Day 4: Legal Mumbo Jumbo – Everything from Licenses to LLCs

Legal Mumbo Jumbo to Start Your Business

by Nicholas Tart

“I’m willing to do everything that it takes to succeed – as long as it’s moral and legal.”
Ben Weissenstein

Disclaimer: We are not lawyers (nor do we want to be). If you’re in sticky legal terrain, we recommend that you grab some professional advice.

But that doesn’t mean we’re completely clueless when it comes to the laws of the land. In fact, it’s essential that every business owner has a grasp of certain legal basics – otherwise, someone could steal your idea or skip out on your contract.

By the end of this module, you’ll know everything you’ll need to know about licenses, permits, patents, trade names, LLC’s, EIN’s, business bank accounts, insurance, contracts, taxes, CPA’s, lawyers and chocolate frogs. Ok, maybe not the chocolate frogs.

We’ve even enlisted the help of an expert to make this part of the guide as good as it can be. When you find a nugget of particularly helpful advice, you can thank Carol Topp (a Certified Public Accountant (CPA) and the owner of Micro Business for Teens).

Laws are different all over the world. The legal information below is only useful in the United States. If you’re doing business in another country, you should seek information about the laws of that country.

Business Licenses and Permits

“Come to India. Go to the streets. They are street-smart people. They know how to sell. They can sell you your own shoes in two minutes.”
King Sidharth

Not all licenses and permits are created equal. Your driver’s license doesn’t give you a license to drive an 18-wheeler. Most businesses don’t require any license whatsoever, but it’s better to be safe than sorry.

Federal Regulations

In the US, the national government requires that you have a license in the areas of, “agriculture, alcohol, aviation, firearms and explosives, fish & wildlife, maritime transportation, mining & drilling, nuclear energy and radio and TV production.” If this sounds like you’re business, find out more here.

State Requirements

If you want to be a lawyer, doctor, electrician, beautician, or architect (along with a host of other professions), you’ll likely need a license from your state. This is your state’s way of making sure that the professionals you enlist to cut your hair or design your house actually know what they’re doing.

Local Licenses

Your city or county will require licenses or permits for some local businesses. Common examples include vendor’s licenses (a.k.a. seller’s permit/sales tax license/sales and use tax license), health permits, and zoning permits. So, if you’re selling a product, cooking something, or working out of your home, there’s a good chance that your local government is regulating it.

Make sure that you’re on the right side of your state and local law by popping your zip code here.

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Since Nick and I are selling our book at events in town, we need to collect sales tax. In order to collect sales tax, we need a vendor’s license from the City of Fort Collins.

A vendor’s license is relatively simple to acquire and it’s the one thing you’ll definitely need if you’re selling a product.

Patented Protection

“I never perfected an invention that I did not think about in terms of the service it might give others. I find out what the world needs, then I proceed to invent.”
Thomas Edison

A patent is like a fortress around your castle to prevent the world’s biggest corporations from coming inside and stealing your damsel.

What is a Provisional Patent?

Technically, there’s no such thing as a “provisional patent”. You can file a “provisional application for patent” which includes a description and drawings of your invention. It proves that you had the idea when you actually had the idea.

Once you file your provisional application, you have 12 months to finalize the invention and complete the patent process. As of September 8, 2010, it costs $110 to file a provisional application. Generally, patents will protect your invention for 20 years.

Three Types of Patents

  1. Utility Patent
    To protect a new invention or product. The most common patent.
  2. Design Patent
    To protect a new or original design for something you manufacture that’s different than the design of similar products.
  3. Plant Patent
    To protect a new variety of plant you develop or invent. Like flowers and herbs.

Filing a Patent

If you want to patent your product, start with filing a provisional application. You can do this online at the United States Patent and Trademark Office.

Once you have your provisional application and you’ve proven the concept, then you should spend the $20,000 or so to hire a patent attorney to make everything official.

Philip Hartman filed his provisional application for SteamTech and he’s pulling together a list of investors and customers before he files for the actual patent.

By the time you’re ready to file a full patent, you need to have sold at least a few sales to prove that it’s something people want.

Becoming a Legitimate Company

“I read a book and some blogs about how to put together your LLC and structure your company…Talking to friends and people on the internet who have already done it – that’s the best resource that you can get.”
Marshall Haas

Ready to play with the big kids?

Is it a Hobby?

The line between a hobby and a for-profit endeavor is a little bit blurry. It depends on your motive. If you’re doing it to make a profit, then the IRS considers it a business. If you’re doing it for the love and enjoyment of the activity (and happen to make money), then it’s a hobby. The IRS looks to see if you’ve spent money on advertising or have received professional help. If so, then that’s a sign that you’re operating a business.

Your friendly, neighborhood IRS offers clarification here.

Lindsay Manseau

Lindsay Manseau is a professional photographer. When she’s shooting weddings and portraits, Lindsay is operating as a business. But if she takes a few scenic photos for fun, and someone happens to buy one, then it can be considered a hobby.

Doing Business As… (Trade Name)

Bruce Wayne’s Trade Name is Batman. Your Trade Name is the name of your company.

If you don’t want someone stealing your company name, then you should reserve it through your Secretary of State. Once that’s done, nobody else in your state will be able to do business under that name. (We’ll show you how to do it, step-by-step, below).

Research your name here.

Limited Liability Company

An LLC is like a legal blanket for business. If you make a mistake as an LLC and someone decides to sue you, they can only sue you up to the value of your company. So they can’t touch your college savings account.

Also, some businesses prefer not to do business with you unless you’re an official company.

When filing your LLC, make sure that you use the exact same name as you registered. That includes punctuation, capitalization, and spelling!

Employer Identification Number (Employer Tax ID)

Your EIN number is what you’ll use to file your taxes for your business and work as an independent contractor. It’s free to set up and it’s good to have so you don’t have to use your social security number on your business forms.

You can get an EIN for free (and use it for all of your businesses) here.

Setting Up Business Bank Account

You can set up a free business savings and checking account at Wells Fargo (or many other banks and credit unions) as long as you’re over 18. If you’re under 18, you’ll need to have your parents or guardians co-sign on the account.

The biggest reason to set up a bank account for your business is to keep your business expenses separate from your personal expenses. This way, you’ll be able to write off your business expenses so you don’t have to pay taxes on those amounts.

Make sure that your bank or credit union gives you a business credit/debit card. Then use that card for all of your business expenses to make keeping track of it easy.

Emil Motycka

When Emil Motycka started mowing lawns as a nine-year-old, he didn’t have a trade name, an LLC, or a bank account. It was essentially a hobby. But as his lawn care business grew, Emil reserved a trade name (Motycka Enterprises), made it into an LLC (Motycka Enterprises, LLC), and set up a bank account for all of the revenue to go through. By the time Emil was a senior in high school, Motycka Enterprises, LLC was making $135,000 in revenue per summer.

It’s important to keep money in your savings account for tax reasons (about 25% of your profit). As an employee, you’re company holds back some taxes from your paycheck. But as an employer, you have to be ready to pay the taxman come April.

Be Sure with Insurance

“Fun is like life insurance; the older you get, the more it costs.”
Kin Hubbard

Operating a business without insurance is like crossing America in a covered wagon without a spare wheel. You can do it, but it’s risky.

General Liability Insurance

Registering as an LLC covers your liability as a company. But some customers, especially commercial clients, will require that you have general liability insurance as well. Essentially, you pay the insurance company a smaller, monthly fee so that they’ll cover the cost of damages if someone or something is ever damaged because of your product or service.

Emil Motycka

Emil Motycka pays about $100 per month for general liability insurance against all of his equipment and he has separate automobile insurance for his five trucks.

Home-Based Business Insurance

A standard homeowner’s insurance policy typically covers some damages incurred by having a home-based business. But if you want your business to be completely covered, home-based business insurance is a more robust alternative.

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We don’t have general liability insurance or home-based business insurance for JuniorBiz because there’s not much risk that the website is going to hurt anyone (no sharp edges).

There’s a good chance that you won’t need any type of insurance for your young business, especially if it doesn’t involve any expensive or dangerous equipment. Before you make your own personal decision, it’s best to consult a legal professional.

Contract Me

“A verbal contract isn’t worth the paper it’s printed on.”
Sam Goldwyn

Just sign on the dotted line?

Not Binding as a Minor

Never make a contract with someone who is under 18-years-old, because they’re not legally bound by contracts. Have their parents or a business mentor sign the contract instead.

Writing a Contract

Here is a list of the seven things your contract should have:

  1. A detailed description the type of work to be done.
  2. A specific price and payment arrangement.
  3. A clearly worded plan that describes individual tasks and deliverables.
  4. A schedule with dates and deadlines.
  5. An agreement as to who owns the rights to what you are creating (i.e. the website files).
  6. Terms to get out of the contract.
  7. Dated signatures from all parties.

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We’ve included a contract template that will help you build your own contract from scratch. Grab it here.

This advice isn’t set in stone because contracts aren’t one-size-fits-all. If you want to ensure that your contract covers all of the bases and is completely legally binding, then seek legal counsel.

Taxes to Uncle Sam

“In this world nothing can be said to be certain, except death and taxes.”
Benjamin Franklin

Just think of it as paying your local firefighter.

Federal Income Tax

If you make $5,700 or more in a calendar year, you will need to pay federal income tax. This income can come from being an employee or from owning a business. $5,700 is the typical amount of a deduction for a single person. It is adjusted by a few hundred dollars every year.

Americans report their income and tax due on a Form 1040. Be aware that business owners report their profit on a form called Schedule C Profit or Loss from Business and attach it to the Form 1040. Go to the IRS website to see what it looks like here.

Self-Employment Tax – The Hidden Tax

If you’re self-employed or own a business and earn more than $400 a year in profit, then you need to know this easy-to-miss tax. The SE tax is 15.3% of your profit. So, if your business makes $1000, you’ll have to pay $153 in Self-Employment taxes – even though your earnings are below the $5700 threshold for paying federal income tax.

This tax goes towards paying Social Security and Medicare

Keeping Good Records

To get started, use Microsoft Excel to keep track of your expenses, revenues, and profits. Every time you purchase something for your business, make sure you use your business credit/debit card. This is important to not only track how well your business is doing, but also so you’ll know exactly how much taxes you’ll have to pay.

Once you start making $5,000 a year or more (as a general benchmark), you should upgrade to accounting software. Quicken is a good place to start.

Then, QuickBooks is the most substantial software you should be using. If you have have an inventory of two or more products, then you should use QuickBooks from the start. It’ll easily manage the sales, inventory, and sales tax for your business.

In addition to tracking your business’ income and expenses, start using Mint to monitor your personal finances. They send you weekly emails and texts with your account balances and budget trackings. Plus, they remind you to pay your credit cards. I love it! We’ll set you up with a free Mint account here.

Ben Weissenstein

Ben Weissenstein paid another company to have software developed for his garage sale service because his business quickly outgrew QuickBooks.

Filing Taxes

Every year, by April 15th, you have to pay taxes on the profit you earned January 1st – December 31st of the previous year. If you have are the sole owner of your company, you’ll have to file the Form 1040 Schedule C Profit or Loss. If your LLC performed as a partnership with two or more members, you’ll need to file a Form 1065.

If you made less than $5,000 during the year, didn’t have any inventory, and operated as a sole proprietor, then you can use the Schedule C-EZ to file your taxes. This is the “EZ”est form to fill out, but don’t let this discourage you from making more than $5,000 in one year.

Carol says: “as a rough rule of thumb, save 25-30% of your profit to pay your federal income tax and your self-employment tax.”

Reaching Out to Other Resources

“Young entrepreneurs need to nail down the art of networking. Some of my best opportunities have come out of those cold-call approaches.”
Lauren Amarante

Everyone needs a helping hand.

Call Your Local Government

Go to your local government’s website (i.e. fcgov.com) and look for contact information for a small business representative. They will be able to give you the best, most accurate information that you can get.

Just call them, let them know what you’re doing, and ask them to give you a list of everything you need to cover your legal basis.

Certified Public Accountants

A Certified Public Accountant (CPA) will help you make sure you’re doing all of your bookkeeping and filing correctly. They charge anywhere from $50-$300 per hour, so it’s not cheap. But getting audited because you did something wrong or filed your taxes incorrectly will cost you much more.

Take your first $100 of profit and visit a CPA. You might be able to get an hour with them for free if you play your “helpless young entrepreneur” cards right.

Small Business Lawyer

Eventually, you’re going to need a lawyer. It’s best to build a relationship with a lawyer as soon as you can.

Find a reputable small business lawyer in your community. Schedule an introductory meeting with them and make sure they know that it’s an opportunity to help out a young entrepreneur. Typically, they’ll give you the first half hour for free, especially if they know you’re a young person.

More Advice from Carol Topp

Here is a collection of other resources that Carol has pulled together.

  1. Starting a Micro Business: Will help you plan and launch a successful micro business.
    Paperback | eBook
  2. Running a Micro Business: Will help you in the day-to-day of running your micro business.
    Paperback
  3. Micro Business for Teens Workbook: To help you implement what you’ve learned from Starting a Micro Business and Running a Micro Business.
  4. Teens and Taxes: Learn about the taxes that affect teenagers in an easy to understand way.
    eBook

Syed Balkhi

Syed Balkhi’s lawyer, finance guy, and insurance guy are all clients of his. A surefire way to get free, professional services is to help people who can help you.

We’ll talk about keeping track of your finances and hiring employees in modules nine and ten.

Take Action

Here are your actionables for the week. I know there’s a lot to do here, but if you don’t do them, a unicorn might die.

If you’re not quite ready to establish the legal foundation of your business, at least set up your free personal financing and bookkeeping.

  1. How to Call Local Government and Obtain Your Business Licenses
  2. How to Register as an Limited Liability Company and Get Your EIN
  3. How to Set Up a Business Banking Account
  4. How to Set up Free Personal Financing and Bookkeeping

See you at the top,
Nick Tart & Nick Scheidies

P.S. This module is just one part of a ten step outline to business success. Use it to launch your product, service, internet business, or something nobody else has thought of yet. The next module will help you hone in on your target market – but the only way to get it is to subscribe to the guide. It’s an investment in your business and it’s absolutely free.

P.P.S. Since we’re giving you this course for free, we just ask that you “Like” it, “Tweet” it, and otherwise share it with everyone you know. Thanks!