Starting something new is exciting. Whether it’s starting a business, building a website, writing your book or creating some kind of product or service, the sky seems to be the limit. But before you jump in with both feet there’s something super important that you were probably overlooking: the legal side of things.
Most creators and entrepreneurs, to be honest, skip over legal requirements because they seem boring or complex. They are thinking, “I’ll deal with that later.” But overlooking legal issues from the start can cause serious problems in the future — ones that could cost you money, time or your entire project.
This article is going to take you through the most vital legal things that you need to know before making anything. We’ve got you covered: protecting ideas, taxes contracts, regulations and more. When it’s all over, you will have a roadmap to help ensure your project stays legally sound from day one.
Legal Stuff That Matters More Than You Think
Let’s start with the basics. Why you should worry about legal when starting out?
And first, legal protection ensures that your work is kept safe. If you build something of value and you don’t safeguard it in the right way, others take your idea or copy your product, or try to take ownership of what you’ve built.
Second, abiding by the law prevents costly legal actions. Being sued can be a bank-draining and reputation-killing experience. And even if you win, legal fights are stress-ridden and time-consuming.
Third, having the right legal foundation helps to establish trust with customers and partners. When folks see that you’re running things professionally and above board, they are more inclined to do business with you.
And finally, knowing the legal requirements from the beginning means you won’t have to solve problems later. Changing your business structure or remedying trademark problems after you’ve already launched is far more difficult and expensive than getting the details right from the get-go.
Choosing the Right Business Structure
Here’s one of the first legal decisions you’ll make: what structure your business will have. This decision will dictate how much you pay in taxes, how exposed your personal assets are and the amount of paperwork you have to complete.
The most simple will be sole trader. You’re the sole owner and your business is essentially a reflection of you. The downside? When something goes wrong, they can come after your personal money and property.
Partnership sometimes succeeds with respect to business ownership; that is, when two or more persons own the business. You will need a partnership agreement — it should clarify who owns what, who does what work and how the profits are divided.
LLC is so common because it protects your personal assets. If the business gets sued or falls into debt, creditors generally can’t go after your house, car or personal savings. LLCs also give you flexibility in how you’re taxed.
Corporation is more complicated, but provides the strongest protection and it’s easier to raise money from investors. You can even become a C-Corporation or an S-Corporation, with different tax rules.
| Business Structure | Liability | Tax Treatment | Complexity | Best for |
|---|---|---|---|---|
| Sole Proprietorship | Unlimited | Simple | Low | Freelancers, solo creators |
| Partnership | Unlimited | Pass-through | Medium | Small teams |
| LLC | Limited | Flexible | Medium | Most small businesses |
| Corporation | Limited | Double taxation (C-Corp) | High | Growing companies, investors |
For most people just starting a business, however, I recommend either a sole proprietorship or LLC. Consult a lawyer or accountant to discuss which is best for your scenario.
Guarding Your Works of Music and Ideas
If you are making something new, whether it’s content, software, art, music or inventions — you should know about the different ways to protect your work through intellectual property.
Copyright safeguards creatively worked things like writing, music, art, videos and software code. The good news is: copyright protection is automatically awarded once you create something original. But filing your copyright with the government means you have stronger legal rights if someone copies your work.
Trademarks protect the names of your business, logos, slogans and other things that distinguish your company. Before you land on a business name or logo (or song title, product name or book cover), check trademark databases to make sure no one else is using it. You can file for trademark protection on your own or pay a lawyer to do it.
Patents are meant to protect creations of the mind and useful ways of doing things. A patent is time-consuming and costly to obtain, but it prevents others from using or selling your invention for 20 years. If you have truly come up with something new and valuable, then a patent might be worth the investment.
Trade Secrets are confidential business information that provides you a competitive advantage– such as recipes, formulas, customer lists or business strategies. To safeguard trade secrets, you have to actually keep them secret, through nondisclosure agreements and other means of security.
Before you sit down to create, do your research. Be careful not to unwittingly reproduce someone else’s protected work. And when you create something of value, do everything you can to protect it.
Contracts and Agreements to Keep You Safe
No one said contracts are sexy, but they’re your best defense. A solid contract spells out what everyone agrees to do, leading to fewer misunderstandings and disputes.
Client Contracts detail what work you’ll do, when you have to do it by, how much will be paid and what happens if someone doesn’t meet their end of the bargain. Leave no stone unturned when a client wants your services and always make sure there is a signed contract before you get into work, no matter how credible or trustworthy the person requesting your services may be.
Partnership Agreements are necessary if you’re working with cofounders or business partners. These papers explain who owns what fraction of the business, how decisions are made and what happens if someone wants out, and how disagreements get resolved.
NDAs — Non-Disclosure Agreements are in place to protect confidential information. If you have to discuss business secrets with employees, contractors or potential partners, arrange for them to sign an N.D.A. in advance.
Terms of Service and Privacy Policies — Essential for a Website or Web App. If you are running a website, you need to have Terms of Service (TOS) and a Privacy Policy in place. Terms of service set the rules for using your platform. A privacy policy explains to people what you do with the data you collect.
Licensing Agreements If you are using someone’s intellectual property, or allowing others to use yours, it matters. These contracts lay out in no uncertain terms what is and isn’t allowed.
Don’t use templated contracts that you don’t understand. Better yet, consult lawyer to review important contracts before signing on.
Acquiring the Right Licenses and Permits
Depending on what you’re making and where, you might need a number of licenses, permits and certifications. Businesses can be fined, shut down and even face criminal charges for operating without necessary licenses.
Business License is typically provided by your city or county. The rules differ depending on where you are and what kind of business you have.
Professional Licenses You need Professional Licenses for some jobs. The lifeblood of professionals – including lawyers, doctors, accountants, contractors and real-estate agents — is government’s belief that it may not be done legally without a license.
Sales Tax Permit if you’re selling physical goods. You’re required to collect sales tax from customers, and remit that money to the government.
Health Permits are required to operate any business that handles food, health care or is in other ways hazardous to the public health.
Zoning Permit will ensure that your business can legally operate in this location. Even if you are working from home, make sure your city permits home-based businesses in residential areas.
You may need Federal and State Registrations based on your type of business. For instance, companies that trade in goods need customs registration.
Study what licenses are required for your case. Your local Small Business Administration office or business lawyer is likely to be able to tell you what those are.
Tax Requirements You Can’t Ignore
Taxes are complicated, but also inescapable. The government will catch up with you one day, and the penalties for not paying tax are severe.
You can think of the Employer Identification Number (EIN) as a social security number for your business. You will need one to open a business bank account, hire employees and file certain tax forms.
The earnings of an enterprise are subject to Income Tax. How you pay will vary based on the type of business structure. Business proprietors report their business income on their personal tax returns. LLCs also get to decide how they are taxed. Corporations file separate tax returns.
Self-Employment Tax is the Social Security and Medicare tax for self-employed individuals. If you are a sole proprietor or one of several partners, you will pay this in addition to income tax.
You may need to pay Estimated Quarterly Taxes if you anticipate owing over a certain amount. Rather than paying your taxes once a year, you send in checks every three months.
Products may be subject to Sales Tax. The rules are different everywhere, so look up what applies to you.
Employment Taxes kick in when you hire employees. You will have to withhold income tax and Social Security/Medicare from employee paychecks as well as pay your share of the employment taxes.
Put aside money for taxes as you make money. New business owners often paint themselves into a corner because they spend all their revenue and don’t set anything aside for the tax bill. A reasonable estimate is to put 25-30% of your income aside for taxes.
Employment Laws If You’re Hiring
Thinking about hiring employees or engaging contractors? There are legal distinctions between the two, and getting it wrong on workers can lead to significant penalties.
Employees are directed and controlled by you. You tell them what, and when, they will be working. As an employer, you need to withhold taxes, carry workers’ compensation insurance and adhere to employment laws about minimum wage, overtime and workplace safety for employees.
Independent Contractors operate as owners of their own businesses and work on a self employed basis. Your employ them for certain tasks, but you don’t tell them how to do the work. Self-employed contractors are responsible for their own taxes and insurance.
The government has quite strict rules about who is and is not a contractor and employee. Simply calling someone a contractor does not in fact, make them one. If you treat contractors like employees (you set their hours, provide equipment and insist they work only for you), the government may indeed decide those workers are indeed employees — but in arrears, since you will now owe back taxes and penalties.
Employment Laws cover many areas:
- Laws against discrimination ensure you don’t treat people differently because they are of a different race, gender, religion, age (or on the basis of other contextually defined “protected characteristics”)
- Minimum wage and overtime rules establish what you must pay workers
- Safety at work You must provide a safe workplace under workplace safety laws
- Family and medical leave laws provide time off for specific circumstances
- Unemployment insurance pays benefits to workers who are laid off
Most employment laws apply to even small businesses. Before you add your first employee, consult an employment lawyer or human resources specialist.
Insurance Protection You Shouldn’t Skip
Insurance can feel like a frivolous cost, particularly when you’re barely getting started, but one lawsuit or financial disaster could decimate everything you’ve put together.
General Liability Insurance covers claims that you are responsible for property damage or bodily injury. For instance, if a customer trips and falls at your business, liability insurance pays medical bills and legal fees.
Professional Liability Insurance (also known as errors and omissions insurance) covers service providers in case someone claims you made a mistake or were negligent. This coverage should be in place for consultants, designers, writers and other professionals.
Product Liability Insurance is necessary if you produce or sell physical products. It includes claims that your product injured someone or damaged something.
Cyber Liability Insurance safeguards in the event of data breach and cyber attacks. If you keep customer data online, this coverage becomes even more important.
You are usually required to have Workers’ Compensation Insurance if you have employees, in most states. It provides assistance for medical bills, lost wages, and other costs after a worker is injured on the job.
Business Property Insurance safeguards your equipment, inventory and physical workspace against fire, theft and other calamities.
The type of insurance you need will depend on your particular business. Speak to your business coverage insurance agent.
Website and Digital Compliance
If you’re building any kind of online presence, there are legal obligations to be met.
Terms of Service explain the rules for using your website or app. They describe acceptable use, cap your liability and protect your intellectual property.
You need to show a Privacy Policy when collecting any personal data of users. It has to describe what information you collect, how you use it and how you protect it.
Cookie Consent laws make it necessary to inform visitors of the use of cookies and other local storage technologies and obtain their informed consent.
Accessibility Requirements exist so that people with disabilities can use your responsive website. The Americans with Disabilities Act has become the basis of lawsuits over website accessibility — and that, in theory, would apply to you.
Copyright and DMCA Compliance is important if people can submit content on your service. You need processes for dealing with copyright-infringement claims.
Laws for Email Marketing such as CAN-SPAM mandate that you provide a simple way for recipients to opt out and honor those requests quickly.
Age Restrictions apply if your content or service is directed to children under 13. There are special privacy laws around children’s data.
Don’t replicate generic policies found on other sites. Laws differ by where you are and the industry sector, so make sure that you have properly drafted policies for your own set of circumstances.
Contracts with Vendors and Suppliers
If you’re purchasing materials, inventory or services from other companies, clear contracts help prevent costly misconceptions.
Purchase Agreements must spell out exactly what you’re purchasing, how much it costs, when shipping occurs and what if anything happens if the goods are defective or late.
SLAs (Service Level Agreements) are vital in the case of outsourcing of core activities. They set out what kind of experience you can expect and limit your recourse if the vendor doesn’t deliver.
Terms of Payment should be cut and dried. When is payment due? What happens if you’re late? Are there early payment discounts?
Dispute Resolution clauses describe resolution of disputes. Because it is so much faster and cheaper than going to court, many businesses prefer mediation or arbitration instead.
Termination Clauses tell us how to break up if the spark has fizzled.
Never sign any contracts without carefully reading every word. Suppliers tend to use one-size-fits-all contracts weighted in their favor. Don’t be shy about bargaining for more favorable terms.
Regulatory Compliance for Your Industry
Specific industries come with specialized rules that you have to adhere to. Those who do not face potential fines, lawsuits or being shut down.
Food and Beverage — Health codes, labeling requirements and FDA regulations apply to Food and Beverage companies. Restaurants, food trucks and packaged food companies are highly regulated.
Healthcare — The health industry is undoubtedly the most regulated of all industries. HIPAA privacy laws, state licensing and insurance regulations all exist.
Financial Services — Banking regulation, securities laws and consumer protection regulations.
Real Estate — The licensing, fair housing laws, disclosure requirements and contracts that must meet legal standards are all part of what makes Real Estate so tricky.
Manufacturing — The production process has to adhere to product safety norms, environmental laws and workplace security regulations.
Internet Businesses — New laws in respect of data privacy, consumer protection and online commerce.
Look into the specific rules that concern your field or sector. Trade groups, industry lawyers and regulatory agencies can offer some navigation.
Record Keeping and Documentation
Good record-keeping practices aren’t just efficient — they are required by law.
Financial Records such as: Revenue (income), Cost of Goods Sold, and Receipts for any expenses or Bank Statements should be kept for 3-7 years. The duration to keep records will depend on the type of record and where you are.
You should keep Tax Records for at least 7 years. If you are ever audited, these papers will be how you prove that your tax returns were accurate.
Employment Records such as Applications, Appraisal Forms, Payslips and Dismissal letters should be retained for fixed terms.
Contracts and Agreements — Obtain, store for the duration of the contract and then hold on to for a few years even after closing.
Corporate Documents such as formation papers, bylaws, meeting minutes and ownership records are the permanent type of documents you need to keep forever.
Organize records one way or another—either digitally, on paper or with any other system. A cloud storage with a good backup system makes it so that you don’t have to worry about losing any important document.
What Happens If You Ignore the Legalese
Some might think they’ll save money by ignoring the legal requirements. Here’s what can actually happen:
Government Fines and Penalties can be huge. Operating without the proper licenses, not paying taxes or flouting regulations can cost you thousands of dollars more than if you had done things legitimately.
Lawsuits — Even if you succeed, the lawsuits from your customers, employees, partners or competitors will sap your bank account. Legal defense is at a minimum tens of thousands of dollars.
Personal Liability — You can lose your house and car. If you haven’t established the right business structure and insurance coverage, creditors and winners of lawsuits can come after your house, car and savings.
Bad Reputation travels at the speed of light, particularly in cyberspace. A person or company in legal trouble is a turn-off to would-be customers, collaborators and investors.
Business Growth Limitations — Your legal risks and liabilities come back to haunt you. Investors will not invest, banks won’t lend and partners won’t partner if your legal house is not in order.
Criminal Charges (for specific violations such as tax evasion, fraud or certain regulatory obligations) may be brought.
In the long run, the money and time you spend securing legal compliance up front is nothing compared to what paying to fix things after costs.
Getting Professional Legal Help
Some legal tasks you can do yourself; others, professional help is supposed to be called for.
When to Hire a Lawyer:
- Creating a Corporation or a Complex LLC
- Creating partnership agreements
- Dealing with intellectual property disputes
- When sued or threatened with severe legal action
- Negotiating major contracts
- Dealing with government investigations
- Handling employment issues
Locating the Right Attorney means looking for someone who has handled your type of case. Specialists including business formation lawyers, intellectual property attorneys and employment lawyers specialize in various fields.
Legal Costs vary widely. Some lawyers bill by the hour and those rates can vary from $150 to $500 an hour or more. Some provide services for a fixed fee. Many will hold an initial consultation for free or at a low cost.
Other Service Providers — Instead of old-fashioned lawyers, there are also document-drafting services which form simple contracts and such, web-based legal platforms for common transactions.
Don’t just wait to find an attorney after you need one. Establish a connection with a good business attorney early on so they know your business and can help you prevent problems.
Frequently Asked Questions
Q: If I’m just starting a small side business, do I really need an LLC?
Not all are in need of an LLC straight away but for many side businesses, it might be worth it to consider one. If there’s a chance that your business could end up getting sued or in substantial debt, an LLC spares you from potentially losing personal assets. The peace of mind can be worth the few hundred dollars it costs to establish one.
Q: Can’t I just use a template contract I downloaded from the internet?
Everyone loves a one-size-fits-all form, but let’s be honest, they are likely inadequate either in their content or for application in your specific case subject to the laws of your state. At the very least, get a lawyer to check over your most important contracts before you put them into action. Quality templates from good online legal services may be sufficient for basic agreements.
Q: What is the distinction between a trademark and copyright?
Books, music and art are examples of creative works that copyright protects. Trademark protects brand elements such as the name of a business or a logo. Copyright is automatic; trademark must be registered. Maybe you need both: copyright for your creative work and trademark for your business name.
Q: How do I figure out how much money to put aside for taxes?
Try 25-30% of Your Net Business Income (as a Safe Rule of Thumb). This includes your federal income tax, state income tax (if you live in a state that requires it) and self-employment tax. Your own percentage will depend on how much you make and where you live, so consult an accountant to find the right number for you.
Q: What if I can’t afford a lawyer?
Begin with free resources: Small Business Administration offices, SCORE mentors and legal aid clinics can offer guidance. Make use of online legal services of the quality that provide you with basic documents. Invest in a lawyer consultation on the things that matter most, where legal issues are concerned. Most lawyers work out payment plans with clients.
Q: Do I need a privacy policy if I’m not collecting personal information?
If your site has any forms, analytics or cookies, you are collecting personal information and should have a privacy policy. Even simple contact forms gather email addresses, which qualify as personal data under most privacy laws.
Q: When do I need business insurance?
Before you start opening your doors or selling a single product. Do not wait until after something has gone wrong. Your insurance company may even refuse to pay a bill for issues that occurred before your coverage began. Get quotes early and budget for insurance.
Q: What if I hire someone on contract, but the government says they are an employee?
The back taxes, penalties and interest on all the employment taxes you should have been paying could be owed by you. The financial penalty can be steep. If you are in doubt, it is best to ask an employment lawyer or HR expert about worker classification.
Moving Forward with Confidence
There are few pleasures in life more satisfying than making something new. And whether you’re creating a business, launching a product, starting something new in your life – that vision deserves to come alive.
Dealing with such legal arrangements may not be the most fun part of the ride, but it’s arguably one of the most important. When I think about the issue of legal compliance, I think it is much like the foundation of a house – it isn’t sexy or out there for everyone to see, riding around in its high heels and skintight jeans turning heads while leaving gawking mouths hanging open. But without that structure holding everything else up, you’d be looking at something that was probably going to fall down before too long.
Start with the fundamentals: Select the right business structure, protect your intellectual property, know your tax obligations and have proper contracts in place. As you get going, purchase insurance, hire legal help when necessary and keep an eye on industry regulation.
Don’t be scared off by the legal stuff. Take it one step at a time. Find out what is applicable in your case, ask when you don’t know and seek professional help for things that are more complicated. Plenty of successful entrepreneurs began their careers with no knowledge of the law — they figured it out as they became successful.
The effort you make to comply with this law is going to save you many times as much. You will sleep better at night with your project being protected. You will also sidestep costly disasters that sink so many promising companies. And also, you will create something that can continue to grow and flourish over the years.
So take that first step. Choose your business structure. Register your trademark. Draft that contract. Do the legal homework. You’ll thank yourself in a few years for starting out with a strong legal foundation.
