remember, because you aren’t an employee.)

Excise Tax

Excise taxes are paid by a business for certain types of use or consumption, like fuels, and other activities like transportation and communication. Each category of business tax might have special rules, qualifications, or IRS forms you need to file.

STATE

Income Tax

A direct tax levied by a state on your income. Similar to federal income tax, but at the state level.

Employment Tax

Similar to federal employer tax, but at the state level.

Sales Tax

All states that apply a sales tax have an established rate.

Use Tax

In addition to the sales tax, many states also have a use tax. A use tax is very similar to a sales tax and is imposed for the storage, use, or purchase of personal property which is not covered by the sales tax. Usually, it is applied to lease or rental transactions, or to major items purchased outside of the state, such as automobiles.

3. How does my business structure impact my tax requirements?

Your business structure (business entity) establishes when to pay your federal and state incomes taxes. This is another reason why it is important to research what business entity is correct for YOUR business. If you are required to pay additional state taxes (sales and use, payroll, etc.) this is usually paid on a quarterly basis. Check your specific state laws to remain compliant.

 

6. PERMITS & LICENSES

FEDERAL AND STATE LICENSES: DO IT RIGHT! DON’T GET SHUT DOWN.
Federal Permits and Licenses

If you’re starting a business in a federally regulated industry— firearms, commercial fishing, aviation, etc.—then you’ll need to consult a specific list of business licenses to operate legally in your industry. If your business is in a federally regulated industry you should have an attorney!

State Permits and Licenses

Permits and licenses vary based on the following factors:

  1. Type of business
  2. County
  3. State

It is best to contact your state and local (county and city) officials to determine the permits and licenses required to operate your business legally. The chart on the following page is a list of the most common permits and licenses that affect small businesses:

Common Permits & Licenses
State
  • Occupational

  • Special (Liquor, lottery, etc.)

  • Re-sellers

  • DBA

  • State Employer

  • Fire

  • Sign

  • Building

  • Public Health

7. BUSINESS BANK ACCOUNT

A BUSINESS BANK ACCOUNT IS IMPORTANT! DON’T SKIP THIS STEP

When you form a business entity you are forming an entity separate from yourself. This concept is at the heart of personal liability. When you create a separate entity you are not personally liable for the debts and obligations of the separate entity.This is easier to understand if you think of your business entity as a separate person.

Example 1

April has a friend named Barbra. April and Barbra are best friends. April is always at Barbra’s house. One day after a snowstorm Barbra did not salt or shovel her sidewalk. A person fell and broke their leg on Barbra’s sidewalk. The person sued Barbra and Barbra claimed April is also liable because April is always at Barbra’s house. Is April liable? Of course not!

This same concept applies when you form your business entity. Barbra is your business entity and as long as you are operating your business as a separate entity you retain personal liability protection. Operating as a separate entity includes maintaining separate business and personal bank accounts.

If you are co-mingling (mixing business and personal) funds it can be said that you and your business are not truly two separate and distinct entities. Therefore, you ARE personally liable for the debts and obligations of your business.

Why Does This Matter?

This matters because you want to protect your personal assets. No personal liability means if your business goes into debt, if there is a legal judgment against your business, or your business is unable to satisfy its obligations then creditors and other persons cannot pursue your personal assets.

Let’s revisit our April and Barbra example with a little twist.

Example 2

April is the owner and operator of Barbra’s Butcher. Barbra’s Butcher is a new business venture and is not yet profitable. April sold all of her assets, except her home, to fund Barbra’s Butcher. One day after a snowstorm April did not salt or shovel the sidewalk outside Barbra’s Butcher. A customer fell and broke their leg on Barbra’s sidewalk. The customer sued and won a judgment against Barbra’s Butcher. Barbra’s Butcher does not have enough money to pay the judgment. Can the customer pursue April personally? It depends.

What information do we need to answer the question? We need to know if April was, in fact, operating Barbra’s Butcher as a separate entity. One way to determine this is to see if April separated her personal and business banking accounts. Let’s continue with our example.

Variant One:

It is determined that April maintained separate banking accounts. The remaining balance of the judgment is a debt of Barbra’s Butcher and April’s personal assets, her home, are protected from the judgment.

Variant Two:

It is determined that April commingled her business and personal accounts. April is personally liable for remaining balance of the judgment. April’s home and money in her personal bank account are possible assets that can be used to satisfy the judgment.

As you can see from the examples above it is very important to maintain a separate business bank account. Opening a business bank account is not as difficult as it once was. There are many free and low-cost options for new and small businesses. Take time to research the different options available and open an account prior to launching your business.

8. TRADEMARK REGISTRATION

PROTECT YOUR BUSINESS WITH TRADEMARK REGISTRATION

Trademark registration is NOT required to legally form your business. There are many benefits of trademark registration, but because you are a new entrepreneur let’s keep this short and sweet. One of the biggest benefits of trademark registration is BRAND OWNERSHIP. That’s right, after all the work required to start your business you don’t even own the brand! Brand ownership is the direct result of trademark registration.

Additional Benefits

Permits and licenses vary based on the following factors:

  1. Type of business
  2. County
  3. State

It is best to contact your state and local (county and city) officials to determine the permits and licenses required to operate your business legally. 

 

8 STEPS TO LEGALLY LAUNCH YOUR BUSINESS

  1. SELECT BUSINESS NAME
  2. SELECT BUSINESS ENTITY
  3. FORM BUSINESS ENTITY
  4. OBTAIN TAX ID NUMBERS
  5. DETERMINE TAX LIABILITY
  6. OBTAIN PERMITS & LICENSES
  7. BUSINESS BANK ACCOUNT
  8. TRADEMARK REGISTRATION

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