Legal and Tax FAQ
What legal matters do I need to consider?
First, decide of the legal form of business organization you want to use. For most businesses, this will be a sole proprietorship, corporation, or partnership. There are also other less used forms such as S corporations, limited liability companies, and limited partnerships.To insure that you are operating a legal business, check with your local and state authorities to notify them of the nature of your business and learn if there are any permits needed. Most small businesses do not need a special permit, but some do. Your local city or county zoning board can help steer you in the right direction.
For tax laws, contact an office of the Internal Revenue Service for booklets and guides. The IRS will give you a free “New Business Kit”. Their Publication 334 also has a lot of useful information about small business tax matters.
Some businesses require special authorization from state agencies before they can conduct business. Certain health facilities, transportation businesses, businesses dealing in dangerous chemicals, food processors, and others must check with the appropriate state agency for permission to do business.
If you will be employing others in your business, the state Employment Commission can advise you of laws pertaining to the hiring, employment and pay of workers. There are also Federal laws in this area, but the state agency can advise you of these also.
In addition, almost everything that you will be doing in your business has a legal implication. Leases, contracts, credit, banking, equipment ownership, real estate – all have legal aspects which should be understood. Establishing and maintaining a relationship with a lawyer is a good business practice. When you need a lawyer to review one of these matters, you will have that specialist available. It is far better to use lawyers to keep you out of legal trouble than to wait to use them after you are in trouble.
Should I hire a lawyer?
As with any specialist, a lawyer is valuable if you need one and a waste of money if you don’t need one. As a business owner, you will undoubtedly need the services of a lawyer now and then. If you will need one frequently, it might be more cost efficient to hire one on a retainer. If, however, you will only need one infrequently, you might locate one and establish a relationship where you can get and pay for what you want when you need it.In using lawyers, it is important to keep in mind that lawyers work with the law. They are usually not business people and often do not understand business issues. They should not be used for business advice unless they have clear competence to offer that kind of advice.
Since lawyers are expensive, especially for small businesses, they are usually hired with care and consideration to their expense compared with their benefit. If the business owner understands the law in certain areas, a lawyer is usually not needed. An example might be contracts. If the business owner is familiar with contracts and contract law, the expense of a lawyer to draft a simple contract is probably not needed. On the other hand, if the business owner is uncertain, the review of the draft contract by a lawyer will be money well spent. Once a contract is signed by you, it is usually too late to fix problems. The law assumes that you have read and understand a contract before you sign it.
What do I do to set up a legal business?
For most businesses, this is easy. Simply decide of the form of business organization you want to use (such as sole proprietorship or corporation) and register your business accordingly. A sole proprietorship is registered at your local county courthouse and a corporation is registered with your state. If you need any special permits or authorization to conduct your business, obtain these from the issuing agencies.Then get your tax information from the IRS and employment law information from the State Employment Commission.
Good advice is to use a business advisor, such as an SBDC or S.C.O.R.E. chapter, or a lawyer or accountant to guide you along.
Do I need a lawyer to incorporate my business?
No. You can do it yourself with the help of a guide book from most large book stores or with the assistance of an accountant, SBDC, or other business specialist. The state agency that issues charters of incorporation can also help you with the forms and procedures. Nevertheless, many use lawyers because the cost is usually small and the help they offer can be beneficial.
Should I use a lawyer to draw up a contract or a lease?
Yes, if you do not feel confident of what you are agreeing to or if you want a legal review of the terms and conditions. The time for the lawyer is BEFORE you sign it, not after.Some contracts and leases are drafted in terms not easily understood by lay people. Words often have a different meaning in the law than in common usage. A lawyer can alert you to these differences. A lawyer can also help you understand the exact nature of what you are agreeing to. You may think you are agreeing to one thing, but the language of the contract or lease may mean something different. Sadly, some legal instruments are purposefully drafted to confuse or mislead the reader.
What are the legal forms of business organization?
The most common are sole proprietorship, corporation, partnership, S-corporation, limited liability business, and limited partnership.
What form of business organization should I pick?
Choose the type of business organization that best suits the needs of you and your business. There is no one best form for all businesses. The most common types of business forms are listed here. Investigate each before making your decision.
- Proprietorship – has a single person as its owner and is the easiest form of business to start. The business owner is solely responsible for the business debts, there is no limited liability, and profits are taxed at the owner’s tax rate.
- Partnership – an enterprise that has two or more people as owners. They receive tax benefits similar to those of a sole proprietorship. A partnership brings the business more capital and talents than one person alone can usually provide and the responsibilities of running the business are shared. The partners have unlimited liability, meaning all partners bear the responsibility for loss and, like the sole proprietorship, could lose personal as well as business assets if the business fails. Partnerships have a limited life – the partnership automatically ends if one partner dies or leaves the business.
- Corporation – an “artificial entity” that can sue and be sued, own and sell property, and engage in business activities outlined in its charter. Stockholders in a corporation have limited liability — only the company loses when losses are realized and personal assets of owners (stockholders) are protected. Corporate directors are responsible for all activities of the corporation and officers are employed to run the corporation. Approval to form a corporation must be obtained from the Secretary of State in the state in which the corporation is formed.
Do I need any permits?
To find out if your business needs a license or permit to operate in your area, call your local authorities. The Texas Department of Commerce in Austin at 1-800-888-0511 provides information concerning specific permits or licenses for Texas.
Why do I need a Federal Tax ID number?
For a number of reasons. Your Federal ID number is like a social security number for your business. It is a unique identifier for your business and is required or desired for a wide variety of business purposes. It helps to make your business legitimate in the eyes of the government and others with whom you do business. You will find it troublesome to conduct business without one.
What regulations apply to my business?
There is no quick or easy answer to this. As a business owner, the responsibility is yours to understand the regulations that apply to you. Fortunately, there is ample help for you to find out. Start by learning the details of your business and the industry in which it operates. An SBDC can help you, as can SCORE. Those knowledgeable about a specific business or industry come to know about the regulations that apply. Past and current business owners or managers are good sources of information, as are suppliers who operate within the industry.On the Internet, look at usa.gov/business, which is the site for the U.S. Business Advisor. This is a resource offering access to information from dozens of government agencies and departments. It gives plain language guidance about federal regulations and compliance issues.
Often, direct contact with the governmental agency or department concerned is advised because they are current with information and are usually set up to offer quick assistance to small businesses asking for information. Many have prepared packets of information they will send to you free.
How will my business profits be taxed?
Business profits are taxed in one of two basic ways: either to you directly or to a corporation you have formed to operate your business.They are taxed directly to you if you operate as a sole proprietor, a partnership, or an S-corporation. They are not taxed directly to you if you have a C-corporation. The C-corporation is considered by the tax laws as a separate person and is taxed under special rules that apply to C-corporations. The profits made by a C-corporation are not included in your personal income tax return. Only the money you receive from the corporation in the form of salaries and dividends are taxed to you personally.
What can I expense in my business to save taxes?
You can expense most any money that you spend in the operation of your business that is not spent for inventory or equipment that has a life longer than one year. You can also expense depreciation of equipment with useful lives of more than one year as well as losses from inventory spoilage or obsolescence.The above quick answer is a generalization and oversimplification, for the tax laws relating to business expenses are complex. IRS Publication 334, the Tax Booklet for Small Business, is a good source of information about what is permitted in the way of business expense.
Different businesses and different industries have different rules relating to expenses. What is allowed for some businesses are not allowed for others. It is important that you understand the rules for your particular business. CPA’s, tax lawyers, the IRS, and other advisors are good sources of information on this subject.
Should I use a Certified Public Accountant (CPA) to do my taxes?
Yes, if your taxes are complicated and you need that level of expertise. No, if your tax return is simple and straight forward. You can either do it yourself by following the IRS guide that comes with your tax form or by using a commercial tax preparer such as H & R Block. If in doubt, show your information to a commercial tax preparer and ask if they are competent to handle it.
Can I prepare my own tax returns?
Probably yes. Many small business owners are unnecessarily intimidated by a tax return. If you take the form one line at a time and follow the IRS directions, it is easier than you may think. Simple logic will tell you that if a commercial tax preparer will do it for you for only a few dollars, it can’t be too difficult.A residual benefit of doing your own taxes is what you learn about your business and the tax codes. This knowledge is useful in your decision making throughout the year.
Can I hire my children or relatives and get a tax deduction?
Yes. This is a common practice of small family owned businesses. As long as the child or relative is performing some needed service for the business and is paid approximately what a non-relative would be paid for the same work, it is allowed.
Can I buy a new car in my business and get a tax deduction?
Yes, provided the car is used in the business. If it is used exclusively in your business, you can deduct all of its cost and operating expenses. If it is used partly for business and part for pleasure, you can allocate the business portion and claim a percentage of its cost and expenses. There are some restrictions on luxury cars, so check the rules before you buy.
If I operate my business from my home, what can I deduct from my taxes?
You can deduct all regular expenses associated with your business. This is no different from operating your business from a location outside your home.In addition, under certain circumstances you can also deduct a portion of your home expenses – that portion that relates to business use. There are some strict rules for this and you should know what they are before attempting to take any deduction for home office or home business use expense. Consult IRS Publication 334, the IRS, a CPA, a tax lawyer, or some other source familiar with these rules.