Whether starting an online business or something that requires a brick-and-mortar storefront, it takes a lot of hustle to turn an idea into a viable company. But while your hustle and drive can help get a business up and running, they aren’t enough on their own. Startup founders also need to take critical steps to protect their business’s legal and financial interests.
By taking care of these important steps during the startup phase, you can help reduce potential risks to your operations and keep everything running smoothly.
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1. Business Registration and Structure
One of the first things founders need to decide is how they’ll structure their business and then register it accordingly. After all, there are significant differences between sole proprietorships, LLCs, S-Corps and C-Corps.
Each business structure comes with its own pros and cons, as they vary in terms of taxes, liability, the founder’s control over the business and more. There’s no one-size-fits-all approach, as different business models will be better served by different structures. Regardless of the structure you choose, you need to make sure you register with the appropriate state and local authorities to avoid potential fines and legal penalties.
Some of these business structures come with additional legal requirements, such as obtaining an Employer Identification Number (EIN) or adopting bylaws. Make sure each relevant step is part of your business structuring plan.
2. Business Insurance
Business insurance is another essential piece of the protection puzzle. There are several different types of insurance a business may need, ranging from general liability to cybersecurity insurance. The right type of insurance ultimately depends on how you run your business and interact with your customers.
As a blog post from biBerk, a small business insurance company, explains, “General liability insurance is needed if customers visit your premises, and errors and omissions insurance is important for individuals or businesses that provide a professional service or advice. If you have assets like equipment and furniture, or if you own buildings, a business owners policy (also called property & liability insurance) is important. And if you have employees, you’ll need a workers’ compensation policy.”
Not every business will need every type of business insurance. But getting the right insurance for your business operations can provide much-needed financial protection if an incident takes place.
3. Written Contracts
Verbal agreements may seem like an easy solution when starting a business, but they can create major headaches later on. Written contracts are needed in several areas, including terms and conditions and a privacy policy for your customers, agreements with suppliers and contractors, invoices for customers and employment contracts.
If you’re starting a business with more than one founder, a written founders’ agreement is also essential for defining the roles, rights and responsibilities of each founder. As a blog post from Warwick Legal Network explains, founders’ agreements should address “Equity ownership and shareholder protections … management roles and responsibilities … compensation mechanisms [and] planning for future investment.”
Using these agreements to set clear guidelines for the company can help prevent future founder disagreements that could disrupt the business and its operations.
4. Understanding Compliance and Regulatory Requirements
Many products and services are subject to compliance and regulatory requirements — and ignoring them can prove costly. Some industries require businesses to obtain specific licenses. Others have strict privacy laws, while certain business types may be subject to financial regulations.
Regulatory requirements can also vary based on your physical location. Some states and cities require businesses to obtain area-specific licenses and permits in addition to broader regulatory requirements.
Finally, any business collecting personal information online must be careful to follow applicable data privacy and security guidelines. Laws like the California Consumer Privacy Act or the EU’s General Data Protection Regulation (GDPR) should influence how you collect and protect data when doing business with customers from these areas.
5. Cybersecurity
CyberCrime Magazine reports that 60% of small businesses “go out of business within six months of falling victim to a data breach or cyber attack.” Despite this, cybersecurity can be a challenge due to the budget constraints many small businesses face. Some founders also treat cybersecurity as optional rather than the requirement it has become.
Even on a budget, founders can prioritize cybersecurity by identifying their top areas of risk, using secure platforms, following cybersecurity best practices such as multi-factor authentication and making targeted investments in cybersecurity features tailored to their business.
Even if your business doesn’t process customer data online, it can still have valuable information stored in CRMs and other digital resources that could make it an attractive target for bad actors. Protecting sensitive data should never be put on the back burner.
Protect What Matters
For many first-time founders, launching a business is the realization of a dream. But without proper financial and legal protection, that dream can quickly become a nightmare.
By taking care of essential business protections from the get-go, you can help avoid financial and legal difficulties later on. Better yet, many of these tasks only require significant work when starting the business, with relatively minimal ongoing monitoring and updates needed in the future.
Most importantly, taking essential steps to protect your company now means you can focus your future time and energy on actually growing the business.
