What Do Solopreneurs Need to Protect a Small Business?
If you decided to start a small business this year, you’re in good company. In June 2020, the U.S. Chamber of Commerce reported that a startup renaissance had shown signs of being well underway prior to COVID-19. A reported 774,725 businesses were less than a year old in 2019, marking a significant bump from 733,825 businesses in 2018. Moreover, an April 2020 infographic from SCORE revealed that while 43.9% chose to maintain a ‘wait and see’ attitude in regard to starting or continuing business, only 2.6% of entrepreneurs surveyed abandoned these plans.
As entrepreneurs — and solopreneurs — venture into doing business in the new normal, some may be new to entrepreneurship. They might not have all of the necessary legal paperwork, which may leave their business in a much more vulnerable position than they realize to do business.
Here are a few basic documents that are of utmost importance for your business to obtain.
Incorporate as a Business Structure (LLC or Corporation)
One of the most common mistakes solopreneurs make when starting a business is not incorporating the business. Some solopreneurs may choose to form a sole proprietorship since this entity is affordable and requires little filing paperwork.
However, a sole proprietorship does not provide its owner with liability protection. This type of protection is only available in business structures, like limited liability companies (LLCs) and corporations, that are separate, legal entities from the owner. Once a business has incorporated as a corporate business structure, it receives limited liability. This separates personal and professional assets. In the event of an unforeseen circumstance, such as a lawsuit or if the company accrues business debt, the personal assets of the owner will not be impacted because they were able to incorporate the company.
What else can incorporating a business do besides protect the owner’s personal assets? Once you pick an entity formation, which may be the aforementioned LLC, corporation, or a different formation like a professional corporation or nonprofit corporation, you may be able to save a bit of money on taxes and establish credibility faster than unincorporated businesses.
Obtain a Tax ID
Tax IDs are often referred to as another common name: employer identification number (abbreviated as EIN). An EIN is a nine-digit number issued to small businesses by the IRS. It is used to identify and track employer tax accounts.
One of the biggest reasons why solopreneurs obtain EINs is if they are ready to hire employees to work for their business. If you’re not ready to hire, there’s no need to file for an EIN — right?
Not quite. Technically, if you plan to form an LLC or corporation it’s advised that you obtain an EIN to identify the business. A business may also be identified by the owner’s social security number (SSN), but an EIN is less sensitive and acts as a safeguard on important paperwork. It’s also critical to have an EIN in order to open a business bank account and in the event that you plan to change your business structure to a different entity formation.
File for Business Licenses and Permits
How does a business license help protect a small business? Once a small business has filed for the appropriate business licenses and permits, they receive permission to operate a business within that specific city, state, and industry. This helps keep the company in compliance with state laws. It also allows the business to remain in good standing — so long as they are also able to keep up with annual maintenance and corporate paperwork, too.
Not sure which licenses or permits your business needs? Check in with your local Secretary of State. They can provide you with a complete list of the necessary documents your business needs depending on its industry and location.
Certain aspects of intellectual property, like the name of your business, its logo, and design, will identify your business and show customers that it is unique. It’s critical that you are able to protect these forms of original IP from plagiarism. The best way to do that is by filing to register the trademark at the federal level.
Prior to registering these unique marks, take the time to conduct a name search. This may be done through trademark databases like the USPTO’s Trademark Electronic Search System, or TESS. Conducting a name search ensures that your marks are indeed unique and that there are no other pending or previously registered marks that are exactly the same as yours. If your search has revealed that your trademarks are original and available, you may fill out a trademark application to obtain exclusive rights to these trademarks.