The United States ranks high on the scale of ease of doing business (the World Bank gives it a score of 91.6/100).
To add some context, the U.S. ranks 6th on a list of 190 countries. So it comes as no surprise that an increasing amount of businesses are born in this country every year.
In 2021 alone, the U.S. saw 5.4 million applications to register new businesses. Truth be told, the pandemic has much to blame — ever since it began, more and more people are interested in initiating their own startups.
And you may very well be one of them. If yes, then we’re sure you’ve bombarded yourself with questions like “What’s the roadmap for opening a new business?”, “What kind of legal documents do I need to start a small business?”, “Should I become a Sole Proprietor or should I open a Limited Liability Company?”, and so forth.
In this article, we’ll take a look at the answers to these questions.
The first step in opening any new business is to register that business.
To begin with, you’ll need to decide which direction you want to go in. Here are three of the most common options:
1. Sole proprietorship
A sole proprietorship is a one-man show — that is to say, you’re responsible for all the profits, losses, and risk-taking that occurs within your company.
And if you want to have full control over your business plans, both starting out and into the future, then that’s, literally, the “cost of doing business.”
One of the biggest perks of this business model is that it is easy to form and operate, especially if you’re a small business or a startup.
However, if you’re uncomfortable with making all the decisions, taking all the risks, and managing all the responsibilities in your business, then we suggest you opt for a different business structure.
2. Limited Liability Company (LLC)
A Limited Liability Company (LLC) is a mix between a partnership and corporation model. This basically means that you can operate your business with multiple partners.
It also means that in the eyes of the law, you and your business are recognized as two distinct, and separate, entities.
The most common reason why people open an LLC is to not burden themselves with any liabilities of their business. However, the grass is not all green here — you might find it hard to raise capital when you’re an LLC.
PepsiCo, Unilever, BMW, and Microsoft — they’re all examples of corporations. A corporation can have many benefits, including rights to legal protection on liabilities, transferability on ownership, and stock options for employees, just to name a few.
On the flip side, a corporation suffers from problems like double taxation, complicated formalities, and heavy regulation.
It should be noted that other business structures, such as partnerships, nonprofits, and S corporations, exist too. The ones mentioned above are just some of the most common business structures.
Also, at the stage of registering your business, you should be prepared with a business name, as the documents to get started will require as much.
Every business runs within a particular government authority.
For example, even if you’re a sole proprietor who shifts to a different country to conduct business, you’d still have to file U.S. tax returns, because that’s where your business is registered.
A license or a permit is simply a document that shows the government’s approval to run a business in a country. In the United States, there are many different types of licenses, each operating on a different level (federal, state, or local).
Here are some of the most common types of business licenses needed to operate a business in the U.S.
1. General business license
A general business license is important for any business owner to have, be it a commercial business or a home-based business.
The cost for this document varies by state, as well as likely to change over time, so be sure to stay up to date on required fees for your specific location.
Renewals are usually annual, or with an option to renew every two years, and can take anywhere from several days to a few months to obtain.
2. Doing Business As (DBA) license
A “doing business as” (DBA) license refers to the name under which you will operate your business.
For example, if you’re a sole proprietor named Jane Doe, and you want to operate your business under the name of JADO Enterprises, then you’ll need a DBA license.
3. Employer Identification Number (EIN)
Okay, so this is not exactly a permit per say, but almost every business needs an employer identification number (EIN) for tax purposes, identification, and security of assets, among many other reasons.
You can easily apply for an EIN on the IRS website.
4. Direct sales licenses
If you do direct sales (either through door-to-door selling or through MLM) over the range of $25, then you’ll need to keep a bunch of direct sales licenses with you.
5. Special business license
A special business license is an added necessity to a general business license if your business deals with firearms, antiques, tobacco, mobile electronics, dating groups, and similar services.
And like we mentioned above, the cost of a special business license will vary by state, and may include an additional fingerprint fee, so be sure to consult with local regulators.
6. Occupational license
Some professions require an occupational license to assure the government and the clients that they’re certified to do the job.
These professions include real estate agents, architects, CPAs, electricians, etc. This license is handed over by the “Occupational and Professional Licensing Division.”
7. Sales tax license
A sales tax license is required if your state has economic nexus legislation (that is to say, if your state has a threshold on the products you sell — in most states the threshold is a value of more than $100,000 or 200 units of products sold in a year).
If this is the case, you need to collect sales taxes on the sale of your products from customers.
8. Federal business license
Certain business activities are regulated by the federal government, so to function within that niche, you’ll need a federal business license.
These industries include agriculture, energy, mining, interstate commerce, and building aircraft, amongst others.
That being said, you might not need all these licenses at once to begin your business.
On the flip side, there’s a chance you might also need more documents, like a trade license, seller’s permit, health department permits, etc — again, it all depends on the kind of business you conduct and the areas you operate in.
Before we begin, this is a quick reminder that operating agreements (or bylaws) are dependent upon the nature of your business.
If you have a sole proprietorship, then there’s a high probability you may have no use for them. However, if you have a Limited Liability Company then you might need them.
Even then, they’re not necessarily needed to file with the secretary of state, but rather for your own benefit.
The reason why most organizations develop an operating agreement is because it’s beneficial while trying to obtain a business loan.
Operating agreements can also be helpful if you don’t want your state’s default rules to be set in motion — the agreements help you set the rules yourself.
For example, if you want someone to inherit the assets of your business after your death, then it will automatically go to your next of kin unless otherwise mentioned in your operating agreement.
The consequences of not having an operating agreement can be massive.
For example, your management may have no idea how to act at a vital time of decision making; your business will then closely resemble a sole proprietorship instead of an LLC, in which case assets might suffer too, and there will be no clear guidelines on roles and responsibilities.
Overall, your business operations will be extremely weak, which is the prime reason why almost every LLC has an operating agreement.
An ownership agreement or a partnership agreement helps you keep all distribution of percentages in one place.
And by that, we mean with partnership agreements you can lay down the percentage of rights, duties, liabilities, ownership, profits, and interests that every partner is entitled to.
Much like an operating agreement, this is not necessarily a need-to-have by law, but it certainly is a nice-to-have.
The other added benefit of such an agreement is that it helps in reducing money-related disputes — you have both an entry plan and an exit plan set in motion, and you establish clear duties and rights to each partner. So, all in all, it’s a win-win.
On the flip side, operating without a partnership agreement can create many issues.
Let’s take the example of Tobias Frere Jones and Jonathan Hoefler, two business partners who operated without a partnership agreement, which resulted in a $20 million lawsuit.
The story goes like this: Jonathan Hoefler met Tobias Frere Jones, who was a business competitor, in 1999, when they were both trying to purchase a German-type foundry catalogue.
Later on, speaking at a grill, Hoefler proposed a verbal 50-50 partnership of Hoefler Type Foundry. However, no formal partnership agreement was made.
Shifting forward to a few years later, the lawsuit has now been settled out of court. But it certainly gives us much to think about regarding what could go wrong without a partnership agreement.
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Additional documents required
Certain documents mentioned in this list are dependent upon the kind of business you do and at what stage of progression your business currently finds itself.
However, these are all-important (and, significantly, legally binding) documents one must know of before starting a new business.
Invoices, when accompanied by a contract, can help you in getting your compensation right on time, without the fuss of having to go through many hoops.
However, by themselves, invoices don’t serve to be legally binding.
Having an invoice can have many benefits.
Here are some of them: it can assist with bookkeeping and tracking inventory; it can help you get paid on time and will reduce billing questions (as all the info is already there); and it assists with taxes (as the IRS recommends having a summary of day-to-day sales for small business).
Plus, it looks extremely professional to have an invoice with any purchase.
2. Vendor agreement
In order to operate, any type of business needs a set of vendors to fulfill their requirements. So, how do you hold vendors accountable?
Vendor agreements, of course. And yes, these are legally valid.
Let’s discuss the pros of having a vendor agreement: you get to specify what is confidential information, you are protected against threats and legal actions, and you have protection against a security breach.
Not having a vendor agreement can result in not seeking damages (punitive, special, incidental, etc.) in a court of law.
3. Project contract
Every business entity needs to form a project contract when entering a new kind of agreement.
These documents are legally binding for all parties involved, and can consist of three types: Fixed Price Contract (FP), Time and Material Contract (T&M), and Cost Reimbursable Contract (CR).
The advantage of having such contracts is that you know the price you’re going to pay before you enter into an agreement, and they can also help you keep a check on payment and delivery cycles.
If you get misled by a contractor and you don’t have a project contract in place, you might not be able to substantiate your argument in front of an arbitrator or judge.
We’ve all heard of NDAs (Non-disclosure agreements) before. Non-disclosure agreements are often required if you’re in a highly-specialized industry or business niche.
Many people confuse NDAs with confidentiality agreements (which are also important documents to have), but NDAs are usually one-sided, whereas the latter is two-sided.
The benefits of an NDA are many, but the implications of not having an NDA can be disastrous. You can easily allow stakeholders to get access to confidential information without having one in place.
And depending on the nature of the information, this can cause heavy damage, and in some cases, result in you losing your business.
5. Contractor agreement
Whenever your business needs the assistance of an SME or an individual contractor, you’ll need to employ the help of a legally viable document (read: contractor agreement) which lays down all relevant details like the deadline, scope, payment, etc., so there is no confusion later down the line.
The main reason why people employ a contractor agreement is so they have all the information in one place (which can be beneficial to both parties).
But in certain cases, it also helps ensure that the work is not subcontracted (if you don’t want it to be).
Aside from that, it keeps note of what kind of liabilities you are excluded from and what services you will pay for so that there are no disagreements in the future.
6. Terms and conditions
We’re all guilty of saying yes to terms and conditions before giving them a second glance; however, you may or may not be surprised to know that these are legal documents which will hold up in a court of law.
So, yes, if your business needs it, develop a set of terms and conditions for your product.
The main benefit of having these terms and conditions in place is that it protects you from a host of legal troubles and issues.
But aside from that, it can also help in building credibility and transparency. Without them, you might run into a bunch of questions from consumers on topics like account expiration, liability, intellectual property rights, etc.
7. Employment agreement
Employment agreements are similar to contractor agreements, except that they’re more in-depth and, of course, the materials in both these contracts differ.
This single document can save you (and your employee) from running into issues (legal or otherwise) on matters like wages, bonuses, health insurance, retirement plans, expectations, and confidential information.
Besides, these are necessary by law to have, so for the sake of every business owner out there, we hope you have yours prepared.
Creating your own startup can be equal parts exhilarating and scary, and all at once. We get that. But we’re sure our free resources can help you get started.
And when all is said and done, and you have created a brand new business for yourself, then feel free to hop onto PandaDoc anytime to smooth out the process of eSignatures for both yourself and your stakeholders.
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