When it comes to starting your own business, consider bringing on a lawyer right in the beginning. In this article we will discuss why hiring a lawyer will be a major benefit to you and your business.
How do I set up a business?
So you are interested in starting your own business, but you don’t know anything about that. You have an idea and you think that it’s a great idea.
Even your mom thinks it’s a great idea.
So how do you start a business?
Let’s consider this on the practical level.
Now, if you go to school for an MBA, they’ll tell you that a business occurs when you either have a product or service that you’re able to sell. You need to find people who are willing to buy that product or service. Then, once they’ve bought that product or service you provide, that is when you have a business.
It’s transactional.
It’s a super simple and bare-bones way to look at it, but that is business, at its core.
Now, from a legal perspective, if you want to set up a company or set up a legitimate business, there are a few ways you can do that. The main thing you want to do is create what is called a legal entity, meaning that it is an official separate organization. It’s something separate from you that provides that product or service that you happen to be a part of.
Why should I set my business up as a legal entity?
The reason that you do that is twofold:
1) For accounting purposes and tax purposes.
I’m not an accountant. I am not going to give you accounting advice, nor am I giving legal advice for that matter, but I will speak as a general business owner.
When your business is set up as a legal entity you will have different banking accounts setup so your business finances don’t mingle with your personal finances. This will help you keep better track of whether your business is profitable or not. It will help with managing your resources for budgeting, payroll, expenses, and any other things that occur. And this will also help you when it comes to filing your taxes which we will discuss in future articles.
2) It helps you to not get personally sued for the product or service your company provides.
When your business is set up as a legal entity you are protecting your personal assets from being seized if your business is being sued, which is great for what’s called mitigating risk.
If you don’t have a legal entity setup and you are selling a product out of the back of your truck and your product injures someone and that someone decides to press charges, everything you own is at risk; your truck, your house, your belongings, all of it. However, with a properly set up legal entity, it’s only the company’s assets that are at risk.
To put it simply, your litigation exposure helps prevent you from personally getting sued.
Let’s use a story to nail down what I’m driving at.
So say that I’ve created the world’s greatest ice cream. I decided to start selling my greatest ice cream in the world out of my garage. I tell all my friends and they all come over to my house and all buy ice cream from me. I set the price at $10 and they all pay $10. They get some ice cream, and they walk away.
That’s just me kind of doing business as a side hustle, and that’s how I run my business.
Now, if you run your business through a company, what would happen is I set up Best Ice Cream Ever Corporation or Best Ice Cream Ever Company, and they are the ones who are selling the ice cream.
They get the money. They provide the ice cream, even though it’s still me handing it out.
The reason that I do this is to keep my finances separate for tax and accounting purposes.
Now let’s say I buy an ice cream maker for my side hustle versus the company I set up invests in an ice cream maker.
When I buy that ice cream maker, I’m using my credit card, my personal money. But if the company buys it, they can pay for it using a company card which won’t necessarily be charged from my personal income.
The same thing happens with the money I make as a business versus the money I make from my side hustle.
Let’s say business is really good.
My business selling ice cream made $100,000. But the company isn’t pocketing that money, it has to pay for supplies, for ingredients, for the cute ice cream cups and spoons, everything. In a company you can label all these as expenses, putting in how much it costs to make the ice cream, how much it costs to run the business, how much to have a roof over head, and the branding and all those things that you can kind of attribute to the business that helps reduce your taxable income.
Whereas if you’re just selling it on the side, all the IRS will really see is you made an additional $100,000 this year.
They don’t really care that you spent $50,000 of it on ice cream making supplies or materials. They just see that there is $100,000 put into your bank account.
They don’t really care if you spend money.
They only care if you make money.
Now, again, I’m not an accountant. There’s a much more refined answer to this, but from a high level, you set up a company so it can operate as its own financial entity that actually takes into account costs.
Do I need it to hire a lawyer or a legal team in order to set up a legal entity?
No, you don’t have to. It is nice to have a lawyer help though. If you’re starting from scratch and you have no idea what the heck you’re doing, it’s nice to have a lawyer come in and double check things.
You would want an attorney to come in to help make sure you’re set up in a way that best sets you up for success.
Let’s dive a little deeper.
When you’re a business, you have goals:
You want your business to succeed.
You want to make the best product and/or provide the best service.
You want to make sure that your profits are protected.
You want to make sure you aren’t paying more taxes than is necessary.
Maybe you even want to hire people so you don’t have to do all the work.
Your goals will determine what sort of company structure you want.
Now if it’s just you, it’s really not that big a deal. You can do all the work, but nine times out of ten, you will be working with people to build your business.
Having an attorney help you write down all the things that you need to write down will be immensely helpful to you.
Let’s use another story:
Think about something like an operating agreement, which basically says, “So I have this business and my friend has decided to go in on this business with me. I’ve put in all the money, but I really want my friend to come in and help with the sales. He’s super charismatic and great with people, so therefore, he is going to help us sell a lot more ice cream.“
I say to him, “You know what? I’ll give you 25% of the business. You are now my sales and marketing person.“
Now, we never wrote that down, but after a year the business is booming and making a million dollars a year. My friend comes to me and says “Hey, you owe me because we’re 50-50 partners.I need 50% of the profits.”
Flabbergasted, you say, “No! We agreed that you got 25% of the business.” But if we didn’t write that down and have it signed and go through those legal processes to define roles and responsibilities, things can easily devolve into a very, very painful and arduous process of having expensive lawyers try to figure that out for us.
There are times where business partners will be operating for years without writing anything down. They’ve just been two friends, in business for years and they’ve never really had an issue.
And then as soon as you start talking to them about how the business is structured and their respective roles you can find a tangled mess.
Having someone watch your back and keep you from getting in bad situations is a big bonus to having an attorney present.