12 Legal Requirements for Starting a Small Business

Legal requirements for starting a business

When starting a new business venture, small business owners and entrepreneurs should comply with all the legal requirements for starting a small business. New businesses and startups have various legal obligations, including financial regulations, tax obligations, and employment laws. Ensure your new company complies with all its legal responsibilities so you can focus on growing your business.

What Are the Legal Requirements for Starting a Business?

You may have a terrific business idea, but to get your startup off the ground, you first have to make sure you comply with all the legal requirements involved as a business owner. Here’s an easy-to-follow guide for starting your business legally:

1. Create an LLC or Corporation

The first legal requirement you’ll need to meet as a new business owner is to choose your company’s business structure. The following four business structures are the most common and offer different advantages depending on the size and aims of your company:

  • Sole Proprietorship: The simplest structure owned by only one person responsible for taxes and liability. It is affordable to set up, but it places greater liability risk on your personal assets.
  • Partnership: Shares ownership between you and one or more business partners, meaning that liability, workload, and profits are typically shared.
  • LLC (Limited Liability Company): Protects you from personal liability under most circumstances. It allows you to file your business income as part of your personal income taxes.
  • Corporation (C corp): Legally separate from its owner or owners. Offers the most significant personal protection from liability, but is more expensive and complicated to form.

2. Register Your Business Name

Once you’ve decided on a business structure, you’ll need to register your business name. Choose a name that reflects your brand and make sure it hasn’t already been claimed. You can then choose to register your business through an entity name, a trademark, a DBA (Doing Business As), or a domain name.

3. Trademark your Slogans and Logos

Create a clear and identifiable brand for your business by trademarking your slogans and logos. This helps protect your intellectual property against other companies with similar phrases and visual branding. Choose simple, memorable slogans and logos that effectively represent your business.

4. Apply for a Federal Tax ID Number

Your federal tax identification number is an Employer Identification Number (EIN). It allows you to hire employees legally, pay federal taxes, apply for business licenses, and open a business bank account. You can apply for an EIN through the IRS website.

5. Determine If You Need a State Tax ID Number

Research whether your startup needs a state tax ID number. You’ll only need one if your state collects taxes from businesses. Visit your state’s website to check the laws related to your income and employment tax obligations.

6. Obtain Business Permits and Licenses

Apply for business licenses and permits at the federal and state government level. The specific licenses you need depend on the industry you work in and your business location. Research requirements at the state and local levels based on where you do business.

7. Protect Your Business with Insurance

Professional liability insurance can protect you in cases where the personal liability protections offered by your specific business structure aren’t enough. Business insurance can protect not just your personal assets but your business assets as well. Some types of insurance are required by law, such as unemployment and disability insurance.

8. Hire and Classify Your Employees Properly

Correctly classifying your employees is key to providing fair compensation and filing your taxes correctly. The employees you hire will typically be classified into four categories: employees, contractors, interns, and volunteers. Research your local labor laws to understand how they apply to your small business.

9. Comply With Labor Laws

Labor laws are essential to protect the rights and safety of employees in your workplace. Research your local labor laws to understand how they apply to your small business so that you can operate safely and legally.

10. Open a Business Bank Account

Separate your personal and business finances by opening a business bank account. Choose a convenient bank that serves your needs and provide the necessary information to open an account, such as your Employer Identification Number and business license.

11. Keep Good Records

Document all your small business transactions for taxation and measuring your growth and progress. Good records also help demonstrate your business’s compliance and make it easy to comply with a tax audit if necessary.

12. Consult the Professionals

To ensure you’ve covered all your legal responsibilities as a business, consult professionals for advice. Consider sitting down separately with a lawyer and an accountant to ensure your company is covered legally and financially before opening for business.

Can I Start a Business Without Registering It?

You need to register your business name in order to use that name for your business. If you don’t have a business name registered with the Secretary of State, you can only conduct business under your personal name. Register the name online through the IRS to legally operate your business under a different name.

Conclusion

Starting a small business requires complying with several administrative steps to ensure that you’re legal to operate. Most businesses begin by registering important information like names, logos, and slogans. This helps protect your company’s brand identity and meet IRS requirements.

As you go through the steps to start a small business, keep detailed records of all your information so you’re prepared when the time comes to renew any licensing. Thorough research of your industry is essential for complying with local business laws. Being prepared is the easiest way to protect yourself and your employees when operating a small business.

FAQs on Starting a Small Business Legal Requirements

What documents should a small business have?

When you start your own business, remember to keep document records of your tax numbers, business name registration, incorporation number, employer identification number, partnership agreement (depending on your business structure), and unanimous shareholder agreement.

Can I run a small business without registering?

While you can run your small business under your personal name, to legally operate it under any other name, you’ll need to register that business name officially.

Does a small business need a permit?

Most small businesses will need at least one type of permit to operate legally. The permits you need will depend on your region and business type.

How do you structure a small business?

Small businesses can be structured as sole proprietorships, partnerships, limited liability companies, or corporations.

What are the tax obligations for a small business?

Your small business tax obligations will depend on where you live, but you’ll typically have to make a minimum level of profits before you’re required to register for GST.

What is a legal compliance checklist?

A legal compliance checklist is a list of items designed to ensure a business meets all regulatory requirements. The items on a compliance checklist will depend on your industry but will typically include required documentation that needs to be submitted, as well as non-compliance items to be avoided.

Note: This article is for informational purposes only and does not constitute legal advice. Consult a professional for personalized advice pertaining to your business.