Five Legal Myths about Startups
Last year, more than *565,000 businesses were started in the U.S. The majority will make it – at least for a number of years – some will not. Unfortunately, many owners believe certain myths about starting and running a business and these beliefs can be their undoing. If you’re thinking of starting a business or have recently begun one, make sure you know fact from fiction so you can be a good statistic!
Myth 1: You can do it yourself.
When getting started, many owners try to save money by doing everything they can by themselves. They form their own corporations or limited liability companies (LLCs) and write their own contracts and other agreements. Doing some legwork can reduce the cost of legal fees and this is a good thing. However, there’s no substitute for professional advice. The cost of legal fees can be cheap in the long run if they save you from expensive litigation or other serious problems.
Turn to an attorney for the following:
- Determining which type of entity is best for your situation (corporation? LLC? sole proprietorship? etc.)
- Setting up the entity you decide on (or at least reviewing submissions if you choose to do it yourself using an online incorporator such as *BizFilings or *Legal Zoom.
- Drafting contracts and other agreements for your business to use.
You can minimize attorneys’ fees by doing some work on your own. For instance, you can use various online templates to write an employee agreement, but then rely on the attorney to view what you’ve done. Find some useful agreements at the SBA site.
Myth 2: A handshake seals the deal.
When you do business, it’s great to have trust. Many in the diamond industry trade millions of gems on a handshake. But for the rest of us, paperwork is better. Oral agreements can lead to misunderstandings and can be difficult to prove in court. In some situations, written agreements are mandatory if you want to sue.
You should put in writing:
- Agreements with co-owners. Partnership agreements spell out terms and expectations of owners and help to settle in advance what happens if one owner wants to leave the business or when partners disagree about things.
- Employee agreements. Make sure that when hired, employees sign nondisclosure agreements so they keep company secrets (pricing, etc.) confidential.
You must put the following in writing:
- The sale of goods for more than $500
- The sale of real estate.
- Agreements that take longer than one year to complete.
Again, templates can minimize legal costs, but are no substitute for a thorough legal review to make sure your interests are protected.
Myth 3: Incorporating protects your assets.
Many owners are under the misimpression that their personal assets are protected if they incorporate or form an LLC. While these entities do protect assets from the claims of many creditors, there are a number of situations where owners remain exposed:
- Co-signing any company obligations, such as leases, business car loans, and lines of credit; in most cases, owners are required to give their personal guarantee.
- Not paying employment taxes to the government. Owners who fail to pay withheld income taxes and the employee share of Social Security and Medicare taxes are personally liable for these amounts.
- Using a business as your personal pocketbook. If you fail to keep business finances separate from your own, then any creditor can set aside the legal protections you thought you had.
Myth 4: No legal protection for the company name is necessary.
Maybe you’ve thought up a clever name for your company or product. Maybe you have a great tag line for advertising. The problem is: someone else may have also had the same idea and taken steps for legal protection. Don’t assume you don’t need to seek protection for your intellectual property (IP).
- Using someone else’s protected name or other IP can expose you to costly lawsuits.
- Not protecting your own IP can cost you in legal fees down the road if another business uses your IP.
Myth 5: Being small makes you invisible to the government.
Businesses are highly regulated at the local, state, and federal levels. While some laws exempt small businesses, many regulations apply regardless of company size. Assumptions that rules or regulations don’t apply or that businesses won’t get caught can get a business owner in serious, and costly, trouble.
Regulations can seem overwhelming. Get started by checking the SBA’s Business Law and Regulation page. Also, talk with your local chamber of commerce or other business organization for guidance on how to stay compliant with government rules and regulations.
Starting a business requires you to open your eyes and dispel the myths that can get you into trouble. When in doubt, ask an expert. There is free help through SCORE.
*Denotes a non-government Website
Barbara Weltman is an attorney, author of several business books including J.K. Lasser’s Small Business Taxes, and trusted professional advocate for small businesses and entrepreneurs. She is also the publisher of Idea of the Day® and her monthly e-newsletter Big Ideas for Small Business®; both are available at www.barbaraweltman.com, and host of Build Your Business Radio. Follow her on Twitter at twitter.com/BarbaraWeltman.
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Your Elevator Pitch: Communicating Your Revenue Model is Key
At our SBDC in Columbus, Ohio we occasionally run a contest called,;Pitch It-. I-s an elevator pitch contest that gives budding entrepreneurs the opportunity to practice their pitch delivery in front of an audience and panel of business development judges. Everyone who hits our stage is excited to have a chance to talk about their business. The passion in their presentation is evident, but what usually is not is how the business will generate revenue. Here Michael Bowers* enlightens us on how to present a pitch the right way.
You have a cool business idea. You are ready to move your business idea to a real business. You are ready to raise money to take your idea to the market. You're out there pitching, pitching and pitching your idea. Why aren't you getting money? Because you aren't telling the investor what they want to hear...How you are going to make money? Let me be clear, I know you are discussing the product, the market, the management team and projected financial statements (the standard stuff) but are you telling them...How you are going to make money?
Put yourself on the other side of the presentation. What would you want to hear? What you wouldn't want to hear is how the entrepreneur thinks they'll make money. You don't want to hear generalities? You want to hear specifically what steps they plan to take to target, sell and close business. Here are a few things you can do to better articulate your intentions:
- Focus on adding value: A couple of years ago I wrote a post called 'Value Inflection Points'* where I discussed the concept of building value in your company by focusing on activities that build value in the business (it's real good, you should read it).
- Focus on 'execution-oriented' activities: Execution is more important than anything else. VC's will tell you that 'A' teams with 'B' ideas will beat 'B' teams with 'A' ideas. This is due to the 'A' teams ability to execute.
- Be specific: Don't talk in generalities. Be very specific in describing your plan to attack the market and get people to buy your product.
- Pitch, don't beg: Think of this as a sales presentation because it is. You are pitching your ideas to investors to get them to buy into your company. Granted some investors are jerks but good investors that like your business will look to create a win-win for both them and you.
- Get help: If this is your first time seeking funding do not go it alone, get some help. There are a number of free resources like the Small Business Development Centers* (click here to find your local SBDC*) or TechColumbus * (if you are in Central Ohio) that are charged with helping entrepreneurs succeed. You should also look at mentors and advisers that have been there, done that to provide you guidance.
- Be flexible: Learn from every experience and apply it to your plan. You may start out on one path but through discussions with customers or investors you can gather valuable feedback on your product that may take you down a more profitable path. Be willing to listen to this advice and incorporate as appropriate.
- Don't beat your head on the wall: This kind of goes along with the previous point but when something isn't working, do't keep using it. I know a guy that has been pitching the same product since 2000 and he has never gotten any investment. His product was actually not too bad when he come up with it but due to his lack of willingness to change he missed his market window and he no longer has a viable product.
- Don't focus on Percentage - focus on Dollars: In the war between investors and entrepreneurs many of the battles come down to valuation. You think your company is worth $20 million and the investor values it at closer to $2 million. What do you do? These difference in opinions can be the difference between selling 10% of your company and 40% of your company. Trust me you won't win this one but if you focus on working to reach a realistic valuation you can reach a level you are comfortable with. Look closely at where the company is really at today and what you need and when you need it to move your company from milestone to milestone. At each milestone what is happening and how is this impacting the value of the company? Work all of this through and bring it back to make a case for where you honestly think the valuation should be.
- What's the bottom line?: I'm not talking about the company's financial bottom line, rather the big picture bottom line. Do you need the money? Are you clear to yourself how you are going to deploy the funds to build your business? If you need the money you have to get it. Don't engage in unnecessary confrontation over silly details. Work to build your case to get the investment.
- Focus on sales and marketing, not the product: Revenue is what will drive value and get investors excited. Everything else is window dressing.
Seeking investment is a challenging process. The key is to put as much detail as you can into what you are going to do to drive revenue and valuation. If you do this and stay committed and diligent, your odds of success will increase dramatically.
Now that I have you thinking drop by the blogs of a few of my friends and consider their thoughts on this subject. Susan Solovic discusses how the professional presentation is key to attracting investors and Caron Beesley shares why your business needs an elevator pitch and how to stand out in the crowd. Happy reading!
You can also find Tonya on twitter at @TonyaWilson
* This hyperlink goes to a non-government website
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How Do I Find an EIN?
No doubt, there are probably quite a few regulatory and administrative items on your new business checklist – getting a permit, registering your business name and more (check out these 10 steps to starting a business for a useful reference point).
One of the key requirements for most new businesses (or businesses that are restructuring) is obtaining an Employer Identification Number, or EIN, from the IRS.
Here’s what you need to know about EINs and how to go about getting one for your business.
What is an EIN?
An EIN is a unique nine-digit number that identifies your business for tax purposes. Think of it as the business equivalent of a social security number (although it shouldn’t be used in place of it).
As a business owner, you’ll need an EIN to open a business bank account, apply for business licenses and file your tax returns. It’s a good idea to apply for one as soon as you start planning your business. This will ensure there are no delays in getting the appropriate licenses or financing that you need to operate.
Who needs an EIN?
An EIN is needed by any business that retains employees. However, non-employers are also required to obtain one if they operate as a corporation or partnership.
Not sure whether you need an EIN? Check out this guide from the IRS. Answering yes to any of the questions in the list means you need one for your business.
Other quirky rules apply, particularly as your business grows, so be sure to check out this guide from the IRS – Understanding Your EIN – for a complete breakdown of the nuances of who needs an EIN.
How to apply for an EIN
The easiest way to apply for your EIN is online via the IRS EIN Assistant. As soon as your application is complete and validated, you’ll be issued an EIN. There is no charge for this service (beware of Internet scams that will try to sell you their EIN application services).
Changing your business structure? Get a new EIN
As your business grows and matures, you may choose to change its legal or ownership structure. For example, a sole proprietor may decide to incorporate or a partnership may be taken over by one of the partners and is operated as a sole proprietorship. In instances such as these, your business will need a new EIN.
There are other scenarios that require a new EIN, such as bankruptcy, a change in a corporation’s name or location and reorganization of a corporation. Check out Do You Need a New EIN? for a complete guide by business structure.
Using your EIN to make tax deposits
If you have employees, you will have been automatically enrolled in the Electronic Federal Tax Payment System (EFTPS) when you applied for your EIN. This allows you to make tax deposits, including estimated taxes and federal employment and corporate taxes, online or by phone.
Lost your EIN?
If you lost or misplaced your EIN, you can retrieve it in the following ways:
- Reference the original notice issued by the IRS when you received your EIN or call the IRS Business & Specialty Tax Line at 800-829-4933.
- If you used it to open a bank account or get a license, contact these organizations they should be able to retrieve your number.
- Find an old tax return. Your EIN should be on it.
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How to Register Your Small Business in Four Steps
“How do I register my business?” is one of the most common questions that new small business owners have. The answer, unfortunately, isn’t as simple as “Go here and fill out this form.”
For most new businesses, the process of getting registered involves several steps (and not always in this order):
- Registering your business name or trade name
- Registering your business as a legal entity – Limited Liability Corporation (LLC), corporation, etc.
- Registering with the right tax authorities
- Registering for the appropriate licenses and permits
Let’s break it down, so that you can see what action is needed on your part one step (and sub-steps) at a time:
1. Register your business name
If you choose to name your business as anything other than your own name, then you’ll need register that trade name or “doing business as” (DBA) name with your state. For example, a sole proprietor called John Smith might choose to operate his business as “JS Painting.” Corporations and LLCs can also register alternate names (as long as they are not being used by other businesses in the state).
There are other factors to consider before you register your trade name, such as trademark infringement. Read more about this and other considerations in SBA’s Choose Your Business Name guide then follow these steps for registering your business name.
2. Register your business as a legal entity
This step will not be required by all businesses. However, if you do decide that your business could benefit from a formal legal structure, such as an LLC or S Corporation, then you’ll need to register your business and file certain documents (articles of incorporation) with your state government. Read more about the different business entity options available to you in this Choose your Business Structure guide.
Many new and small businesses operate under the most basic form of business type – sole proprietorship. A sole proprietorship is basically an unincorporated business owned and run by one individual (no partners are involved), with no distinction between the business and its owner. If you choose this option, you can skip this step and move on to the next one.
3. Register your business with the IRS and state revenue office
Take note of the various sub-steps in this section:
If you have employees, any business partnerships, are a corporation or other organization, you'll need to apply for an Employer Identification Number (EIN). If you don't need an EIN, you can simply use your Social Security Number to administer your business finances.
You’ll also need to request quarterly estimated tax vouchers from the IRS and your state revenue office. These are filled in and returned with your quarterly payments. You can download the IRS forms (1040-ES) here.
If you expect to collect sales tax from customers (for example if you operate a retail or food-service business), you may also need to apply for a sales tax permit from your state’s revenue office.
4. Get the right business licenses & permits
All businesses need some form of license or permit in order to operate legally. This often comes as a surprise to new business owners, especially online and home-based businesses.
From professional licenses (doctors, hair stylists, etc.) to home occupation permits and more, find out what you need in: What to Know about Small Business Licenses and Permits.
If you’re still not sure which licenses apply to your business, contact your local Small Business Development Center, SBA Regional Office or state’s Department of Commerce (they can often connect you with local business resources).
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