16-Step Legal Checklist for Startups and Small Businesses 

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Are you thinking about starting a business? Or maybe you’ve already got the ball rolling with your startup, but want to make sure you’re doing it the right way.

Great, then this series is for you!

Our our 16-Step Legal Checklist for Startups & Small Business Owners walks through starting a business step-by-step from a legal perspective.

This list is designed to help startups, entrepreneurs, and small businesses set up their organization in a thoughtful and legitimate way. It will also help you create legal protections that many business owners often overlook. We will release new sections of the checklist every Tuesday and Thursday, so check back regularly for more legal education.

 
 
 

16-Step Legal Checklist for Startups

Click on the below links to jump to a particular section.

 

All videos and articles are for educational and entertainment purposes only. This is not legal advice and should not be relied on as such. Every case is different. Consult a licensed professional in your state. Mark Lyda is a Colorado-licensed attorney. Viewing this channel or its content does not create an attorney-client relationship with Lyda Law Firm or any of its lawyers.

 
 

Step 1.
Define Your Mission

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Creating a clearly defined mission statement is the first thing you should do when starting a business or entrepreneurial venture.

There are many resources that go into great depth about writing a mission statement, but it’s ultimately a very personal process. If you want to read a whole book on the subject, Start With Why by Simon Sinek is a popular resource.

To come up with your mission statement, start with reflection. Ask yourself these important questions and reflect deeply.

  • Why do you want to start this business?

  • What are you trying to accomplish?

  • What will it mean for your life?

  • What will it mean for your co-workers?

  • What will it mean for your customers?

  • How will you create change with your business?

  • Why does this business have to exist and why do you have to be the person to start it?

After you’ve gone through the reflection phase, articulate your findings. Grab a pen and paper and write down some of the answers you developed during reflection. Your mission statement is not something that just lives in your head. Actually write it down and read it back to yourself. Then revise it. Then revise it again.

 
 
 
 

There are no formal requirements for what a mission statement has to say or include. It can be short or it can be long. The important thing is that it clearly communicates what is driving you to start this particular business. The whole purpose of a mission statement is to communicate your business’s purpose to yourself and to others.

But why is a mission statement included in a legal checklist?

We included this step because Your mission statement will act as your north star and guide your later legal decisions. It will inform the type of entity you select, your tax treatment, who you work with, where you work, and more. We will discuss those particular decisions in future chapters.

At the Lyda Law Firm, our mission statement is to:

“Increase access to high-quality legal services for small businesses and moderate-income individuals.”

Each word in our mission statement was carefully selected. We don’t just want to provide legal services, we want to provide high-quality legal services. We want to increase access, meaning we want to make legal services more affordable. We also have a focus on our clients: small businesses and moderate-income individuals - these two demographics are often underserved in the legal industry.

One thing to keep in mind about mission statements: even though they are your north star in guiding your business, they are not necessarily set in stone. Your mission statement can evolve as your business evolves.

For example, we’ve realized that the Lyda Law Firm’s mission statement does not address something important to us: how we treat our employees. The legal industry has an incredibly high burnout rate, so it’s important for us to create a positive work environment for everyone on the team. We have not yet incorporated that into our mission statement and that is one way we expect our mission statement to evolve.

Once you’ve successfully defined your mission, it’s time to start looking into the future.

 
 

Step 2.
Define Your End Goal

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Once you’ve set a clear mission statement, it’s time to look into the future of your business and define your end goal.

Defining your end goal is slightly different from defining your mission statement. It’s more specific and it’s more concrete.

Picture your business in one year, five years, ten years, and at the end of your career. Where do you see your business down the road?

  • Do you want to have lots of outside investors?

  • Do you want to be publicly traded on a stock exchange?

  • Do you want it to remain small and fit into your existing life?

  • Do you want to sell the business and spend the rest of your days on a beach?

It might seem too early to think about your exit, but defining your end goal will affect all of your later legal decisions.

For example, if you want your business to become publicly traded, you likely to want to set yourself up as a C-corp (a subchapter C corporation) right from the get-go (we’ll go into more details about selecting an entity type in future chapters).

Another example of how your end goal can have legal impacts on your business is if your end goal differs from your business partner. If that’s the case, you could face legal complications down the road.

 
 
 
 

Your end goal will also affect where you do business and even what state you register your business in. There are advantages to registering in different states, but those advantages are only worth it if you have a specific end goal in mind. For example, registering a business in Delaware can be advantageous for large corporations, but it probably doesn’t make sense for a small local business.

That main point is that there are many legal decisions that will ultimately trackback to your end goal.

What are some examples of end goals for small businesses?

  • Acquisition - Perhaps you want to sell your business to a larger business someday.

  • Going public - Some businesses start with the end goal of becoming publicly traded by listing the business on a stock exchange.

  • Creating an Enduring Brand - Maybe your ultimate goal is to have your business outlast you.

  • Staying Small - Many people start small businesses with the intention of keeping it small and close to the family.

  • Provide Supplementary Income - Perhaps you want to keep your business on the side while you maintain employment elsewhere.

All of those are legitimate end goals for a business. No one end goal is better than the other. It’s just important to find out what works for you and your future so that you can have that as a baseline for all of your legal decisions going forward.

Next up in the Legal Checklist for Startups, we’ll discuss why it’s important to define the people associated with your business.

 
 

Step 3.
Define Your "Who"

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The next step to think about when starting your business is what we call “defining your who.” This is when you identify the people who will be involved with your business.

Like some of the other items on this list (like defining your mission and defining your end goal), defining your who is not in itself a legal concept, but it will absolutely affect your legal decisions.

The “who” of your business can be broken down into three different parts:

  • Partners

  • Employees or Independent Contractors

  • Other Collaborators (Investors, Lenders, Vendors, Service Providers, etc.)

Let’s take a look at each of these parts in more detail.

 
 
 
 

Partners

The first group of people you should identify is potential partners.

We talked about this earlier in Defining Your End Goal. If you’re thinking about going into business with a partner, it’s important that you both have a similar end goal. Otherwise, you could go off in different directions, which could create a lot of tension.

You’ll also want to make sure that a partnership is right for you, personally. If you are considering bringing on a partner, make sure you are comfortable giving up some level of control. Also try to identify what each of you brings to the table so you can break up responsibilities and set realistic expectations.

Employees or Independent Contractors

The next group you need to think about when defining your who is people who will work for your business. Namely, employees and independent contractors.

It is extremely common for businesses to pay their workers as independent contractors when they should be treated as employees. If you try to save tax money by classifying an employee as an independent contractor, it can come back and bite you. If you are caught, you’ll have to pay back-taxes and penalties.

In short, if you have someone who is working for you most of the time, and your business mostly supervises them and the time, place, and manner of their work; then they are most correctly and appropriately defined employees rather than independent contractors.

When you are thinking of who will work for your business, think about the day-to-day activities that you can’t (or don’t want to) handle. Next, think if this will be a person who you will bring on full or part-time as an employee, or if this can be handled by a contractor (or a combination of the two).

Other Collaborators

Another group to think about when you are defining your who is other collaborators.

One of the most significant types of collaborators are lenders and investors. If you collaborate with people who will be providing funding for your business, you need to think about what type of relationship you want. At this stage, you may not know specifically who your investors will be, but you can start to think about what types of investors you would want.

For example, if you’re seeking venture capital funding, do you want an investor who just gives you money and gets out of the way? Or do you want someone who will serve more as a mentor and advisor to your business, with a board of directors seat and hands-on involvement in the day to day operations?

The last group we will talk about in defining your who is vendors. Vendors could be the suppliers of raw materials, landlords, service providers (such as advisors like attorneys and accountants), and even technology providers. Vendors are much like independent contractors or employees, but instead of being individuals, they are most often other businesses.

When considering outside collaborators, think about your strengths and weaknesses. What skills are you lacking? Does it make sense for someone (a partner, employee, or other collaborator) to fill that gap?

Why is this important? Because if you bring on partners it will affect the type of business entity you select. If you have people working for your business it will affect your tax decisions. Keep reading, because we will discuss business entities and tax treatments in future sections.

 
 

Step 4.
Define Your "Where"

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Item #4 in the Legal Checklist for Startups is to define your “where.” This doesn’t just mean figuring out what state you want to work in, there are more intricate details that you’ll have to work your way through.

You “where” can be broken down into three parts.

  1. Where do you want to work?

  2. Where do you want to register your business?

  3. Where will your customers be?

Let’s take a look at each part in more detail.

 
 
 
 

Where Do You Want To Work?

First, where do you want to work? We’re not just talking about what city or state you want to work, we’re talking about your specific location. The main options here include retail space or office space.

If you are selling hard goods, then you will more than likely need a retail space. Operating your business out of a retail space opens up your business to potential liabilities if someone gets injured in your store, so you’ll want to make sure proper legal protections, like insurance, are in place.

You’ll also need to think about a commercial lease and negotiating that lease. Another factor that you’ll obviously need to consider for any retail location is advantages and disadvantages of that space. For instance, do you want to be in a location with a lot of pedestrian foot traffic? If so, monthly rent will probably be much higher than a place that is off the beaten path.

When selecting a retail space, it is important to weigh the pros and cons and estimate the eventual impact on your business.

If you are in the service business or another profession industry, you may not need a retail space and opt for an office space instead. There are a few factors to consider when selecting an office space that will affect your legal and financial decisions.

For instance, do you need a space for a large group, or just a few key individuals? How much do you want to grow your team? This is a decision that will be affected by defining your who, which we talked about in the previous section.

If you’re going to have an office, will a virtual office suffice? Virtual offices can be a great way to keep expenses low while maintaining the benefits of a physical office space. A virtual office is a place where you can receive mail or rent out conference space while working remotely from your home or other office location.

Speaking of other office locations, coworking spaces are growing in popularity. Coworking spaces can offer a great environment for collaboration and can lead to random interactions with other small businesses. Many coworking spaces also have private offices within the larger coworking space, so you can have the privacy of a personal office with the benefits of a coworking space.

If you do want your own private office, you need to consider potential liabilities if someone is injured at your office. You’ll also have a commercial real estate lease to consider. If you have a long-term commercial real estate lease, it is not uncommon for landlords to ask for a personal guarantee, especially for new business owners. If your landlord requires a personal guarantee, it is imperative that you fully understand the agreement and what it means for your personal finances.

Where Should You Register Your Business?

The second part in defining your where is figuring out in which state you want to register your business.

We previously mentioned that if you are interested in starting a large corporation that you may want to register in Delaware. Many businesses register in the state of Delaware because of their specialized business courts and other advantages for large corporations. But if you have no intentions of growing that large, you may not need to go through all the trouble to register in a different state. Registering in your own state is likely to be perfectly sufficient.

In most instances, registering in the state where you live and work makes the most sense. But with all major business decisions, it is never a bad idea to consult with a professional.

We will talk about how to register your business in Step 8.

Where Are Your Customers?

The third part of defining your where is to determine where your customers are. If you are a small retail business, your customers may only be in your state. But it is becoming more and more common for businesses to interact with customers in other states and even in other countries.

If you are selling a product or service across state lines, you could become subject to the laws of those other jurisdictions.

For example, if you’re selling a product out of Colorado to people in other states, there is a possibility that you could get sued in those other states because you’re choosing to do business in those states. The law will say you’re purposefully availing yourself of business contacts in those other states.

We’ll later talk about determining your industry-specific regulations. If you’re doing national or international business, you’ll need to think about how laws in those areas could potentially affect your business.


That wraps up Step 4 in the Legal Checklist for Startups: determine your “where.” Next up, we’ll talk about how you can protect your brand and intellectual property.

 

All videos and articles are for educational and entertainment purposes only. This is not legal advice and should not be relied on as such. Every case is different. Consult a licensed professional in your state. Mark Lyda is a Colorado-licensed attorney. Viewing this channel or its content does not create an attorney-client relationship with Lyda Law Firm or any of its lawyers.