Having a great idea for a product or service is usually the first step to opening a new business. The nitty-gritty details of forming and operating the new business may not be as exciting, but they are just as essential. Here are the four most common legal decisions that owners of start-up businesses will need to make.
Formation – To LLC or Not to LLC?
There are many different considerations when choosing the appropriate business entity for your new business. More recently, the limited liability company or “LLC” is typically the business structure of choice, largely because there are fewer corporate formalities for LLC’s to observe compared to corporations. For example, an LLC is not required to have a Board of Directors or a specified number of officer positions, but corporations have such requirements under New Jersey law. Owners of an LLC are referred to as “members” whereas owners of a corporation are referred to as “shareholders”. Generally speaking, an LLC is the business entity with the most flexibility: it has the benefits of a partnership when it comes to management and economics and the benefits of a corporation when it comes to shielding members from individual liability.
Deciding which legal entity to choose can also be crucial when it comes to taxes and taking distributions from your new company. The default tax classification for LLCs is for them to be treated as partnerships or disregarded entities for federal income tax purposes. Which tax classification to choose should be done in consultation with your attorney and accountant, and may depend on whether the membership interests in the LLC are owned equally (i.e., 50/50) or unequally (i.e., 60/40 etc.). .
The easiest, but the least preferred method of business ownership is the sole proprietorship. In this form, the individual owner remains responsible for all debts and other liabilities of the company. Business owners can avoid this type of liability by forming an LLC or a corporation.
Another detail to think about is which licenses the business needs. Some businesses need a federal license, such as those that sell firearms, make or sell alcohol, broadcast over the TV or radio, or transport goods or people commercially. Others need licensing at the state level. In New Jersey, for example, a state license is required for businesses that perform home improvement services, offer childcare, build homes, prepare and sell food, or provide medical care, among others.
Obtaining a business license usually requires owners to pass an exam, complete training courses, get the right insurance and to pay fees to the State. While seemingly complicated, these rules protect both the business and its customers. Not obtaining a proper license can result in business closure, fines or even legal consequences.
Employees vs. Independent Contractors
Business owners need to decide whether to hire employees or use independent contractors as needed. The difference between the two is important, especially regarding taxes. Businesses that hire employees have to pay employment taxes and withhold income taxes, as well as withhold and pay Medicare and Social Security taxes and obtain workers’ compensation insurance. Hiring independent contractors does not require these steps.
Be cautious in how you categorize your workers. Some businesses try to get away with hiring independent contractors and treating them like regular employees, which is against the law. Business owners are not allowed to require contractors to work at a certain time like they can with employees, and they generally have less say over how contractors do their job. Business owners who want regular employees need to comply with the federal and state withholding requirements and pay the other related taxes or they risk facing financial and legal penalties.
Contracts & Agreements
Owning a business means you will be required to consider multiple contractual obligations. They range from commercial leases, purchasing agreements with vendors and suppliers to payment agreements with lenders, and when necessary, protecting your confidential business information when employees leave your business. Regardless of the contract, it’s important to understand the benefits, obligations, and loopholes before signing on the dotted line. Form contracts from the internet are rarely the answer and are usually not designed to fit a business’ specific needs.
The best decision is to have your lawyer look over any contracts before agreeing to the terms. Otherwise, you may enter into unfavorable commitments or commitments you can’t possibly adhere to, landing you in legal trouble. Many business owners skip talking to a lawyer because they don’t know what to expect or simply don’t want to pay any legal fees. Skipping this step can be penny-wise and pound foolish, costing even more money in penalties, fees and damages.
You can rely on Askin & Hooker, LLC to be a valuable resource and ally for your new and existing business. Whether you have questions about the initial formation of your business, contract negotiations, or the resolution of internal or external disputes, we can provide strategic guidance and practical results-oriented legal counsel. Contact us today to set up a consultation.