6 Legal & Licensing

Legal & Licensing

One of the first areas to chip away at when starting a business plan is to understand the legal requirements you will have as a Foodtrepreneur and all the necessary licensing. The choice of your business entity is done early on in the planning stage.  It can be overwhelming and as such, it is important to have a good picture of what you will need to consider.

Overall Summary chart of business entity

Sole Proprietorship Partnership C Corp S Corp LLC
Membership 1 individual Min 2 max none No restrictions Max 100 No restrictions
Limited Liability None None Yes Yes Yes

 
Fed Taxation Taxed on owners return Pass through to owners return Taxed @ corporate and personal Passed through to owners’ returns Passed through to owners’ returns
Management Self General Partners Board of Directors Members or managers

 
Owners as employees? No No Yes Yes If a S Copr LLC then Yes otherwise no
Selection Name Free of trademark infringement Free of trademark infringement Free of trademark infringement or like name in Il. Free of trademark infringement or like name in Il. Free of trademark infringement or like name in Il
DBA Register name with county & publicize in newspaper Register name with county & publicize in newspaper Yes Yes Yes
State Registration N/A N/A Articles of incorporation base entity Articles of Incorporation
Agreement N/A Partnership Agreement Bylaws base entity Operating Agreement
FEIN Required if employees Required Required Required Required
Illinois State Tax # If employing people and selling things If employing people and selling things Yes Yes If employing people and selling things
Federal Income Tax N/A Form 1065 Form 1120 FOrm 1120S Form 1065 or 1120S
Illinois Income Tax 4.95 % Individual Tax Rate 4.95 % Individual Tax Rate & 1.5 % Repalcement tax 7% income tax + 2.5% replacement Taax + possible dividend tax 4.95% Individual Tax + 1.5% Replacement Tax 4.95% Individual Tax + 1.5% Replacement Tax

 

Selecting your business entity

Sole proprietorship

A sole proprietorship is easy to form and gives you complete control of your business. You’re automatically considered to be a sole proprietorship if you do business activities but don’t register as any other kind of business. 

Sole proprietorships do not produce a separate business entity. This means your business assets and liabilities are not separate from your personal assets and liabilities. You can be held personally liable for the debts and obligations of the business. Sole proprietors are still able to get a trade name. It can also be hard to raise money because you can’t sell the stock, and banks are hesitant to lend to sole proprietorships.

Sole proprietorships can be a good choice for low-risk businesses and owners who want to test their business idea before forming a more formal business.

Partnership

Partnerships are the simplest structure for two or more people to own a business together. There are two common kinds of partnerships: limited partnerships (LP) and limited liability partnerships (LLP).

Limited partnerships have only one general partner with unlimited liability, and all other partners have limited liability. The partners with limited liability also tend to have limited control over the company, which is documented in a partnership agreement. Profits are passed through to personal tax returns, and the general partner — the partner without limited liability — must also pay self-employment taxes.

Limited liability partnerships are similar to limited partnerships, but give limited liability to every owner. An LLP protects each partner from debts against the partnership, they won’t be responsible for the actions of other partners.

Partnerships can be a good choice for businesses with multiple owners, professional groups (like attorneys), and groups who want to test their business idea before forming a more formal business.

Limited liability company (LLC)

An LLC lets you take advantage of the benefits of both the corporation and partnership business structures.

LLCs protect you from personal liability in most instances, your personal assets — like your vehicle, house, and savings accounts — won’t be at risk in case your LLC faces bankruptcy or lawsuits.

Profits and losses can get passed through to your personal income without facing corporate taxes. However, members of an LLC are considered self-employed and must pay self-employment tax contributions towards Medicare and Social Security.

LLCs can have a limited life in many states. When a member joins or leaves an LLC, some states may require the LLC to be dissolved and re-formed with new membership — unless there’s already an agreement in place within the LLC for buying, selling, and transferring ownership.

LLCs can be a good choice for medium- or higher-risk businesses, owners with significant personal assets they want to be protected, and owners who want to pay a lower tax rate than they would with a corporation.

Corporation
C corp

A corporation, sometimes called a C corp, is a legal entity that’s separate from its owners. Corporations can make a profit, be taxed, and can be held legally liable.

Corporations offer the strongest protection to its owners from personal liability, but the cost to form a corporation is higher than other structures. Corporations also require more extensive record-keeping, operational processes, and reporting.

Unlike sole proprietors, partnerships, and LLCs, corporations pay income tax on their profits. In some cases, corporate profits are taxed twice — first, when the company makes a profit, and again when dividends are paid to shareholders on their personal tax returns.

Corporations have a completely independent life separate from its shareholders. If a shareholder leaves the company or sells his or her shares, the C corp can continue doing business relatively undisturbed.

Corporations have an advantage when it comes to raising capital because they can raise funds through the sale of stock, which can also be a benefit in attracting employees.

Corporations can be a good choice for medium- or higher-risk businesses, those that need to raise money, and businesses that plan to “go public” or eventually be sold.

S corp

An S corporation, sometimes called an S corp, is a special type of corporation that’s designed to avoid the double taxation drawback of regular C corps. S corps allow profits, and some losses, to be passed through directly to owners’ personal income without ever being subject to corporate tax rates.

Not all states tax S corps equally, but most recognize them the same way the federal government does and tax the shareholders accordingly. Some states tax S corps on profits above a specified limit and other states don’t recognize the S corp election at all, simply treating the business as a C corp.

S corps must file with the IRS to get S corp status, a different process from registering with their state.

There are special limits on S corps. Check the IRS website for eligibility requirements. You’ll still have to follow the strict filing and operational processes of a C corp.

S corps also have an independent life, just like C corps. If a shareholder leaves the company or sells his or her shares, the S corp can continue doing business relatively undisturbed.

S corps can be a good choice for a businesses that would otherwise be a C corp, but meet the criteria to file as an S corp.

B corp

A benefit corporation, sometimes called a B corp, is a for-profit corporation recognized by a majority of U.S. states. B corps are different from C corps in purpose, accountability, and transparency, but aren’t different in how they’re taxed.

B corps are driven by both mission and profit. Shareholders hold the company accountable to produce some sort of public benefit in addition to a financial profit. Some states require B corps to submit annual benefit reports that demonstrate their contribution to the public good.

There are several third-party B corp certification services, but none are required for a company to be legally considered a B corp in a state where the legal status is available.

Close corporation

Close corporations resemble B corps but have a less traditional corporate structure. These shed many formalities that typically govern corporations and apply to smaller companies.

State rules vary, but shares are usually barred from public trading. Close corporations can be run by a small group of shareholders without a board of directors.

Nonprofit corporation

Nonprofit corporations are organized to do charity, education, religious, literary, or scientific work. Because their work benefits the public, nonprofits can receive tax-exempt status, meaning they don’t pay state or federal income taxes on any profits it makes.

Nonprofits must file with the IRS to get tax exemption, a different process from registering with their state.

Nonprofit corporations need to follow organizational rules very similar to a regular C corp. They also need to follow special rules about what they do with any profits they earn. For example, they can’t distribute profits to members or political campaigns.

Nonprofits are often called 501(c)(3) corporations — a reference to the section of the Internal Revenue Code that is most commonly used to grant tax-exempt status.

Cooperative

A cooperative is a business or organization owned by and operated for the benefit of those using its services. Profits and earnings generated by the cooperative are distributed among the members, also known as user-owners. Typically, an elected board of directors and officers run the cooperative while regular members have voting power to control the direction of the cooperative. Members can become part of the cooperative by purchasing shares, though the amount of shares they hold does not affect the weight of their vote.

Combine different business structures

Designations like S corp and nonprofit aren’t strictly business structures — they can also be understood as a tax status. It’s possible for an LLC to be taxed as a C corp, S corp, or a nonprofit. These arrangements are far less common and can be more difficult to set up. If you’re considering one of these non-standard structures, you should speak with a business counselor or an attorney to help you decide.

Choose your business name

You can find the right business name with creativity and market research. Once you’ve picked your name, you should protect it by registering it with the right agencies.
Register your business name to protect it

You’ll want to choose a business name that reflects your brand identity and doesn’t clash with the types of goods and services you offer.

Once you settle on a name you like, you need to protect it. There are four different ways to register your business name. Each way of registering your name serves a different purpose, and some may be legally required depending on your business structure and location.

  • Entity name protects you at a state level
  • Trademark protects you at a federal level
  • Doing business as (DBA) doesn’t give legal protection, but it might be legally required
  • Domain name protects your business website address

Each of these name registrations are legally independent. Most small businesses try to use the same name for each kind of registration, but you’re not normally required to.

Four different ways to register your business name

Entity name

An entity name can protect the name of your business at a state level. Depending on your business structure and location, the state may require you to register a legal entity name.

Your entity name is how the state identifies your business. Each state may have different rules about what your entity name can be and usage of company suffixes. Most states don’t allow you to register a name that’s already been registered by someone else, and some states require your entity name to reflect the kind of business it represents.

In most cases, your entity name registration protects your business and prevents anyone else in the state from operating under the same entity name. However, there are exceptions pertaining to state and business structure.

Check with your state for rules about how to register your business name.

Trademark

A trademark can protect the name of your business, goods, and services at a national level. Trademarks prevent others in the same (or similar) industry in the United States from using your trademarked names.

For example, if you were an electronics company and wanted to call your business Springfield Electronic Accessories and one of your products Screen Cover 5000, trademarking those names would prevent other electronics businesses or similar products from using those same names.

Businesses in every state are subject to trademark infringement lawsuits, which can prove costly. That’s why you should check your prospective business, product, and service names against the official trademark database, maintained by the United States Patent and Trademark Office.

Doing business as (DBA) name

You might need to register your DBA — also known as a trade name, fictitious name, or assumed name — with the state, county, or city your business is located in. Registering your DBA name doesn’t provide legal protection by itself, but most states require you to register your DBA if you use one. Some business structures require you to use a DBA.

Even if you’re not required to register a DBA, you might want to anyway. A DBA lets you conduct business under a different identity from your own personal name or your formal business entity name. As an added bonus, getting a DBA and federal tax ID number (EIN) allows you to open a business bank account.

Multiple businesses can go by the same DBA in one state, so you’re less restricted in what you can choose. There’s also more leeway in the clarity of business function. For example, a small business owner could use Springfield Electronic Accessories for their entity name but use TechBuddy for their DBA. Just remember that trademark infringement laws will still apply.

Determine your DBA requirements based on your specific location. Requirements vary by business structure as well as by state, county, and municipality, so check with local government offices and websites.

Domain name

If you want an online presence for your business, start by registering a domain name — also known as your website address, or URL.

Once you register your domain name, no one else can use it for as long as you continue to own it. It’s a good way to protect your brand presence online.

If someone else has already registered the domain you wanted to use, that’s okay. Your domain name doesn’t actually need to be the same as your legal business name, trademark, or DBA. For example, Springfield Electronic Accessories could register the domain name techbuddyspringfield.com.

You’ll register your domain name through a registrar service. Consult a directory of accredited registrars to determine which ones are safe to use, and then pick one that offers you the best combination of price and customer service. You’ll need to renew your domain registration on a regular basis.

Business Licenses 

Other licenses one must consider in the early stages of business planning are:

          • liquor licenses
          • Outdoor sidewalk or patio licenses
          • Wholesale licenses
          • Loading and unloading zones
          • Farmer’s Market Licenses
          • Food Truck LIcenses
          • Single event permit

 

Get business insurance

Business insurance protects you from the unexpected costs of running a business. Accidents, natural disasters, and lawsuits could run you out of business if you’re not protected with the right insurance.

Pick the type of business insurance you need

The protections you get from choosing a business structure like a limited liability company (LLC) or a corporation typically only protect your personal property from lawsuits, and even that protection is limited.

Business insurance can fill in the gaps to make sure both your personal assets and your business assets are fully protected from unexpected catastrophes.

In some instances, you might be legally required to purchase certain types of business insurance.

The federal government requires every business with employees to have workers’ compensation, unemployment, and disability insurance.

Some states also require additional insurance. Laws requiring insurance vary by state, so visit your state’s website to find out the requirements for your business.

Six common types of business insurance

After you purchase insurance that’s required by law, you can find insurance to cover any other business risk. As a general rule, you should insure against things you wouldn’t be able to pay for on your own.

Speak to insurance agents to find out what kinds of coverage makes sense for your business, and compare terms and prices to find the best deal for you. Here are six common kinds of business insurance to look for:

Insurance type Who it’s for What it does
General liability insurance
Any business
This coverage protects against financial loss as the result of bodily injury, property damage, medical expenses, libel, slander, defending lawsuits, and settlement bonds or judgments.
Product liability insurance
Businesses that manufacture, wholesale, distribute, and retail a product
This coverage protects against financial loss as a result of a defective product that causes injury or bodily harm.
Professional liability insurance
Businesses that provide services to customers
This coverage protects against financial loss as a result of malpractice, errors, and negligence.
Commercial property insurance
Businesses with a significant amount of property and physical assets
This coverage protects your business against loss and damage of company property due to a wide variety of events such as fire, smoke, wind and hail storms, civil disobedience and vandalism.
Home-based business insurance
Businesses that are run out of the owner’s personal home
Coverage that’s added to homeowner’s insurance as a rider can offer protection for a small amount of business equipment and liability coverage for third-party injuries.
Business owner’s policy
Most small business owners, but especially home-based business owners
A business owner’s policy is an insurance package that combines all of the typical coverage options into one bundle. They simplify the insurance buying process and can save you money.

Four steps to buy business insurance

  • Assess your risks. Think about what kind of accidents, natural disasters, or lawsuits could damage your business. If you need help, the National Federation of Independent Businesses (NFIB) provides information for choosing insurance to help you assess your risks and to make sure you’ve insured every aspect of your business.
  • Find a reputable licensed agent. Commercial insurance agents can help you find policies that match your business needs. They receive commissions from insurance companies when they sell policies, so it’s important to find a licensed agent that’s interested in your needs as much as his or her own.
  • Shop around. Prices and benefits can vary significantly. You should compare rates, terms, and benefits for insurance offers from several different agents.
  • Re-assess every year. As your business grows, so do your liabilities. If you have purchased or replaced equipment or expanded operations, you should contact your insurance agent to discuss changes in your business and how they affect your coverage.

https://www.sba.gov/business-guide/launch-your-business/get-business-insurance

Other Types of Insurance 

    • Workmen’s comp insurance
    • Vehicle Insurance – if doing deliveries and or if you have a company car
    • Food Truck Insurance

 

 

 

 

 

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Foodtrepreneurship Copyright © 2022 by Nancy Carey is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

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