Sure, there are times when you can save a few dollars (or a few hundred dollars …) by doing something yourself – changing the oil in your car, fixing a leaky faucet or painting your house. Starting a business, generally speaking, shouldn’t be one of them. Why not? Aren’t the forms all available online? Aren’t there services who do this for a fraction of the cost that lawyers charge?
The answer is “you don’t know what you don’t know, until you find out what you did wrong.” There are so many potential pitfalls for someone who is inexperienced in business entity formation, tax law and licensing that we can’t offer a comprehensive list of all the things that could potentially go wrong. But here’s a few things for you to consider, if you feel the urge to “do it yourself” setting up your new business.
The first issue is a simple one – choosing your starting a new business name. Just searching for an available domain name doesn’t mean that somebody else is not already using that name for their own business. Trademarks can be registered both federally, and by each of the 50 states. Trademarks are the legally protected right to use a business name in a particular category of commerce. You may be prevented from using the business name for which you just bought a domain if it is confusingly similar to a person with a registered trademark. So, your work building (or paying for) that beautiful website might be for nothing if someone else already owns the name.
Another potential pitfall to “do it yourself” business formation is knowing what kind of business entity is right for you. Do you understand the difference between a “D/B/A Certificate” and a limited liability company? One of them protects your savings and assets for losses suffered by the business; the other does not.
Do you understand the difference between S corporations and C corporations? Do you realize that under one type of corporation you pay tax twice and under the other type you only pay tax on your personal profits from the business? Do you need to collect sales tax? How do you get authorized to do that? Does your type of business need a license? Do you need consent from the State to use a particular word, like “financial”, “wellness”, or “memorial”, in your business name? There are many pitfalls to be avoided.
Another common problem in trying to set up a business without professional assistance is that services like LegalZoom or Rocket Lawyer are not permitted to give legal advice. The same is true with employees of state agencies or the IRS; they may not give you advice on the proper way to complete forms to achieve your desired result.
LegalZoom, for instance, can help someone register a business, but they don’t provide you with an operating agreement or shareholders agreement – an agreement among partners in a business. These type of partnership agreements are essential to set up at the outset.
There needs to be clear understanding about who will be employed by the business, how much will they work, and what they will contribute (money, labor, skills or other expertise) to the operation of the business. Is this new business a part-time job for you, but a full-time job for your partners? Are you the silent partner who invests money, or the chef who creates the menu and runs the kitchen?
Do you have particular expertise in sales, or accounting, or building websites? Are you skilled at construction bids? Do you have tools of the trade, or a delivery vehicle that the business will use? Who hires and fires staff? And most importantly, who owns how much of the business, and how will profits be shared? What if you want to sell your shares and quit the business?
If you delay setting up these kinds of partnership documents – the “ground rules” of how the business will be run – until after you have paying customers, disagreements may emerge at the very outset of starting the business that could destroy the business before it has a chance to be successful.
One more reason for hiring a lawyer to set up your business for you is to avoid losing time and money trying to fix mistakes you have already made.
These days, state governments are over-worked and under-staffed. Ever since COVID, the response times of government agencies has plummeted. Things that used to take a couple weeks now take a few months to even get reviewed. If the State rejects your paperwork – and it may be for the slightest of reasons, like spelling or punctuation errors in your application – then you lose several months of time waiting for it to be corrected.
What happens in the meantime if you can’t open a bank account? How will you pay your staff, or pay the rent?
What does it do to your business insurance, your credit rating, the hiring of employees, if you have to change your entire business structure, change your bank accounts, get a new tax ID number and cancel the old one, or you have to re-do your website? What happens to all your work, if you have to simply start over? There’s an old saying: “Time is Money”.
If you are setting up a new business that is anything more than “just a hobby”, it’s my advice to spend a few hundred dollars more to get a professional to help you do it right. There are so many pitfalls to starting a new business. You should spend the majority of your time working on the business itself – how can I make my product or service better, where can I find more customers, where I can I hire quality employees? Those are the things you should be spending your time on, not being a part-time lawyer, or a part-time accountant, or a part-time web designer.
Do the things you know how to do, and hire others to do the things you don’t know how to do, at least not without a lot of time and effort. Maximize the value of your time by outsourcing anything that isn’t essential to the operation of your business, so you can focus more on the fastest path to more revenue. You might think you can save yourself a few dollars by “D.I.Y.”, but the biggest resource you don’t have enough of is time.
For assistance setting up a new business, join the hundreds of people who have used my services to start on the road to an independent financial future. Being your own boss doesn’t mean that you literally have to do everything by yourself. You don’t have to reinvent the wheel. Use cost effective service providers, and stick to doing the things that make YOUR business special. That is the fastest path to success.
You can reach me at mattvanrynlaw@gmail.com or by phone at (315) 877-1741.
