Okay. No business owner enjoys doing paperwork. You start your own business to pursue your dream, not to wade through arcane legal filings. Besides, with your business just getting off the ground, who has the money to pay an attorney? You’re often barely collecting a paycheck yourself!
Unfortunately, opening a business means abiding by the rules and regulations of your state. And these rules are one area where ignorance is definitely not bliss.
Our company has helped thousand of startups file legal paperwork with their state government. Based on our experience, here are three of the most common legal mistakes entrepreneurs make.
Mistake #1: Not Limiting Your Liability
Operating a business involves a certain amount of risk. You may take out business loans that need to be repaid, even if your business fails. And you can be sued based on the actions of your business. Your personal savings and your assets are at risk unless you protect yourself.
Many small business owners protect themselves by forming a limited liability company (LLC), which helps reduce their personal liability. You could choose to form a corporation instead, but LLCs have simpler paperwork than corporations. LLCs typically use “pass-through taxation,” which means that the business doesn’t have to file a separate tax return.
To form an LLC, you usually have a partner who owns a share of the company. It doesn’t have to be an equal partnership; each member can own a variable stake in the company. You can also file as a single-member LLC, which means you don’t need a partner. That sounds attractive, but be aware that the liability protection given to single-member LLCs isn’t a matter of settled law in all states.
Delaware, Nevada and Wyoming have legislated that single-member LLCs have the same creditor protection as a multi-member LLC, while Florida, for example, has gone the other way. So, be careful. You don’t want a nasty legal surprise down the road.
Mistake #2: Ignoring Required Business Licenses
Most of us understand that a food service business, like a bakery, needs several licenses to operate. But you may not realize that even a simple, home-based consulting business may need licenses.
For example, if you run a marketing business from your home in Pasadena, California, you will likely need a Home Occupation Permit, a Fictitious Business Name statement, and a General Business License. A Home Occupation Permit authorizes you to do business from a neighborhood residence. A Fictitious Business Name statement (also know as a DBA) discloses any alias under which you may be doing business.
Also known as a Business Tax Certificate, a General Business License is issued by the city and is required for any business operating in city limits. The number of types of licenses you need varies from state to state, county to county and even city to city. To help new business owners understand what they need, the U.S. Small Business Administration has setup a helpful website with links to state resources.
Mistake #3: Failure To File Annual Reports
Ok, so you manage to focus on legal issues long enough to file your LLC papers and get your required licenses. Great! Check that box and move on. But you still have an on-going requirement to file a Statement of Information for your business.
A Statement of Information is a periodic report that ensures the state has up-to-date information about your company. The filing period for a Statement of Information varies from state to state, with some states requiring an Annual Report and others requiring a Biennial Report. California requires an Annual Report for corporations and a Biennial Report for LLCs.
Your Statement of Information isn’t difficult to file, and just requires some basic facts about your company, such as a list of the company’s officers and directors (or members and managers for an LLC) along with their addresses. But you do need to file a Statement of Information in the state where your company is registered and in every state where you are “qualified” to do business. So, if you incorporated in California, but your business is based in Nevada, you need to file reports in both states.
As may be clear by now, the exact rules governing a business vary quite a bit from state to state. When you hear people say that a certain state is “more business friendly” than another, they’re referring to the tax and legal filings required in that state. The mix of rules across the U.S. can make it confusing to know exactly what applies to your business. If you aren’t sure what you need to do, consult with a business attorney.
This article has been edited and condensed.
Stan Huser is the founder of SunDoc Filings, a California-based company that helps entrepreneurs with their business filings in any U.S. state. A pioneer in document filing and retrieval, Stan started his first company in 1979. Connect with @sundocfilings on Twitter.