How Entrepreneurs Can Protect Small Businesses

As more people pursue entrepreneurship, it’s important that they conduct their due diligence. They must understand which legal steps to take so they can protect their small businesses and intellectual property. There are several items all entrepreneurs must be able to cross off their legal to-do list, including covering these key areas:

  • Incorporate or form a limited liability company (LLC) to protect the business.
  • Register for trademarks to ensure exclusive rights to the marks.
  • File for necessary business licenses.
  • Obtain an Employer Identification Number (EIN) to hire employees.
  • Determine who will act as your registered agent.
  • Keep up with annual maintenance to stay in compliance with the state.

You’ve drafted a business plan, reviewed the viability of your business idea and accessed how much capital you’ll need to start your business. Now, it’s time to protect your startup.

1. Incorporate The Business

This is one of the basic, first steps many entrepreneurs take to protect their small businesses. An unincorporated business struggles to establish credibility, and it does not receive liability protection like an incorporated formation. An incorporated business receives liability protection. This allows personal and professional assets to remain separate from each other. It also ensures that personal assets, like houses and cars, are protected in the event of an unforeseen circumstance that may negatively impact the company.

Entrepreneurs may choose to incorporate as one of several different types of business structures. Here’s a look at some of the most common, and popular, options available:

  • Limited liability company (LLC): This flexible entity may be run as a single-member LLC, member-managed LLC or manager-managed LLC. It depends on the number of members (or owners) in the company. Forming an LLC confers liability protection. It gives you the ability to choose if you would like to be taxed as a partnership or corporation.
  • Corporation: Forming a corporation also offers liability protection. However, it is less flexible than an LLC. The formal structure of a corporation allows the company to issue shares, accept capital from potential investors and take the business public with an initial public offering (IPO).
  • General partnership: There are several types of partnerships available for entrepreneurs, including joint venture and silent partnerships. Many small businesses incorporate as a general partnership, which allows two (or more) partners to run a company. All profits, management duties and liabilities divide equally between the partners. It is strongly recommended that the partnership agreement outlines everyone’s role in the company. General partnerships, unfortunately, are typically considered to be unincorporated, so the partners may consider forming an LLC or corporation for the business. Depending on their industry, they may also form a limited liability partnership (LLP).

2. Register Trademarks

Chances are your small business has a creative word, phrase, logo or design. This mark is likely used to emphasize the uniqueness of your business to the world. However, if it has not been registered as a trademark, a competitor may plagiarize it and pass the mark off as their own.

The easiest way to keep this from happening is to file for trademark registration. Conduct a name search first to ensure that your mark’s application is available and is not pending or registered with another company. Then, file a trademark application to register the trademark. Once it has been registered, you alone have exclusive rights to the mark.

3. Obtain Business Licenses

Obtaining a business license ensures that you may operate your business legally. Once you have registered, your business license tracks the activities of your company for tax purposes. It also ensures that the business has met the minimum requirements necessary to protect the public health and notifies citizens of activities that may impact the public.

Every business is different and may require business licenses and/or permits that are specific to its industry. Check with your local Secretary of State to see which licenses and permits your business is required to have and obtain the necessary paperwork to begin the filing process.

4. Apply For An Employer Identification Number (EIN)

Issued by the IRS, an Employer Identification Number (EIN) is a nine-digit number that acts as your federal tax ID. It helps identify and track employer tax accounts after they incorporate their businesses.

Many entrepreneurs assume that it’s only necessary to obtain an EIN when you’re ready to hire employees. Yes, it’s true that you need an EIN before you may hire and pay employees at your business. However, an EIN does much more than ensure you can hire talent. You must also file for an EIN if you’d like to open a business bank account or establish a retirement plan. Additionally, EINs may be used to identify your business on important documents. Typically, entrepreneurs use their Social Security number (SSN). An EIN is less sensitive than an SSN and may be used when filling out payroll reports and paying federal taxes.

 5. Obtain A Registered Agent

A registered agent (RA) acts as the point of contact between the business and the state. They accept important documents from the state on your behalf, organize the paperwork and deliver it to the business owner in a timely manner for review.

Who can be a registered agent? Entrepreneurs may act as their own RA or enlist the help of a third-party service for assistance. Keep in mind that you must meet the following requirements if you decide to be your own registered agent:

  • The RA must have a physical street address location. This address must be in the same state as the company’s formation. A P.O. box is not an acceptable form of address.
  • A registered agent must be a resident of the state where business is conducted.
  • RAs must be available to receive process during general business hours. Typically, this means Monday through Friday from 8 a.m. until 5 p.m.

It’s perfectly okay if you find you are unable to meet these requirements. Consider designating a trusted third-party service to act as the registered agent for your business.

6. File Paperwork To Stay In Compliance

You successfully incorporated your business, registered trademarks, obtained business licenses and EINs, and designated a registered agent. Don’t forget that from here on out, you will need to pay renewal fees and file annual reports!

Annual reports are fairly easy to fill out. These reports document changes made within your LLC or corporation, such as an address change. You may also need to pay renewal fees throughout the year, and you will also need to update any operating agreements or bylaws associated with your LLC or corporation. This keeps everyone updated on changes within your organization and allows you to stay in compliance with the state.