Congratulations! You’re embarking on the exciting journey of starting a new business. This is an incredibly brave and rewarding journey, but it can also be a daunting one. You’ve come up with a great business concept, but where do you start? And how do you protect yourself in the process? “Legal” issues sound scary. How do you gain a baseline understanding of the risks associated with starting your business and the steps you can take to minimize the risks?
Entrepreneurship doesn’t need to be frightening. Below are a few tips to help protect you and your new business.
1. Form your business entity
Entrepreneurs are often so focused on starting and developing their businesses that they often rush out of the starting gate without actually forming the company first. It may seem like a menial task in the overall process, but it is a very important step, particularly for liability purposes (discussed further below).
Until you form the entity (e.g., a corporation or a limited liability company), you will have personal liability for all actions that you take. This is certainly not ideal, so in order to minimize your personal liability, the entity should be formed before you begin providing any goods or services to customers/clients.
2. Obtain insurance
Your personal automobile and property insurance policies are not designed to cover business claims, so your business should be separately insured. Common types of business insurance include general commercial liability insurance (coverage for general claims involving third party injuries or damages) and commercial property insurance (coverage for general claims involving damage to your business property).
Depending on the nature of your business, additional types of insurance may be required (e.g., professional liability insurance, commercial automobile insurance, workers’ compensation insurance if you have employees). Here is a helpful summary from the Small Business Administration regarding the six most common types of business insurance and what these policies generally cover. Instead of purchasing each policy separately, you can choose to purchase a Business Owner’s Policy (a “BOP”), which includes the protection of multiple policies, but keep in mind that a BOP often does not include professional liability insurance, commercial automobile insurance or worker’s compensation insurance.
The cost of insurance will vary depending on the type of work that your business does, its location and the number of employees that you have. According to Trusted Choice, the median cost of general commercial liability insurance for a sole proprietor is about $500 per year. Be sure to work with an insurance agent that is knowledgeable about commercial coverage, as an experienced agent can provide cost-effective guidance to determine the appropriate policies and coverage levels for your business.
3. Find an accountant
As a business owner, you’ll need to comply with federal, state and local tax regulations. For example, you’ll need to pay annual franchise taxes in the state in which you incorporate and in any other states where you are registered to do business.
Consult with an accountant as early as possible to ensure that you understand your tax obligations and are in compliance on an ongoing basis. Your accountant will also be able to help you find and maintain the right bookkeeping system for your business.
4. Separate your personal assets from your business assets
The business entity that you form is a separate legal entity that can (and should) retain its own assets and incur its own liabilities, separate from your personal assets and liabilities. You’ll want to do everything you can to minimize your personal liability, and the best way to do that is to use your company as the distinct entity that it is.
Once you form the company, you should open a bank account in the name of the business, separate from your personal account(s). You can pay yourself a salary, but these payments should be from the company account to your personal account. Never accept funds from a customer or client directly into your personal account.
5. Execute all contracts in the name of the business
All contracts and agreements relating to your business should be in the company's name, not your individual name.
For example, if Mary Smith forms a company called "MS Goods, Inc." and then wants to enter into an agreement with Vendor A, the agreement should be between Vendor A and MS Goods, Inc. (not Mary Smith).
The result is that the obligations and liabilities of the agreement will generally be incurred by the company, not by Mary personally. If Vendor A wants to assert a claim and seek damages (i.e. for an alleged breach of the agreement), Vendor A’s primary claim would likely be against the company, and, in general, damages would likely be assessed against the assets of the company, not against Mary's personal assets.
6. Get everything in writing
All business agreements and relationships should be documented in writing. I understand it can be time-consuming to stop and document everything, but you’ll likely save a lot of time (and potentially a lot of headache and money) down the road by doing this.
Some key terms to document include the parties to the agreement, pricing and payment obligations (e.g., net 30), delivery requirements and deadlines, and the length of the contract. To the extent possible (i.e. if you’re not using “click-wrap” agreements (where your customers simply click an “Agree” button to accept the terms), agreements should be dated and signed by both parties, as this serves to indicate that your customer/client is agreeing to pay you for your product/services, and you are agreeing to provide the product/services.
7. Protect your intellectual property
Almost every business has intellectual property to protect, and there’s a range of investments and processes you can put in place to protect it.
First, it’s advisable to require your employees and consultants to sign assignment of inventions agreements so that, in the event they develop any intellectual property during the course of performing work for you, this intellectual property will be owned by the company.
You can also protect your company’s trade secrets by requiring your employees and consultants to sign confidentiality agreements. Finally, depending on your business goals, it could also be beneficial to consider applying for a trademark to protect your name and logo.
8. Network and find mentors
Starting a business is a very empowering experience, but it can also be isolating. You no longer have a boss or a supervisor to turn to if you need advice, so you may sometimes feel a bit lost at sea.
Developing and maintaining a network of fellow entrepreneurs will provide much-needed support as you navigate the many twists and turns of business ownership. Finding mentors is even better, as they’ll gain familiarity with your business and can use their experience and network to continuously help you along the way.
Consider having an informal advisory board comprised of other business owners and professionals that can provide useful guidance for growing your business. Attending Pepperlane’s Coffee Chats would be a great way to start building your network.
The content provided herein is for informational purposes only and does not constitute legal advice.
Kate Sams is a Corporate Attorney at Gesmer Updegrove, a full-service law firm in Boston which caters to entrepreneurs and emerging companies. Kate helps her clients form, grow and maintain successful businesses, and enjoys serving as their trusted advisor.