Steps to Start a Small Business in Colorado

10 Essential Legal Steps for Starting your Small Business

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Oy vey! LLCs, corporations, formation, asset protection, trademarks, partnership agreements, and tax identification. Where to begin? We get it, the legal details are not the glamorous parts of launching a business. However, sorting out the legal nuts and bolts are essential to 1) protecting your personal assets 2) avoiding conflicts and 3) fostering optimal business growth.

BEFORE you make any significant business obligations make sure you have the following legal nuts and bolts in place.

1. Protect Your Personal Assets

Without the proper legal infrastructures, you will be personally responsible for all the debts and liabilities of your business. This means that your business creditors will take your personal assets to repay the debts of your business. Even if you don’t have personal wealth, you will still be personally required to pay those debts over time.

You can protect your personal assets by 1) forming a business entity and 2) following business formalities. If you have significant personal wealth, consider additional asset protection options. Such as, transferring assets to family members, creating a trust, or using a special form of spousal co-ownership.

2. Determine Your Correct Entity Form

Your business entity form will guide business decisions, tax issues, and determine how you can scale your business. Many small business entrepreneurs form their small business as an LLC. However, a corporation may be a better option for some, while others should elect S-Corp status for their LLC or corporation. The best structure for your small business depends on the nature of your business, financing desires, and long-term goals. Often, the LLC v. corporation decision hinges on whether or not you plan to raise money through investors, as many investors are unable to invest in LLCs.

3. Vet Your Business Name

Before investing in branding or marketing, determine whether your chosen business name is available. By doing so, you’ll save money and avoid disputes with other business owners.

If your business name is confusingly similar to another business’s name, or the exact same, that business may demand that you to stop using the name. The law may require you to stop using the name, or at the least, you’ll need to hire an attorney to investigate and respond to the other business’ demands or lawsuit. By vetting your name, you’ll avoid these potential conflicts, thereby saving time and money.

4. Officially Form Your Business Entity

To officially form a business entity, you must file the proper organizational documents with the Secretary of State and pay the required government fees. In Colorado, LLCs file Articles of Organization and Corporations file Articles of Incorporation. Forming your business entity before you launch your provides greater liability protection and stronger business credibility for your small business.

5. Follow Business Formalities

To protect your personal assets from your business liabilities, you must always follow business formalities. If not, you can lose the protections that insulate your personal assets.

You’ve likely heard the expression “piercing the corporate veil.” This is an extremely important concept for all business owners, big and small to understand. Briefly, by forming a business entity you create a legal entity that is separate from you as a person. It is this “separateness” that protects business owners from the liabilities of their business. However, if the corporate veil is pierced this “separateness” disappears and the business owners become responsible for the liabilities of their business. So, yes, you’ve guessed it, piercing the corporate veil is very bad and all steps should be taken to avoid piercing. By following business formalities from the start and through the life of your business, you will avoid piercing the corporate veil.

Some important business formalities include:

• Using a business bank account to keep personal monies separate from business monies (no commingling).
• Using the name of the business to conduct all business. For example, sign all contracts in the name of the business and as a representative of the business, not in your own name.
• Follow proper accounting measures.
• Adequate capitalization and maintaining proper operating capital.
• Keep up to date records.
• Maintain governance documents, such as an Operating Agreement or Bylaws.
• Hold regular meetings.
• Keep up to date on all entity filings.

6. Apply for an EIN with the IRS

An Employer Identification Number (EIN), also known as a Federal Identification Number, is issued by the IRS. When you file taxes, the EIN is used to identify your business, instead of your social security number. While not all entity types are required to obtain EIN, you should do do so to maintain your business as a separate legal entity from yourself and to protect the confidentiality of your social security number.

7. Open a Business Bank Account

Commingling your personal funds with your business funds should never occur. Many companies lose liability protection by commingling funds. Note, most banks require an EIN to open a business account, so this should be one of your first steps after forming your business entity.

8. Strategic Operating Agreement or Bylaws

State laws will control how how your business is run if you do not have an Operating Agreement for your LLC or Bylaws for your Corporation. For instance, state laws will decide internal governance and management matters, transfer of ownership interests and exit strategies, and more. Additionally, these documents further strengthen the liability protection that a business entity provides. Lastly, strategic governing documents will give you the best opportunity to think through how you’d like your company to operate, and to put these mechanisms in place.

9. Investigate Trademark & IP Protections

Planning to invest in branding? Are you eager to protect the name or logo of your small business? If so, you’ll want to investigate the pros of trademark protection. Additionally, if your business focuses on creating or designing something, you need to learn the difference between copyrights, trademarks, and patents and which your business needs. Registering for copyright and trademark protection is relatively straight-forward once you understand what your small business needs.

10. Hire a Skilled Small Business Attorney

Every small business has legal needs, and it’s best to establish a strong working relationship with a small business attorney before any serious legal issues arise. A skilled small business attorney will help you structure your business correctly from the outset, allowing you to easily grow your business as you move forward.

Even DIYs should hire a small business attorney to review their work and important legal decisions. “Light” legal counsel will save you money, while also establishing a working relationship with a small business attorney. Eventually, you’re legal issues will become more complex. When this happens, you’ll already have a small business attorney you are comfortable working with, and who won’t need to spend extra hours getting up to speed on your business.