What Every Entrepreneur Should Know about Business Law before Launching a Startup

Dixie Somers

November 13, 2014

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Launching a startup is as much about the structure as it is the product or service. Getting the legal requirements right upfront can ensure that the business operates smoothly and avoids many of the common legal quagmires that new companies often run into. Here are a few things every entrepreneur should know about business law before launching a startup in order to avoid running into legal trouble.

Business Structures

Understanding the legal protections that come with launching a business is essential. This is especially the case when entrepreneurs are choosing the business structure that works best for them. If a person wants to protect their assets in the event of a claim and reduce their tax burden, developing a familiarity with the structures is a must. The sole proprietorship structure only permits a person to start a business under a name, but it not represent a separate legal entity. The business owner is liable for any business debts incurred whereas the LLC structure does not. Knowing the pros and cons of each of the available structures is essential for new entrepreneurs in order to have future success.

Understanding Tax Obligations

Knowing the various tax obligations will save the entrepreneur a lot of time when it comes to tax planning and throughout the fiscal year. Every business will have to pay some form of taxes to state and social entities. A familiarity with all of the state requirements will improve your chances of avoiding tax hurdles later on, and can increase savings for the business. There will always be corporate and income taxes for most different types of businesses. Income and employment taxes are the most common forms of taxes that the typical business will be responsible for collecting. Income taxes depend on the structure of the business. Limited liability companies get taxed separately while the sole proprietor structure and the individual are treated as one entity. Employment taxes like worker’s compensation and unemployment are required for all business owners. Some states may even require temporary disability insurance.

Breakdown for the Organization

Having a founder agreement in place benefits all parties involved whenever multiple co-founders are involved. Terms outline in in the documentation include how the company is broken down where ownership is concerned. Breaking down the responsibilities of the individuals involved in everyday operations is also recommended. How the shares will be broken down among members if a founder leaves, and the price at which the shares will be sold is something that should be clearly defined in the documentation. The salaries of the founders and the rate at which the salaries will change are also important topics. In some cases, a founder can be removed from a business, and the contracts need to address those challenges. How every day decisions will be made will improve operations and reduce conflict.

Companies have to be mindful of the many risks that come with opening a startup. Startup entrepreneurs can avoid consequences and pitfalls many other businesses face by paying particular attention to these legal considerations in the beginning stages. Some new business owners think they will pick these things up as they go, but once the business launches, everything will only get more hectic. The last thing you want is to have your business dreams put on hold, or stopped altogether because you neglected to follow legal protocol. The information for this article was provided by the professionals at the Thomas Jefferson School of Law who offer an online masters in law for interested students.