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Making Your Business Legal
If you’ve decided you have what it takes, it’s time to think about what you need to do to make your business legal — from choosing a name to ensuring you have the proper licenses and permits. This chapter outlines what you need to know generally. It’s not possible for me to provide specifics for every jurisdiction, so you will have to look into the particular regulations for your area.
1. Choosing A Business Name
Many expectant parents spend hours choosing the right name for their baby. They know it is a name that will be with them for a long time and will be used many times each day. Your new lawn care business is much the same. It’s your baby. What will you call it?
My own experience illustrates the importance of the business name. When I started out, I came up with the name Dirty Deeds Landscaping. It was catchy, and I received positive comments daily. It was not until a few years later that I realized how this name was working against me. Think about it: If you wanted to hire someone to come in and beautify your lawn and garden, who would you call first? Dirty Deeds or a company named something like Beautiful Lawns? On the other hand, if it is June, you have not cut your lawn yet, and your dog has been doing his business in the long grass, who will you call to give it that first cut? In that case, Dirty Deeds probably sounds just right. Dirty Deeds served me well for the first couple of years, when I was willing to take almost any job that came along, and I did get a lot of calls. Later, when I could be choosier about my work and had moved on to a narrower market, it required a lot of marketing to convince the public that the company was all about beautifying.
The moral of the story? Choose a name that represents what you want to do. And don’t forget about resale value in case you ever want to sell your business. A name like Johnny’s Lawn Care will work against you if your potential buyer is not named Johnny.
You should register your business name with the government department that handles business registration in your jurisdiction. Note that in many areas, registering your name does not secure it, but it does let you know if there is a company with a similar name operating in the area. To secure the name and prevent others from using it, you often must incorporate (see section 2.3). Check with the government department for the rules in your area.
2. Choosing A Business Structure
You will need to choose a business structure that best suits your needs. A business can be formed as a sole proprietorship, a partnership, or a corporation. There are pros and cons to each of the structures, and there are important tax implications. You should obtain legal and tax advice before making your final decision.
2.1 Sole proprietorship
By far the easiest and cheapest form of business setup is the sole proprietorship, and it is what I recommend you start out with. A sole proprietorship is simply a business owned and operated by one person. You and the business are one and the same. You have full decision-making control over the business and you get all the profit, which is recorded on your personal income tax statement.
On the other hand, since the business is legally considered an extension of you, you have no protection against creditors. You assume all responsibility and liability for your business. Sole proprietorships lack the tax flexibility that an incorporated company offers. As well, if you need financial backing for your start-up, you may have more difficulty attracting it than you would with a legally incorporated company. Finally, if you are seriously injured or die, there will be no one to carry on the business. You or your survivors will lose that source of income.
2.2 Partnership
Like a proprietorship, a partnership has the advantage of low start-up costs, and you may enjoy sharing the responsibility of owning a business with someone else. But be careful before entering into this form of business structure. Most discussions of partnerships are rife with warnings and horror stories. Incompatibility between partners can lead to the breakdown of the business, as well as the end of any personal relationship you may have had with your partner or partners.
If you are considering a partnership, reflect on these points:
• A partnership works best when the people involved have complementary skills and attributes.
• Equal partnerships are most likely to fail due to deadlocked situations. There is nothing saying that a partnership has to be equal. Consider making one of the partners the “leader” and grant that partner a greater share of the business, even if it is just one percent more. If you cannot decide on who will be leader, take warning. It may be a glimpse of things to come.
• Be aware that in most partnerships, one partner may be responsible for the other partners’ liabilities if something happens to them.
If you choose to run your business as a partnership, seek legal and financial counsel first. Be sure to draw up a partnership agreement that includes explicit directives for the graceful termination of the partnership should it become necessary.
2.3 Incorporation
A limited, or incorporated, company is a separate legal entity. One benefit to incorporating is that your liability is limited to your investment in the company, hence the name “limited liability company.” (Note, however, that being incorporated only protects you from liability up to a point. For example, you may be protected if you were sued, but most creditors will insist on a personal guarantee if you purchase items on credit, especially if you are just starting out.) There may be tax advantages to incorporation as well, but you should investigate local statutes and talk to a financial advisor to find out if and how you would realize them.
Since the limited company is expensive to set up and administer (you have to pay annual fees), requires a lot of work to maintain (forms must be filled out, records kept, income tax statements prepared by accountants, etc.), and is usually overkill for a small start-up company, I don’t recommend it unless your financial advisor offers compelling reasons to go this route.
3. Licenses And Permits
To legally operate a business, you must take care of the obligatory bureaucratic red tape. Consult with municipal and state or provincial authorities to make sure you have all the necessary licenses and permits. Here are some of the considerations that generally apply:
• Business license. You will have to register and pay an annual fee for a business license. You may also need a special permit to run your business from your house.
• Fictitious business name registration. Most jurisdictions require that you register a “fictitious” business name (that is, a company name that does not include your surname or the names of your partners).
• Vehicle permit. Check to see if you must have special commercial vehicle permits in your area.
• Contractor’s license. In the United States, you may need to have a separate license if you decide to expand beyond general maintenance (lawn care and gardening) into landscaping. This is not the kind of license that requires you fill out a form and hand over some cash. Instead, it involves a test that generally requires you to show that you have worked in the field for a number of years. (This is not a requirement in Canada.)
• State/provincial tax registration. In the United States, tax laws vary from state to state and even within a state. Check with the tax department or an accountant. In Canada, you will likely not have to register for provincial tax unless you become a reseller of goods. Services are not taxed at the provincial level.
• Federal tax registration. In the United States, as a sole proprietor you probably don’t need to register federally (unless you have employees).