A record 900,000 new businesses launched in 2023, data from NatWest Group reveals. And, on average, just over 50% of new businesses are still in operation five years down the line. If you’re currently setting up a new business, you can up your odds of survival by avoiding common legal mistakes that can threaten to sink your operations. So, if you haven’t yet chosen a legal structure, created a business bank account, or checked that your business name is clear of trademark issues, don’t panic. There’s still time to cover your legal bases and set your business up for best chances of success.
Not choosing a legal structure
If you haven’t yet chosen a legal structure for your business, you may be putting your personal assets at unnecessary risk. This is because, right now, you're likely a sole proprietor or sole trader, which isn’t a legal entity. So, there’s no legal separation between your business and personal assets. If your business is sued or goes into debt, for example, your savings, house, or car may be used to pay for losses incurred. So, choose a legal structure to protect you and your business. In the UK, a private limited company (Ltd) is a popular option, which means the company is a separate legal entity from the owner, and therefore only your business assets will be used to pay for losses or debts. As an Ltd, you may also pay less in taxes than you would as a sole trader. For instance, the income tax rates that sole traders pay are generally higher than the amount of corporation tax paid by Ltds.
Alternatively, in the U.S., a limited liability company (LLC) is the most popular legal structure, used by 35% of small businesses. Similar to an Ltd, with an LLC, you won’t be held personally liable for debts accrued by your business. You can also benefit from pass-through taxation, which allows the business profits to pass directly to you and be taxed as part of your personal income. You therefore avoid double taxation as you’re not taxed at a corporate level.
It’s also fairly inexpensive to establish an LLC (as little as $35), although the exact cost varies between states. To simplify the process of setting one up, you can hire a registered agent to handle it for you. Northwest Registered Agent, for example, provides a reputable service that usually costs $100 plus state fees. You can also use a Northwest Registered Agent discount for 60% off. Registered agents have other benefits, too, as they accept legal documents and mail on behalf of your business, which further makes things easier for you.
Failure to open a designated business bank account
As an LLC or Ltd, you’re also legally required to keep your business and personal finances separate. If you don’t, you may not be covered by the personal liability protection provided by these structures. And, even if it’s not a legal requirement, all business owners can benefit from keeping a clear line between personal and business income. It makes tax time easier for one. With separate accounts, there’s less chance of you forgetting an expense that can be listed as a business deduction. A business bank account can also help if you want to apply for a business loan. Lenders will usually ask for a clear overview of your business finances, and separate accounts are necessary for this.
Not checking your business name is free to use
Also, be careful to research your chosen name before making it final on your business application — otherwise you risk trademark infringement, which can potentially open you up to expensive legal trouble. The good news? This can be easily avoided with a quick Google search to check whether your preferred name is already in use. Even if a business is using a similar (but not the same) name, you may still be infringing on a trademark if it has the potential to confuse customers over which business is which. Another step you can take is to see if the domain name you want has already been taken, which may indicate it’s in use by a business. So, search name registrars like GoDaddy or Namecheap to see what’s available.
You can also go a step further and perform a trademark search. In the UK, the Intellectual Property Office has a trademark database you can search by keyword or phrase. Alternatively, in the U.S., you can search the U.S. Patent and Trademark Office website for federal trademark registrations on the name you’re after. If you’d like professional help, an intellectual property lawyer can take care of this for you.
Don’t let legal mistakes sink your new business before it even gets off the ground. Get your legal bases covered early on, so you can focus on growing your business with confidence and peace of mind.
