Starting a business has been your priority, but you need help figuring out where to start.
You keep hearing how easy it is to start a business and that you don't even need money to get started. But you don't know what you don't know, and you're scouring the internet searching for the "right" answers and the steps to start a legal business. Rest assured, many of your business questions will be answered here. Questions you didn't even know you should ask. I sat down with Small Business Attorney Courtney English with Upscale Law. We discussed six important topics everyone should know when starting a business.
These six steps will help you start a secure, legal business without confusion. Let's get started.
1. CONTRACTS: WHY THEY ARE A MUST-HAVE AND HOW THEY PROTECT YOUR BUSINESS
No matter the size of your business, you should always have a contract in place.
Many businesses, especially small businesses, work without contracts. This is a scary practice for any business owner, large or small, new or established.
It is essential to know that your business always has a risk for any liability. Yes, even if you are selling printables on Etsy.
The Top 5 Things Your Contracts Should Always Include and Why
1. Terms:
Terms help you and your client know exactly what to expect during the time you work together.
How long are you in the contract?
How will you renew the contract?
Do you want to renew the contract?
Terms can also be a great business tool. It's a great way to start a conversation if you wish to continue working with your client when you need to renew a contract.
What if you did not put an end date in your contract, and the client wants more time than you discussed, and you could not come to a resolution between you and the client?
The courts would look at the industry standard for the time the work generally takes, and that time frame would reside.
2. Termination and Cancellation:
Termination and cancellation in a contract define how you or your client can end your working relationship without hardship. What happens when you no longer want to work with your client or partner(s)? What if things don't work out? Will you refund the funds that have already been used?
You don't want the courts to decide this for you.
You need to set boundaries; this is the perfect place to do that. In your contract, you would include the language to protect how you want the situation handled.
If you are working with a partner, how do you resolve the work you are doing together?
Have you set a time frame and certain work obligations to complete before you can terminate the agreement?
If your client is unhappy with your work, will they still provide you a certain amount of money for the work you did and any materials you supplied?
It's essential to be clear in your contract so that both parties understand what they will receive from working together.
3. Dispute Resolution
Dispute resolution can protect you from going to court and having the courts decide how to handle the situation.
For instance, you can add a 30-day clause that allows you to try to remedy the situation so you don't have to go to court and incur expensive court and attorney fees.
Clients cannot ignore this clause. If the client decides they don't want to try to resolve the issue with you and allow you to remedy the situation and the client takes you to court, this clause would be in your favor, and the client would have to allow you 30 days to fix the issue.
4. Governing Law
Defining which state laws your company follows.
This is the law that is going to govern based on the state law that is written in your contract.
For example, my business is in IL, and I have contracted with a company in Washington. So that the law is unbiased and fair for both parties, we may pick another state; for instance, Texas could be written into the contract, and the laws of Texas would preside so that the law is the same for both parties versus IL, where my business is located.
Always have an attorney help you with this.
5. Entire (Integrated) Agreement Clause
A condition that the terms of the contract are a final agreement between all parties. Everything in the contract is what sticks and is binding.
Conversations you may have had via email or text that were not written into the contract, the business cannot be held accountable for those agreements.
Example:
Let's say you had an email exchange regarding a discount for a product you were purchasing. In the meantime, you signed the contract, not realizing that the discount was not in the contract. Now the invoice comes, and you are billed for the full amount. The business does not have to honor the discount because it was not in the contract. The price in the contract stands firm. Everything in the contract sums up the agreement.
MAKE SURE YOU READ THE ENTIRE CONTRACT AND ASK QUESTIONS BEFORE YOU SIGN IT.
Be cautious when having a contract written. You want to ensure the information you receive is accurate and pertains to your business situation.
If you use a ready-made contract, make sure the contract is updated to the specifics of your business. If the contract is not complete and accurate or specific to your business needs, it could cause you liability.
Remember, the goal is to be proactive versus reactive and to prevent issues from happening.
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2. WHICH BUSINESS STRUCTURE IS RIGHT FOR YOUR BUSINESS? UNDERSTANDING THE DIFFERENCES
When you go from a side hustle to a business that is making money, you need to decide what type of business entity you want to establish.
How do you determine what business license is right for you and your business?
You first need to think about what the future of your business looks like.
Here are some questions to ask yourself:
How many employees will you have?
Are you making physical products or providing a service?
Is your company international?
Will you have partners or investors?
Liabilities - tax and personal.
Licensing and renewal costs.
Can I pass my business to my family, and will they be able to access my business assets should I perish?
Before you decide on the type of business structure, you want to make sure there is long-term protection for your business, even when you're not here. The first step is understanding each of the business structure options.
Here's a breakdown of the five most used business entities and how they protect you and your business:
Sole Proprietorship:
A Sole Proprietorship is just that; you and the business are the same. This has the least amount of protection for you legally. You hold all of the liability of the business. This option is often not advised because all the liability is on you, and your personal assets are also part of the mix. You also can't pass your business as a legacy should you perish.
Partnership:
A Partnership is when you and another person(s) are in business together. This is often not recommended. Each of you is liable for a part of the business. As a partner, you are also liable for the actions of your other partners. You can't pass your business as a legacy should you perish.
Limited Liability Corporation (LLC):
A Limited Liability Corporation, often referred to as an LLC, has members. It's created by a statute of the state versus the federal. It provides you with personal liability protection separate from your business; however, the business taxes pass through your personal tax return, and you also get some business tax benefits.
S-Corp (Standard Corporation):
An S-Corp is for smaller businesses, and it has shares. It's the gap offering between an LLC and a C-Corp. It provides more tax incentives than an LLC. An S-Corp can raise funds through the sale of stock, but there are limits to how many shareholders it can be distributed to. Many states require that you have a board of directors for your S-Corp. Check with your local state to confirm what your state requirements are.
C-Corp. (Large Corporation):
C-Corporations are very large corporations like Walgreens, Walmart, etc.; they hire hundreds of employees, have more tax incentives, and have shareholders. A C-corp removes liabilities against your personal assets and strictly goes through the company assets.
DBA (Doing Business As)
DBAs are branches of the primary business entity. It's a great way to have multiple levels of your business without having numerous business licenses.
Check your local state for the requirements for a DBA.
Before filing an application, your first step is to perform a business name search through your local secretary of state to see if the name is available.
Always talk to a small business attorney before filing a registration. You want to ensure you select the proper business structure for your business needs.
Now you're ready to start working with clients.
3. WORKING WITH CLIENTS: WHY IT'S IMPORTANT TO SET BOUNDARIES
It's important to set boundaries when you start a business, and that starts with your clients. What is the best way to protect yourself as a business owner when working with clients? Let your clients know what they can expect from you and what you expect from them.
If you're a product-based business, check with your state for any requirements on how to label your products.
Do you need a special permit to sell your products? Are you adding disclaimers to your products and services?
Even if your state doesn't have requirements to add disclaimers, it's recommended that you add them to your products and services.
Don't make any claims.
Guaranteeing results is a dangerous practice. You could open yourself to personal liability, and if you don't have a business entity or insurance to help protect you, they can go after your personal assets.
Make your disclaimers clear.
Here's how:
Late fees - list what they are and how they are implemented.
Cancellations - do you accept them, and what are the terms?
Terms - what do your products and services include?
Delivery Date - when can the client expect their order? Are there a set number of days between when an order is received and when it ships?
Funds Not Available - what happens when a client's payment method fails?
How are you going to deliver the product or service?
How will you communicate with them?
Have them agree to your policies and procedures. A paper trail is something you want to have.
4. THE DIFFERENCE BETWEEN CPAS, ACCOUNTANTS, AND BUSINESS ATTORNEYS AND THEIR ROLES IN YOUR BUSINESS
Working with a team of professionals is important when running your business. Whether small or large, your goal is to make sure you manage your business structure at all stages of your business.
What is the difference between a CPA and an account, and does it make a difference?
CPAs have taken an extended test and are licensed within a particular state.
An Accountant does not have to be licensed.
CPA has to do continuing education.
A CPA is more versed in the tax laws in your state.
CPAs can represent you in a tax audit.
An Accountant can't represent you through the entire audit process.
A CPA may cost more than an accountant to hire.
A benefit to working with an accountant that works for an accounting firm with CPAs on the team often provides the extra security of having a CPA available should the need arise.
Overall having a CPA in your corner comes with additional benefits. However, having one, if not both, is recommended on your team of advisors.
Why A Business Attorney Over A CPA Or Accountant?
A business attorney and a CPA or accountant are recommended for your business needs, and each of them holds their own skills on how to protect you and your business.
A business attorney can write contracts for your business a CPA can not. Sometimes accountants may offer to prepare a contract for their clients; this is highly NOT recommended. If they are not licensed to practice law, they cannot draft a contract, though sometimes they are unaware.
An accountant may feel they are helping their clients, but you need to be cautious about a contract from someone other than a business attorney.
When working with a business attorney, make sure they are asking you questions about your specific business. You want to make sure that they understand your business needs and goals so that they prepare a contract that is meant for your needs, not just a general business contract.
A good attorney will know when to draw the line and stick to their boundaries between what they can help you with and what a CPA or accountant should be helping you with.
When do the two forces combine? If you have legal and tax issues, you need a tax attorney. Tax attorneys are generally for larger businesses.
Your professional team helps keep your business running smoothly and without interruption.
Let's keep your business flowing and make sure your website is protected.
5. YOUR BUSINESS WEBSITE: IMPORTANT POLICIES YOU MIGHT BE MISSING
Did you know that it is a law that if you are collecting people's information on your website, you need a privacy policy on your website? Yes, even if you are only collecting email addresses for a free download.
Two Pieces Of Information You Should Always Have On Your Website.
1. Terms and Conditions
You don't have to include terms and conditions on your website, but you should.
It's like a contract. You are setting business boundaries letting users know what you expect from them while on your website. These are the rules while they are using your website.
You are telling users what they can and can't do on your website and what the outcome will be if they don't follow your rules.
For instance, you have a membership site that allows your users to connect with other users. You could include terms and conditions that state they may not bully, use foul language, spam your audience, etc.
The key thing you want to remember is that you want to limit your liability.
Having terms and conditions on your website:
Limits your liability for you regarding your content.
Holds your content under copywrite law.
It's a contract between you and the user.
If you're a licensed professional and include examples of policies, terms and conditions, etc., you will want to add "this is for informational purposes only."
2. Privacy Policies
It's the law.
Privacy policies are to protect you and provide the users with how you will collect their information and their use on your website. You must have these on your website.
If you use or do the following, you must have privacy policies on your website:
Redirect a user to another website.
Use Google Analytics.
Credit card information - how you collect the information and how you store the data.
Pop up's and freebies where you collect names and email addresses - make sure you include a disclaimer that the user can check to accept when providing you their information, and include if they are subscribing to your email list for future correspondence.
Privacy laws vary from state to state, and just about every state has one, so you must check with your local state and county to ensure you have added any language necessary for state laws.
You can have a blanket statement that protects you across all the states. Make sure to check with a business attorney to confirm that the language is correct.
California has a strict privacy policy that went into effect on January 1, 2020, and it can be retroactive for 12 months. You need to know that if you collect any personal information from anyone in CA, you must state how and where that information is going. Personal data is very broad under CA law. Even if someone hasn't been hacked, they still have the right to see where their information went if you can't provide that, you are liable as a business.
Additional Notices To Include On Your Website:
Cookies Collection Notice
A cookie is a tech file that is used for marketing purposes that can access the device that you are using (phone, computer, tablet, etc.), so the company can collect private information about you.
Here are some of the things Cookies can collect:
Browsing activity
Device settings
Location
Preferred language
Security settings
Advertising
GDPR (General Data Protection Regulation)
In 2011 the European Union adopted the Cookie Elective to protect European citizens' privacy.
Why do you need to know about the GDPR if you don't do business in Europe?
With the internet, we are a global society. Your business is available to anyone around the world. If a European resident visits your website, you need to have a cookie policy on your website. You can be held liable if anything happens to the data your website collected from their visit to your website.
This is why it is necessary to have this listed on your website. You never know where information travels, and it's better to be protected than not.
Most importantly, be transparent. Privacy policies are to protect you. How do you protect your business? Let's discuss business insurance.
6. WHY BUSINESS INSURANCE IS A MUST-HAVE FOR ANY BUSINESS
Despite implementing various measures such as contracts and privacy policies, there remains a possibility that a client may choose to take legal action against your business.
Business liability insurance is an additional layer of protection that can help keep you protected even further.
Many small, independent business owners don't think these types of precautions are necessary, but instead, they see them as added costs. However, remember that just one instance can take away everything you have worked so hard for and leave you broke and without a business.
To help explain how business and professional liability insurance protects you and your business, I contacted Gianni Zavacos, Insurance Risk Advisor of Sungolde Insurance Agency.
I asked Gianni to explain the differences between the two types of recommended insurance (business liability and professional liability) to better understand why it's advised to have both for your business.
Here's How These Insurances Protect Your Business:
Business Liability Insurance
In general, liability insurance helps to protect you and your assets financially.
Liability insurance protects the insured for third-party damages offering protection against claims resulting from bodily injury and damage to property.
Liability insurance policies cover both legal costs and any payouts for which the insured party would be responsible if found legally liable or considered to be at fault.
A business liability policy would include coverage for any medical expenses resulting from bodily injury as well as defense costs if a lawsuit was presented to the party at fault.
There is coverage for personal and advertising injury, which offers protection against alleged claims of libel, slander, and various other offenses.
Coverages, limits, and premiums may vary based on the type of business and or revenue estimates for the business or individual seeking coverage.
Defense costs, as well as costs associated with investigating a specific claim that would arise from property damage or bodily injury, are also included, as well as compensation for court costs and attorney’s fees.
Business liability covers things that you may not expect, such as copyright infringement and reputation damage.
Let's Review Examples Of How Business Liability Insurance Protects Your Business
Examples Of Business Liability Claims:
Copyright infringement:
A start-up company wants to launch its new website and hires a web design team to create a website to display its services.
An issue arises when an image used on the website was copied from the internet and is protected under copyright.
The photographer who claims to have taken the photo (and owns it) was made aware of the fact that the picture was used in a manner not in connection with her original intended use of the photo and sued the business for $10,000 for copyright infringement.
Reputation damage:
A discussion occurs over a social media platform; the owner of a consulting firm says something negative about a competitor that may not be true.
The discussion is widely covered by industry trade media, causing an adverse reaction on social media toward the competitor.
The competitor sues, claiming a case of slander that cost them potential customers by damaging their reputation.
What Is Professional Liability Insurance?
Professional Liability
Professional liability insurance or errors and omissions liability insurance, also known as E&O, offers coverage for lawsuits against negligent acts for professional services.
These types of lawsuits can also arise from failure to deliver on professional duties.
Architects, lawyers, accountants, doctors, nurses, consultants, or any business providing a service to a client in exchange for a fee should have this specific coverage.
Coverages, limits, and premiums may vary based on the type of business and or revenue estimates for the professional seeking coverage.
E&O (errors and omission) insurance offers coverage for attorney fees, court costs, and any settlements deemed negligent for acts rendered up to the policy limit purchased in the contract.
This insurance will not provide coverage for fraudulence, bodily injury to third parties, or criminal prosecution.
Let's review some examples of how business liability insurance can protect your business.
Examples of Professional Liability Claims:
Example - Incorrect filing of tax documents:
The client hires an accounting firm to manage their account. Unfortunately, the firm fails to handle the client's account properly, causing the client to lose thousands of dollars.
In this case, the accounting firm incorrectly filed tax codes and left the business exposed.
E&O insurance would help cover the accounting firm, in this case, for legal fees and court costs during the claim process. Financial protection would be provided to the accounting firm for settlement of the claim and any fees associated with the case.
Example - Architecture firm fails to meet safety standards:
An architecture firm designs a building that fails to meet safety standards specific to an area that has guidelines for building codes.
The construction company that erects the building may be responsible for having to go back and fix the errors. This could result in costly repairs for both the company and the client.
In this case, the architecture firm is left exposed and can be sued for the errors and oversight that caused significant overruns.
What does liability insurance provide to your business? An extra layer of protection.
Now it's time to put all the pieces together.
YOUR NEW BUSINESS AWAITS. GET STARTED TODAY
You now have the information you need to start a business.
Envision the day you receive your business license approval and you open the doors to your new business. No more nine-to-five corporate jobs. A new chapter in your life just began, and it feels good.
It may seem challenging at first to start a business. However, when you take your time, gather your team of professionals, and work with your first client, the challenges will seem like small stepping stones.
You got this!
Now it's time to get started and start a business. Bookmark this page and use this as a resource guide to help you navigate your business needs.
*Disclaimer: This article is for informational purposes only. I am not a licensed attorney, CPA, or insurance agent. Always consult with a licensed professional.
