You originally picked up a calligraphy pen for a creative outlet and never put it down. Friends and family start noticing, and inquiries are starting to trickle in. You realize you really can do this: pursue your creative passion and maybe start a little business in the process. You’ve caught the entrepreneur bug, and you can’t wait to get started. But getting started…what exactly does that entail? How do you start your business legally sound?
This was my story almost exactly one year ago. During a class with a local calligrapher, a peer who had just started her business, encouraged me to start my own business. I was hooked; not only was I able to continue to refine my craft, but I might be able to try my hand at business ownership along the way. For the rest of the year, I spent my days the way so many of us do: juggling a full time 9-5 job by day, immersed in calligraphy at night.
My story isn’t unique, except for one detail: my “day job” was working as a full time litigator for small business owners. More days than I’d care to admit, I showed up in court with ink-stained hands. Because I was an attorney, I knew exactly what steps to take to get my business started off on the right foot, legally speaking. And because I knew my business was legally sound, I was completely confident in growing my business.
Photography by Molly Thrasher
My friend that I met in that class? Her business took off and was very successful from the get go. But nearly a year in, she received a letter that any business owner dreads– a demand that she change the name of the business that she had worked so hard to build. Why? Because her brand name too closely resembled that of another (completely unrelated) company. To be clear, she had done nothing wrong. However, dealing with the conflict took her focus off of her business, and was an all around draining experience.
Unfortunately, her story isn’t unique. An important aspect of business ownership is dealing with the unforeseeable, which is why it is so important to make sure it is legally sound from the start. Protecting your business all comes down to limiting your liability. And while (spoiler alert!) I’ll always recommend that you meet with an attorney to get started, make sure you start by following these steps:
Set up a formal business model. First, although you might have started calling yourself a “solopreneur” when you opened up your Etsy shop or sold to a few family and friends, the government actually considers you a “sole proprietor”. You don’t need to file any paperwork with the state to be a sole proprietor, but you also won’t receive any liability protection.
The driving factors behind deciding on a business formation revolve entirely around liability and taxes (get started with your local accountant to discuss tax considerations). Business structures such an LLC are popular for many reasons, mainly because they separate your personal assets from your business assets. If there isn’t any separation and you’re sued for anything involving your business, a court could allocate
your personal assets to pay damages.
For example, say you are a calligrapher and you start selling prints with one of your favorite artist’s song lyrics. The print is a hit, and it becomes the best seller in your shop. One day, you receive a cease and desist letter from the recording artist’s attorney, demanding that you stop selling the print and pay a fine for infringing upon the artist’s intellectual property rights. If you wind up in litigation over the dispute and you are operating as a sole proprietor, your car or your house could be used to help pay damages. If, on the other hand, you have an LLC and your business is separate from your personal assets, meaning the court can only pull from business bank accounts to pay for legal damages. The key is that you need to have the LLC formed before the dispute arises. If you wait until you’re sued, you’ll miss out on the protection an LLC offers.
After hearing this example, most clients tell me that they have a DBA and liability insurance, so they don’t need to file an LLC. Wouldn’t this provide the same protection? It’s a great question, and there is a straightforward answer: your insurance is nothing more than a contract between you and the insurance company. It won’t protect you from every random claim, and it likely won’t protect you from anything you did on purpose. In the example above, it wouldn’t offer any protection. Once you plan on providing products or services for clients, it’s time to form an LLC.
(DBA? LLC? Sole-proprietor? Oh my! I’m breaking all these terms down in a free guide to help you assess your business’ legal needs today.)
Set yourself up for growth with the right contracts. The goal of every business is growth, but if you aren’t protected with the right contracts, your business will stay stagnant and vulnerable. Aside from protecting your business with every client interaction, the right contracts allow you to position your business to expand.
You’ll feel confident to reach out and collaborate on styled shoots with fellow creatives, you can enter into joint ventures, and maybe even host the conference you’ve always dreamed of. Without the right contracts in place, you won’t feel confident to take these steps in your business, and you open your business up to liability with each client interaction.
Protect yourself for the future. The protection you set in place in the beginning of your business will carry through into the future. From a technical standpoint, most potential claims carry at least a two or three year statute of limitations. For example, in Oklahoma, a person has five years to bring a breach of contract claim. By having a business entity such as an LLC in place, your potential liability is already reduced. As small business owners, our most valuable asset is time, and investing a little time and energy in making your business legal from the start protects some of that valuable time, and saves you stress and worry about the “what if’s” later.
How to Start Your Business Legally – Your 10 Step Checklist:
- Run a detailed name search
- File for your DBA or FBN (check with your state)
- Get all applicable licenses and permits
- Invest in the right contracts
- File an LLC
- File for your EIN number
- Open a business bank account
- Check insurance requirements
- Make sure your website is legal
- Register your copyright/trademark
Need a little more in-depth explanation of all these terms and what to do? Download your free 10 Page Guide to Audit Your Business’ Legal Needs!