How To Start Your Own Business. Part 5 - The Scary Stuff: Legalities, Licenses And Permits
Don't Sweat The Scary Stuff
A lot of legal and business matters seem either boring or intimidating. However, they don't have to be. Actually, the more you know about the nuts and bolts of business, the more powerful you will feel!
How To Choose Your Business Structure
A decision that will need to be made at a relatively early stage is the structure your business will take. There are three main options available and each one has different levels of responsibility attached to it. The following shows the different structures and indicates the main advantages and disadvantages of each.
Take advice on the appropriate business structure for your purposes. It is be advisable to speak to an accountant who has knowledge of the fashion industry.
The business structure you choose will have legal and tax implications. Learn about the different types of business structures and find the one best suited for your business.
Sole Proprietorship
Becoming a sole proprietor is perhaps the easiest way of starting up in the fashion business. It is an unincorporated business owned and run by one individual with no distinction between the business and you, the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.
Advantages of a Sole Proprietorship
- Easy and inexpensive to form: A sole proprietorship is the simplest and least expensive business structure to establish. Costs are minimal, with legal costs limited to obtaining the necessary license or permits.
- Complete control. Because you are the sole owner of the business, you have complete control over all decisions. You aren’t required to consult with anyone else when you need to make decisions or want to make changes.
- Easy tax preparation. Your business is not taxed separately, so it’s easy to fulfill the tax reporting requirements for a sole proprietorship. The tax rates are also the lowest of the business structures.
Disadvantages of a Proprietorship
- Unlimited personal liability. Because there is no legal separation between you and your business, you can be held personally liable for the debts and obligations of the business. This risk extends to any liabilities incurred as a result of employee actions.
- Hard to raise money. Sole proprietors often face challenges when trying to raise money. Because you can’t sell stock in the business, investors won't often invest. Banks are also hesitant to lend to a sole proprietorship because of a perceived lack of credibility when it comes to repayment if the business fails.
Heavy burden. The flipside of complete control is the burden and pressure it can impose. You alone are ultimately responsible for the successes and failures of your business.
Limited Liability Company
A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.
The "owners" of an LLC are referred to as "members." Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs.
Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are "passed through" the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.
Advantages of an LLC
- Limited Liability. Members are protected from personal liability for business decisions or actions of the LLC. This means that if the LLC incurs debt or is sued, members' personal assets are usually exempt. This is similar to the liability protections afforded to shareholders of a corporation. Keep in mind that limited liability means "limited" liability - members are not necessarily shielded from wrongful acts, including those of their employees.
- Less Recordkeeping. An LLC's operational ease is one of its greatest advantages. Compared to an S-Corporation, there is less registration paperwork and there are smaller start-up costs.
- Sharing of Profits. There are fewer restrictions on profit sharing within an LLC, as members distribute profits as they see fit. Members might contribute different proportions of capital and sweat equity. Consequently, it's up to the members themselves to decide who has earned what percentage of the profits or losses.
Disadvantages of an LLC
- Limited Life. In many states, when a member leaves an LLC, the business is dissolved and the members must fulfill all remaining legal and business obligations to close the business. The remaining members can decide if they want to start a new LLC or part ways. However, you can include provisions in your operating agreement to prolong the life of the LLC if a member decides to leave the business.
- Self-Employment Taxes. Members of an LLC are considered self-employed and must pay the self-employment tax contributions towards Medicare and Social Security. The entire net income of the LLC is subject to this tax.
Partnership
A partnership is a single business where two or more people share ownership. Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business.
Because partnerships entail more than one person in the decision-making process, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (bring in new partners or buy out current partners) and how to dissolve the partnership.
Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one.
Advantages of a Partnership
- Easy and Inexpensive. Partnerships are generally an inexpensive and easily formed business structure. The majority of time spent starting a partnership often focuses on developing the partnership agreement.
- Shared Financial Commitment. In a partnership, each partner is equally invested in the success of the business. Partnerships have the advantage of pooling resources to obtain capital. This could be beneficial in terms of securing credit, or by simply doubling your seed money.
- Complementary Skills. A good partnership should reap the benefits of being able to utilize the strengths, resources and expertise of each partner.
- Partnership Incentives for Employees. Partnerships have an employment advantage over other entities if they offer employees the opportunity to become a partner. Partnership incentives often attract highly motivated and qualified employees.
Disadvantages of a Partnership
- Joint and Individual Liability. Similar to sole proprietorships, partnerships retain full, shared liability among the owners. Partners are not only liable for their own actions, but also for the business debts and decisions made by other partners. In addition, the personal assets of all partners can be used to satisfy the partnership’s debt.
- Disagreements Among Partners. With multiple partners, there are bound to be disagreements Partners should consult each other on all decisions, make compromises, and resolve disputes as amicably as possible.
- Shared Profits. Because partnerships are jointly owned, each partner must share the successes and profits of their business with the other partners. An unequal contribution of time, effort, or resources can cause discord among partners.
How To Choose And Register Your Business
Choosing and registering your business name is a key step to legally operating your business and potentially obtaining financial aid from the government. Not only should you pick a name that reflects your brand identity, but you also need to ensure it is properly registered and protected for the long term. You should also give a thought to whether it’s web-ready. Is the domain name even available?
Here are some tips to help you pick, register, and protect your business name.
- How will your name look? – On the web, as part of a logo, on social media.
- What connotations does it evoke? – Is your name too corporate or not corporate enough? Does it reflect your business philosophy and culture? Does it appeal to your market?
- Is it unique? – Pick a name that hasn’t been claimed by others, online or offline. A quick web search and domain name search (more on this below) will alert you to any existing use.
Check for Trademarks
Trademark infringement can carry a high cost for your business. Before you pick a name, use the U.S. Patent and Trademark Office’s trademark search tool to see if a similar name, or variations of it, is trademarked.
Pick a Name That is Web-Ready
In order to claim a website address or URL, your business name needs to be unique and available. It should also be rich in key words that reflect what your business does. To find out if your business name has been claimed online, do a simple web search to see if anyone is already using that name.
Next, check whether a domain name (or web address) is available. You can do this using the WHOIS database of domain names. If it is available, be sure to claim it right away. This guide explains how to register a domain name.
Claim Your Social Media Identity
It’s a good idea to claim your social media name early in the naming process – even if you are not sure which sites you intend to use. A name for your Facebook page can be set up and changed, but you can only claim a vanity URL or custom URL once you’ve got 25 fans or “likes.” This custom URL name must be unique, or un-claimed.
Register Your New Business Name
Registering a business name is a confusing area for new business owners. What does it mean and what are you required to do?
Registering your business name involves a process known as registering a “Doing Business As (DBA)” name or trade name. This process shouldn’t be confused with incorporation and it doesn’t provide trademark protection. Registering your “Doing Business As” name is simply the process of letting your state government know that you are doing business as a name other than your personal name or the legal name of your partnership or corporation. If you are operating under your own name, then you can skip the process.
Learn about the requirements in your state and how to file in this Registering Your Doing Business As Name guide.
Apply for Trademark Protection
A trademark protects words, names, symbols, and logos that distinguish goods and services. Your name is one of your most valuable business assets, so it’s worth protecting. You can file for a trademark for less than $300. Learn how to trademark your business name.
Obtain Business Licenses & Permits
To run your business legally, there are certain federal and state licenses and permits you will need to obtain. These resources will help you understand the requirements for your small business.
Find Business Licenses & Permits
In order to operate your business, you must comply with a wide range of local, state and federal rules. SBA’s Business Licenses and Permits tool can help you navigate through this process.
Learn About Business Law And Regulations
Advertising & Marketing Law
Employment & Labor Law
Finance Law
Learn about the financial laws that protect businesses, investors and customers and how you can comply
Intellectual Property Law
Learn how intellectual property law can protect your business interests and find out how to register a trademark or service mark, file a patent or copyright your work.
Online Business Law
Whether selling on eBay, or operating an e-commerce site, there are several laws that you must comply with such as how and when to collect sales tax. Learn more about laws for online businesses.
Privacy Law
Learn how intellectual property law can protect your business interests and find out how to register a trademark or service mark, file a patent or copyright your work.
Environmental Regulations
Laws to protect the environment could impact your small business. Refer to this guide to find out how to comply with environmental laws.
Regulation of Financial Contracts
If you are conducting business transactions outside of your state, you need to comply with the Uniform Commercial Code (UCC). Learn more about UCC requirements.
Workplace Safety & Health Law
Learn more about a variety of tools, guides and training materials that can help you comply with occupational safety and health laws.
Foreign Workers & Employee Eligibility
Be sure to understand all laws and regulations about employee eligibility as you prepare to hire employees.
Contact a Government Agency
Need help determining which laws your small business must comply with? These resources can help.
This is the fifth in a series of articles on How To Start Your Own Business.
Part 1 - Do You Have What It Takes To Be A Fashion Entrepreneur?
Part 2 - Finding A Business Mentor
Part 3 - Understand Your Market
Part 4 - Create Your Business Plan
Part 5 - The Scary Stuff: Legalities, Licenses, and Permits
Part 6 - The Scary Stuff Cont.: Loans, Grants, and Funding
Part 7 - Getting Your Name And Product "Out There"
Part 8 - Finding Your Voice And Professional Style
Part 9 - 5 Rules For Making Your Business A Success
Part 10 - Helpful Web Sites And Resources For The Fashion Entrepreneur
