Tips to Keep Your Startup Company Safe from Potential Legal Issues

woman inside her shop

Every business comes with a degree of risk, one of which is the risk of facing legal issues. As an entrepreneur, it is your duty to mitigate these risks and while ensuring that you’re adhering to the law. Being audited by the IRS or being slapped with a lawsuit, for instance, could be the cause of your downfall. And even if you recover, your reputation will certainly be tarnished.

Since launching your startup involved tremendous effort and investment, there’s no doubt that you’d like to do your part to prevent legal issues. That said, here are the ways to protect your new business from legal complications:

1. Choose the Right Legal Entity

There are generally three types of legal entities, namely sole proprietorship, partnership, and corporation. You might also hear of a limited liability partnership or limited liability corporation, both of which are legal entities as well.

Many startups register as a sole proprietorship, which makes the owner fully responsible for anything the startup experiences. This actually puts your personal assets, such as your home and car, at risk of seizure if your startup gets sued, because your personal identity isn’t separated from your business’s.

Therefore, make your startup a separate entity by registering it as a limited liability corporation. This will keep your personal assets separate from your business and therefore safe from seizure or any mandate by the court, should your startup get sued.

2. Obtain Necessary Licenses and Permits

Missing one important license could be your ticket to a lawsuit, so be sure to obtain every license and permit your startup requires. Startups must apply for a basic business operation license, which enables the government to track you for tax concerns and allows you to run your business in your chosen location.

You must also file an application for an employer identification number (EIN). Having an EIN allows you to open a business bank account. To ensure what other permits and licenses you’ll need, consult your local registration offices.

lawyer signing papers

3. Insure Your Business

Just as insuring your life, car, and home are important, so is insuring your startup. All businesses should invest in liability insurance, which would be useful if a customer gets into an accident within your premises.

When your startup grows and you can already afford to establish a subsidiary, consider setting up a captive insurance company, which is a form of corporate “self-insurance.” This allows you to pay lower premiums and taxes while being assured that your company is protected against the risks unique to it. To ascertain that you won’t encounter compliance issues, obtain the assistance of an experienced captive insurance attorney.

4. Be Informed of the Taxes You Can Legally Deduct

According to Gary Milwick, chief product officer of 1-800Accountant, many startups are unaware of the tax deductions they’re legally allowed to make. Here are the common business expenses you may deduct from your startup’s taxes:

  • Expenses and mileage incurred by personal vehicles that are used for business purposes
  • Phone bills
  • A portion of costs involved in operating a home-based business, such as mortgage, rent, or utilities
  • 50% of meal and entertainment costs with existing or prospective business partners, clients, employees, or contractors
  • Costs of new business equipment purchased
  • Costs of setting up and contributing to a retirement fund

5. Be Careful in Dealing with Other Businesses and Potential Partners

Be careful in making statements about your competitors, because it may turn out libelous, possibly leading to a lawsuit. When you’re looking for new partners, be meticulous about verifying their legitimacy, because your startup can be dragged into a sticky legal mess if an illegal company you unwittingly worked with gets busted.

To be certain that you’re abiding by the law, through and through, hire a competent corporate lawyer as well. Being guided by a professional in the legal field saves you time from extensive research and allays your fear and doubts, allowing you to focus more on the management and marketing demands of your business.

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