4 Legal questions you should ask yourself while growing your business

You’ve been mulling over the idea of starting your own creative business for months, and have finally decided to pull the trigger.

Or maybe you’ve been freelancing by yourself for a while and you’re ready to partner with someone else, build a bigger business, or change the kind of business your’e doing.

Now what?

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Your first instinct is probably to go sign up a paying client (or more if you already have them). But once you do you’ll then be asking yourself, “Who will I tell them they’ve hired?” or “How should they make out the check?”

That’s why it’s important to first set up your legal structure. Sounds scary and difficult, doesn’t it? I promise, it’s not that bad!

Here are the four steps you’ll need to follow to create the legal and business structure and start or grow your own business!

1) Which legal entity type should my business be?

The first step to creating your business’ legal structure is to decide what type of legal entity you need. Your primary choices are:

  • a sole proprietorship,
  • a limited liability company (LLC),
  • a partnership,
  • a C-Corporation, and
  • an S-Corporation.

To understand the relative advantages and disadvantages of each type, read more here:

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If you’re like most creative business owners, you’ll end up choosing an LLC because of the combination of strong legal protection and cheap administration costs.

But you don’t have to. It’s whatever makes the most sense for you.

2) Have I filed with my state?

Once you’ve decided on the type of entity you want your business to be, you need to actually form it by having a state government recognize its existence.

Assuming you want to base your business in the state you live in, the process will take less than 10 minutes:

  • Visit your secretary of state’s website and download the documents.
  • You’ll need your company name, address and phone number.
  • Send the documents along with a check or a credit card authorization form. (Some states allow you to file electronically.)

The cost of forming a legal entity depends on the state, with the cheapest being $45 and the most expensive $800. In a few states (notably New York) there’s an additional publication requirement that can run you up to $1,600.

If you’ve filled out the application correctly and the business name you’ve chosen isn’t already taken, you’ll receive a stamped piece of paper recognizing your business.

For e-file states, you could receive your stamped document within two days! (Other states may take a few weeks.)

3) What’s my Federal tax ID number (& do I need one)?

To do business with businesses (as opposed to individuals), you’ll need a federal tax ID number (also called an EIN number).

You’ll also need this number to:

  • open up a company bank account,
  • apply for a business credit card,
  • be able to accept credit cards,
  • sign a lease, or
  • a multitude of other things you probably want to do as a creative business owner.

The good news is that the U.S. government makes it really easy to get a federal tax ID number.

Simply visit the IRS website and complete the online application. You’ll need a copy of the stamped document you received from in Step 1, so make sure to do that first.

Once you’ve completed the application, you’ll generally receive an EIN on the same day.

Note: If you’re a sole proprietor, you’ll just use your Social Security number.

4) Do I have (or need) a solid operating agreement?

At this point, congratulations! You’ve officially formed a company!

For creative businesses with only one owner, this may be as far as you need to go. But if you plan to have a partner or accept outside investors in the future, you’ll want an operating agreement.

An operating agreement sets forth the basic rules under which a company’s management operates. So, if you’ve got a partner, for example, it will clarify how many votes each of you gets when making important decisions.

It will also clarify what happens if you can’t agree.

The operating agreement is more complex than just writing up something from scratch, but you also don’t need pay thousands of dollars for an attorney. Download a free sample agreement, and if you want help, a number of online services like LegalZoom and RocketLawyer will help you for less than $100.

Now go start making money!

Building your own creative business is one of the most rewarding yet difficult things you’ll ever do. But ask almost any entrepreneur and they’ll tell you they wouldn’t trade it for the world.

So what are you waiting for? Follow these 4 steps and start building the life and career you’ve been dreaming about!

Note: This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor or tax advisor with respect to matters referenced in this post. Millo, its owners, and the author of this post assume no liability for actions taken in reliance upon the information contained herein.

Thanks for reading!

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About Rich McIver

Rich McIver is an attorney licensed to practice in the State of Texas. He left the practice of law in 2014 to start his own business, MerchantNegotiators.com, a site where businesses can compare merchant account services pricing. Follow him on Twitter and Facebook.

Comments

  1. Great article. Very informative. I’ve had several businesses over the years so I can say this process is dead on. It has been several years since I’ve completed the steps but if memory serves me correctly, I do believe for me to file for a sole proprietorship (WV at the time) was FREE. I don’t remember paying anything. Does this differ state to state? Or has it changed totally since I’ve done so (about 6-7 years ago)?

  2. Sharon Pettis McElwee says:

    In Virginia it is free to become a sole proprietor as well, but that seems to be the only advantage because in my state you are personally liable for any problems that may arise in your business when you operate that way.

  3. Carolina Escobar says:

    I’m an American freelancer currently living in California, but moving to Spain long-term. All of my clients are in US. Do you know if I can select any state to file the business or does it have to be California? If I can select the state, do you have any recommendations?

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