Legal requirements for starting a small business

10 legal requirements for starting a small business

Getting ready to launch your own small business is an exciting step that merges both your personal and professional goals. Not only do you get the chance to become your own boss, but you also have the opportunity to bring your creative visions to life and dictate how you want your business to operate. But there’s more to building a new business than setting up the lemonade stand that inspired your entrepreneurial dreams once upon a time.

Beyond scouting a location and developing a business plan, there are several legal requirements for starting a small business. In this post, we’ll take a look at ten steps to take before opening up shop.

Read on for a step-by-step perspective or use the links below to skip throughout our list of legal requirements for small businesses.

• Choose your business structure
• Brainstorm and register your business name
• Get your federal tax ID number
• Obtain a state tax ID number
• Review small business insurance options
• Apply for business licenses and permits
• Open a business bank account
• Protect yourself with legal support
• Make a compliance plan
• Set up your accounting system

1. Choose your business structure

After coming up with your initial vision and business plan, one of the first steps you’ll take is choosing your business’s structure. Your business structure sets legal and tax-related precedents for your organization, so it’s important to take this step seriously.

There are several types of business structures to choose from, each with its own legal structures and tax implications. Let’s take a deeper look at how four of the most common classifications work so you can find the best solution for your small business.

Sole proprietorship

• According to the Small Business Administration, sole proprietorship is the most straightforward and most common type of business structure. Sole proprietorships are basically a convergence of the individual business owner and their business. Sole proprietorships only have one business owner.
• Because there’s no separation between the small business owner and business entity, the individual owner is entitled to all profits and is liable for all debts, losses, and liabilities.
• Sole proprietors will report business earnings and remit taxes on their personal tax return using Form 1040 and Schedule C. As the proprietor of their own business, sole proprietors are also subject to self-employment taxes.

General partnership

• A general partnership is a legal agreement between two or more business partners to share their business’s profits, losses, liabilities, and assets.
• Partners are individually responsible for their own tax liabilities and must report their partnership earnings on their individual tax returns.

Limited liability corporation (LLC)

• Both businesses and individuals can form a limited liability corporation (LLC). LLC regulations vary by state. In most states, banks and insurance companies are not allowed to form LLCs but some states permit it.
• Limited liability companies are considered corporate structures in the United States, which means that the business owners are not personally liable for the company’s debts or other liabilities. Instead, the company’s assets would likely be seized if it can’t settle its debts.
• LLC entities do not pay taxes themselves; the tax liability is passed onto the owners to be claimed on their individual tax returns.

S Corporation

• S Corporations, also known as S Subchapters, are a type of corporation. S Corporations have shareholders that own a percentage of the company, sort of like a partnership. These shareholders must be individuals, certain trusts and estates, or specific tax-exempt organizations.
• The formation of an S-Corp allows businesses to incorporate while still being taxed as a partnership. Business income, losses, and liabilities, including taxes, can be passed on to shareholders. Individual shareholders will report this information on their tax return.

Note: Other types of business formations that are typically more nuanced include nonprofits and C corporations.

Because your business structure can have such a strong impact on your operations and finances, it may benefit you to seek legal advice as you approach this step. A legal professional can better contextualize how each structure would impact your business, for better or worse. Bottom line, selecting a business structure is one of the more important decisions you’ll make at the start, so be sure to do your research before diving in.

2. Brainstorm and register your business name

Coming up with your business’s name is one of the more creative steps in the legal proceedings required to start a small business. However, there are some legal guidelines to keep in mind as you start brainstorming.

There are four different ways to legally register your business name:

• Entity names: An entity name is how the state identifies your business, this protects you at the state level. Usually, securing an entity name with your state prohibits other entities from operating under similar names. This process is handled at the state level.
• Trademark: A trademark protects your business’s name, products, and services at a federal level. When you register a trademark, other businesses will not be allowed to use any of your trademarked names.
• Doing Business As (DBA): Some state and local jurisdictions require DBAs, also known as trade or fictitious business names. These names don’t offer legal protection but might be legally required depending on local regulations and your business structure.
• Domain name: A domain name represents and protects your business’s online presence. A website address or URL is an example of a registered domain name. Once you’ve registered and paid for one, no one else can operate under the same online domain.

3. Get your federal tax ID number

Part of owning and operating a small business is fulfilling your federal obligations to Uncle Sam, aka paying taxes. Depending on your business structure, you, as the business owner, may be responsible for reporting income on your tax return, or you may have another process for paying your income taxes. In addition to paying income taxes, you’ll also be liable for employment taxes if you hire employees.

In order to fulfill your employment tax responsibilities, you’ll need to obtain a federal tax ID number, also called an employer identification number (EIN). You can apply for an EIN by going to the IRS website.

You must apply for an EIN if your business:

• Pays employees
• Operates as a corporation of partnership
• Files tax returns for employment, excise, or alcohol, tobacco, and firearms
• Withholds taxes on income, other than wages paid to a nonresident alien
• Uses a Keogh Plan (a tax-deferred pension plan)
• Works with certain types of organizations

4. Obtain a state tax ID number

Depending on what state you live in, your business entity may have to pay state or local taxes. This may include income taxes, sales taxes, or both. Once you have a better idea of your state’s small business tax requirements, you’ll need to integrate those requirements into your accounting system.

Each state has its own tax bureau that handles state tax ID numbers for small businesses. Check with your state government’s website to learn more about applying for a state tax ID number.

5. Review small business insurance options

No matter how big or small, your business is your baby, so you want to protect it at all costs. The way both individuals and businesses do this in the United States is with insurance coverage. There are several different types of insurance policies that can work to protect your personal assets and legal and financial affairs.

Some common types of insurance small businesses may leverage include:

• General liability insurance
• Errors and omissions insurance
• Worker’s compensation insurance
• Home-based business insurance

When it comes to selecting the right insurance plan for your small business, you’ll want to make a decision based on your business’s structure, number of employees, assets, and other special considerations.

6. Apply for business licenses and permits

In order to operate locally—and legally—you’ll need to obtain a business license and any other relevant permits that your municipality may require. If you’re opening a restaurant and plan to serve alcohol, for example, your local jurisdiction will likely require you to get a business permit and liquor license before you start serving customers.

If you’re supplying goods or services that are regulated by a federal agency, you will need to get a federal license to operate. Business license requirements vary on the state and local level, so be sure to check with your local government’s website to make sure you’re getting the required licensure.

7. Open a business bank account

In order to exchange money securely, your business needs a business bank account. Having a separate bank account just for business can help you better organize your finances, and in some cases, it may be a requirement.

According to SBA.gov, some of the benefits of business bank accounts include:

• Protection: Keeping your business and personal funds separate establishes personal liability protection.
• Professionalism: Gives customers the opportunity to pay your business via credit or debit card or with a check made out to your business, not your personal account.
• Preparedness: In most cases, having a business bank account also comes with the opportunity to open a line of credit. Having available credit can help cover emergency and other substantial costs.
• Purchasing power: Credit can also help your business fund initial startup costs until profits start rolling in. Of course, you’ll want to create a plan for paying all of your borrowed funds back.

8. Protect yourself with legal support

As you know by now, there are a lot of legal steps to take as you begin the initial process of launching your small business. For many business owners, enlisting the help of a legal professional is well worth it in the beginning stages and throughout your small business’s lifetime.

A legal professional can help you set up protections to safeguard your intellectual property, assets, privacy policies, tax compliance, and general liability.

9. Make a compliance plan

Businesses in the United States are subject to a number of regulations, in addition to the legal requirements we’ve mentioned in this post. These legal guidelines may impact your marketing and advertising efforts, employment policies, financial recordkeeping, etc.

Meet with an industry or legal professional to get a better understanding of the regulations that may apply to your business and to create a plan that will help you maintain compliance. As you continue to bring your entrepreneurial vision to life, refer back to your compliance plan to make sure you’re operating in alignment with these rules.

10. Set up your accounting system

Your accounting system is a cornerstone of your small business. From assessing budgets and ensuring tax and payroll compliance to measuring your milestones, having a streamlined accounting setup is essential.

With QuickBooks accounting software for small businesses, you can monitor your income and expenses, invoice customers, conduct payroll, and more. QuickBooks accounting features are intuitive and automated, giving you more time to focus on building and growing your business.