*The information below is not legal advice. To procure legal advice, become a Legalpreneur Member*
Welcome back to the content creator’s blueprint to legal! Today, we’re talking about Employer Identification Numbers and why they are important.
After filing a legal entity (in your case, an LLC), your next step is filing an employer identification number in order to get a business bank account. This is an important step in creating liability boundaries, by separating your business funds from your personal.
What is an EIN and why do I need one if I have a single-member LLC with no employees?
An EIN is filed with the IRS. You may have already had one as a sole proprietor. However, you will have to get a new EIN to procure a business bank account as an LLC owner. This is because banks require an EIN to do so.
Why does my LLC need a separate bank account?
As you now know, an LLC business structure limits personal liability (remember, personal liability is when folks can come for your personal assets like your car when collecting business debts) as it draws a line between the business and the member’s personal assets. So, it’s important to mind the boundary. This means that you must maintain your business separate from yourself. While your Legalpreneur attorney can further advise you on this, the basic concept to mind is that you should not blur the line between you and your business. Some instances of blurring the line between an LLC and member might include “commingling funds” in one bank account. It is required to maintain a separate business bank account once you have an LLC. This is one of the quickest ways to “pierce the corporate veil” and lose the LLC protection.
For illustration purposes, think about the example laid out in part one, with Brenda and her knitting business. If Brenda owned an LLC, and still used her personal account to deposit funds from her business clients, she could actually compromise the protection having an LLC afforded. Because she did not keep business funds separate from herself, she compromised the LLC personal liability shield. As such, if a client sues Brenda, she may have access to Brenda’s personal assets (her personal car, house, etc.). Ouch!
A remedy for this is to establish a separate business bank account distinct from yourself. With a business bank account, you create some proof that there is no “commingling of funds.” You have established an intent to separate your personal assets from that of your business. From there, it’s important to send/track invoices and to document spending and funds. Some banks may provide tracking tools within their online banking options. Importantly, you should invest in a tax expert to guide you through the financial and tax components of your business. These factors will help you keep that boundary in place.
While you can DIY the EIN filing process, we know that for many entrepreneurs, more paperwork might be the LAST thing on which you want to spend your talents. Legalpreneur members, fear not: this comes as a service to you free-of-charge. If you are not a member and want to learn if our program will help you realize your business goals, contact us and check out The Legalpreneur Membership!
Alright, Legalpreneur. I got my LLC, my EIN, and my bank account. That’s all, right?
No, not exactly. We need to make sure your LLC is compliant with regulations. While you must visit your state’s website to learn more about how to do that, here is a brief overview of things to consider:
2. Make sure you keep your business stays legally compliant:
Know your state’s/county’s business operating rules— study your Secretary of State’s and Comptroller’s websites and of course the IRS/any federal websites.
What do I need to do to make sure my business is compliant with State regulations for operating a business?
When you have a business, you will need to ensure that you follow your state’s/city’s rules for operating a business. These regulations vary by each state. For instance, some states may require businesses to file for certain certificates, licenses, or adhere to particular reporting dates (distinct from Federal Income Taxes). Overall, visit the Small Business Administration for additional guidance. It’s important to learn these requirements and track due dates so you stay compliant. Your state’s Comptroller and Secretary of State (SOS) site will have more information for your particular type of business structure and category. Also, check out our Annual Legalpreneur Checklist to help you stay on track.
If you feel overwhelmed or lost in the process, you can always reach out to your state’s SOS and Comptroller. Moreover, if you join the Legalpreneur Membership, you have several options to work with a lawyer who can guide you. You can discuss these in your monthly calls, email them for guidance, or have them look over state documents to ensure they are accurate. Be advised that some documents may need to be reviewed by tax advisors instead.
Okay, I’m getting the hang of this. What’s next—I’m ready!
Next up, we will discuss how you should protect your business through the usage of contracts for every business client.
3. Make it plain and save yourself from future pain: cover your business with a contract any time money is changing hands.
To ensure you and your client’s expectations are memorialized, along with other important points, it’s critical to have a contract in place.
Why do I need a written, formal contract for clients?
We, here at Legalpreneur, know firsthand how paperwork can keep entrepreneurs from wanting to seek clients or even carry on a business. But while it may appear to be a time-saving tactic to simply agree on a service in email or verbally and move forward, that usually does not intend to be the reality when expectations change. Let’s go through an example to show what we mean:
Two days from her grand opening, Kelly Client frantically commissions Brenda’s Balloonery, LLC “Balloonery” to create a balloon fixture for the event. Through, texts, they agree that Balloonery will create an eight-foot display for $600. Brenda, from Balloonery, is so preoccupied with the deadline that she doesn’t draft an official contract. However, on the day of, Brenda learns that Kelly’s store is 45 minutes further away than she thought, at a high-rise building where parking is $20/ two hours. Moreover, the event is slated for two days in two different rooms of the building. On day two, Kelly asks Brenda to help her move the balloons to Room 2. After the move, the balloons deflate because of the room’s temperature. To make matters worse, the assembling glue damaged the walls. At the end of the ecent, Kelly pays Balloonery $300 because she says she was not warned about the temperature requirements and couldn’t fully use the balloons on day two. She also does not reimburse Brenda $80 for her parking. Kelly’s landlord, who believes Balloonery is in a partnership with Kelly, threatens to take Balloonery to court if the owner is not reimbursed for the wall damage.
Balloonery could have protected itself from this situation with a contract in place. For example, a contract would have disclosed the nature of their relationship (i.e. Balloonery is not in partnership with Kelly), extent of liability (i.e. disclaiming relevant warranties or responsibilities), expectations/what is covered in services (i.e. payment for mileage, payment for parking, charging for additional moves), how unforeseeable situations are handled (i.e. temperature causing glue to damage walls), and how disputes are resolved (i.e. arbitration clauses vs. court suits).
See why it’s so important to have a contract? While you can likely create a contract from scratch, due to the delicate, legal nature of business contracts, it can be time-consuming. And, if you are not a specialized attorney, you may feel overwhelmed by having to discern whether contract templates available online have any credibility.
To make it easier on you, consider our Contract Vault. These are vetted, attorney-made contract templates for niche-specific industries. Of course, you can customize them for your circumstances; in doing so, you can ask your Legalprenuer attorney to review it. Visit our Contract Vault to learn more. If you have questions about which contract template you need, reach out to us. You may also want to consider our Legalpreneur Membership. If you are a LP member, you receive access to the Contract Vault for free.
These are great tips and resources, Legalprenuer! That’s all, right??
It’s actually not, but this is a good start for now!
Conclusion: Get started on legally protecting your business; The Legal Protection Playbook is a great place to get started, and it’s only $37!
We touched on ways to keep your business legally protected through establishing an LLC, filing an EIN, opening a business bank account, being compliant with regulations, and utilizing formal contracts with business clients. We can’t stress enough how this doesn’t cover everything you need to do to keep your business legally protected. But it’s a solid start.
We will approach additional ways to protect your business as a content creator over the course of our blog. In the meantime, if you are a content creator and want to take on freelance clients as a business, contact us for information on how we might be able to take care of the legal side of your business so you can focus on creating meaningful content for the world to see.
*The information in this article is not legal advice*