Starting a Business

Posted on Aug 23, 2015

How to Start a Business?

Whether you have a family business or aim to be a public company in the future, prior to starting a business, the entrepreneur or a member of the management team should identify the requirements and procedures necessary to build a business on a solid foundation. This may be accomplished by seeking the advice of an attorney specializing in business law and/or a government sponsored agency commissioned to help small businesses, such as the Small Business Administration (SBA).

The following are some initial issues a new business owner should consider prior to proceeding with a business plan:

Formation and Choice of a Business Entity

A business owner should consider whether the business will be organized and operated as a sole proprietorship, partnership, corporation, limited liability company, or other form of business entity. The form chosen may have a substantial effect on ownership, control, taxation, and liability of both the company and its owner(s). Choosing the right entity to operate your business may affect the tax consequences of your estate.

Many owners create entities for asset protection reasons. However, certain entity maintenance and formation requirements must be met to assure the protection of the corporate shield from shareholder or member liabilities.

Registering Your Business With the Government

Creating your business entity is only the initial step. The State of Washington, like most other states, requires that every business be “registered” with the Department of Licensing, Department of Labor & Industries, Department of Revenue, as well as the Employment Security Department. Filing a Master Application with the Department of Licensing begins the process by informing all the state departments of the type of business to be operated and providing other information about the business. Certain types of businesses are also required to be “specially licensed” by the designated agencies in addition to registration.

On a local level, the business must verify with each city where an office is located whether it requires that business to obtain a City Business License. Last but not least, the Federal Government requires that a business entity must obtain an Employer Identification Number, which is the equivalent of a social security number for a business, for purposes of filing a business tax return and payment of taxes. Financial Institutions will also require this identification number prior to opening a business bank account.

Corporate Financing/Securities Laws

Entrepreneurs often discuss with their friends or relatives their dreams of success and the possibility of becoming “investors” or “partners.” The receipt of money or other valuable commodity in exchange for interests in a business will likely constitute an offer and sale of “securities” which is regulated by the Securities Exchange Commission and the Washington State Securities Division. The offer and the sale of securities will trigger the federal and state securities laws which require the registration of securities unless there is an applicable exemption. An illegal sale of securities in violation of applicable securities laws may result in civil and criminal liabilities for fraud, sale of the unregistered securities, as well as enforcement actions by the state and federal securities divisions against the individual owners of a business and other individuals involved in the selling regardless of the business entity.

A business owner, prior to offering ownership interests or other collateral interests of business (through instruments such as promissory notes and other financing arrangements) should seek the opinion of a securities attorney or otherwise confirm that the interests do not constitute a “security” or that the transaction fits into an applicable exemption.

Employment Laws

If the business hires employees, even family members, employment regulations must be followed. The Department of Labor & Industries regulates employees and employers stringently. A business must not attempt to circumvent the Department by only hiring independent contractors as they will be deemed employees. Penalties for such actions can be very high, including but not limited to the suspension of all business licenses, and specialty licenses for the individual business owner(s) regardless of the entity.

Business owners should also be up to date on the requirements of federal and state laws regarding the hiring and management of employees such as the Occupational Safety and Health Act (OSHA), Washington Industrial Safety & Health Act (WISHA), Americans with Disabilities Act (ADA), and the Fair Labors Standard Act (FSLA).

The type of employee/employer relationship will affect the responsibility of the employer for the work or actions of the employee. Under the legal theory respondeat superior, an employer is fully responsible for the actions of the employees performed within the scope of employment. A different theory will apply if a person is hired as an independent contractor of the employer.

Furthermore, if the business involves a highly competitive industry with trade secrets, employee non-compete and confidentiality agreements are recommended to discourage employees from using materials and information received during their course of employment, if the employees later become or are hired by a competitor. The documents are designed to prevent competition by employees, but truly only provide a remedy to the business if an employee breaches the agreement.

Patent/Trademark/Trade Name Registrations

If the business creates a uniquely designed or engineered product that the owner wants to protect from competition, the business owner must act diligently to maintain the right to a patent. Patent laws will not protect an item or concept that has been commercially marketed or used for longer than one year. It is imperative that the business owner consults a patent attorney at the earliest date since incidental use can trigger the onset of the one-year limitation.

If the business is conducted under a trade name, which is anything but the name of the corporate entity or the sole proprietor, the state requires that name to be registered as a trade name. In addition, registration of the name, design, or logo used in association with the company’s goods or services gives the owner a presumption of ownership and exclusive rights in the name, design, or logo.

These issues should be discussed and considered prior to the pursuit of the business to ensure compliance and to prevent the loss of certain rights which could later be valuable to the business and should be claimed by business owners.