Legal Requirements For Starting a Small Business
Starting a small business is an incredibly exciting time of your life. It’s your chance to be your own boss and to show everyone what you’ve got to offer. The sky is the limit and you have all the freedom in the world; but the opportunity doesn’t come without serious potential pitfalls. It’s a risky affair, particularly in the beginning. Like a house of cards, it could all come tumbling down, and one of the most common reasons for a business’ demise is legal troubles.
Once you’ve finished creating a business plan, you’ll have to consider any legal requirements you must fulfill for your business to operate lawfully. This might involve anything from obtaining permits and licenses to securing the proper insurance. You’d be amazed by how many small business owners put their company in peril out of sheer ignorance of their legal duties. So, if you wish to avoid legal issues that small business owners often face, there are legal requirements you must meet.
Read on to discover the most common legal requirements for entrepreneurs that start a business.
Legal Requirements For Starting a Small Business
Before you can bring your business idea to life, there are steps you’ll want to take to ensure that your I’s are dotted and your T’s are crossed. Such measures include but are not limited to the following:
Designate the Proper Business Entity
For tax and liability purposes, it’s critical that you designate the appropriate business entity for your small business. Doing so can impact your:
Ability to fundraise
The most common structures you have to choose from are:
Sole proprietors – An enterprise that’s owned and operated by one person. There are no legal distinctions between the business and the person. There are several possible consequences you should consider concerning this structure:
Your personal property may be forfeit if found liable
You report business losses in personal income
You have to pay a small self-employment tax
Partnerships – An agreement between two or more people wherein they’ll manage and operate the business in return for a split of the profits. In this, partners share liability and profits equally. For taxes, they fill out a 1065 form but do not have to pay business taxes.
C-Corporations – Any type of corporation where the owner and the business pay separate taxes. This can provide you with tax advantages, especially due to the recent tax cuts. It gives a company limited liability and unrestricted growth potential.
S-Corporations – In this arrangement the corporation forgoes paying business taxes by reporting losses and revenue. Instead, the shareholders note everything in their personal tax filings. Such an action allows you to avoid penalties of getting hit with double taxes.
LLC – LLCs are private limited companies that are set up in such a way as to make a legal distinction between the business and the owner. It provides the limited liability of a corporation and the pass-through taxation you receive in a partnership.
Register The Business Name
Your small business needs a name that your local and state government can use to keep track of your actions. Unless you’re a sole proprietor operating under your own name, you’ll need to register a Fictitious Business Name (FBN) or Doing Business As (DBA). The selected name will be registered with the county and then you’ll operate and file taxes under that name. If you’re in California, you’ll be legally required to file a DBA if you are in a sole proprietor, partnership, LLC, or corporation that is operating under a different name (different than what’s listed on the entity)..
To get the ball rolling you must take the following steps:
Check for availability – When starting your business, you need to know whether the name is available. If you want to find out prior to filing, you can search the county clerk’s office database. As a note, you aren’t allowed to have any potentially misleading titles to the end of your name. Examples include:
File the name – At your county clerk’s office, you’ll need to fill out the forms for filing the business name. You’ll have to include:
Your full legal name
Full legal names of registered owners
State business ID number
After, you must notarize the form and submit the required paperwork within 40 days of starting the business.
Pay filing fees – There are DBA filing fees that differ depending on your county. Typically, it’s approximately $25 for the first name and $5 for any additional names.
Publish the name – Once you’ve completed filing, you’ll be required to publish the DBA statement once a week for four weeks in your local county publication. This must be started within 30 days of filing and the publication will have to provide an affidavit of your complicity.
Obtain an EIN
After the initial two steps, your next task is to acquire an Employer Identification Number (EIN). This is your small business’ identifier for tax purposes. Think of it like your Social Security number but for your business. An EIN can be used for:
Opening a business bank account
Applying for business licenses
Filing tax returns
To do this you must:
Operate your business primarily within the U.S. or U.S. Territories
Have a legal Taxpayer Identification Number (TIN)
Be the owner
Complete an IRS Form SS-4
The easiest way to apply for your EIN through the IRS’ website.
Figure Out Your Federal Taxes
Every small business owner must pay annual taxes. How much and what type of taxes depends on your business structure. If you’re unsure, go to the U.S. Small Business Administration portal to identify what forms and taxes you’ll be paying. Typically, you’ll be required to pay some combination of the following:
It may be wise to hire an accountant, tax advisor, or utilize accounting software to ensure compliance with tax laws. These professionals can also keep your books in order, since almost every state requires the recording of any business transactions. Proper record-keeping and filing of all transactions and documents will simplify the tax process. Also, if you decide not to wait until April to file taxes, the IRS allows a quarterly pay-as-you-go payment system. Staying on top of your taxes protects your business, particularly from fines or back taxes.
If you’re hiring employees, you’ll have to set up tax withholding records. What types of taxes you pay will be determined by whether or not the employees are listed as full-time, part-time, or independent contractors. Regardless, you’ll need to set up the following:
Federal Income Tax Withholding – As you’re hiring, new employees must fill out a W-4 employee withholding, which will then be sent to the IRS.
Federal Wage and Tax Statement – Every employee who joins your small business will need to have a W-2 Form filled out and filed and sent to the SSA.
Don’t Forget State Taxes
Along with federal taxes, you’ll likely have to pay state and local taxes. These may include:
Naturally, the taxes will depend on your business structure and the state you are operating in, and some states are more friendly to small businesses than others. The U.S. Small Business Administration can once more help you with the particulars of your state taxes.
Bringing on employees opens up an entirely new can of worms. It can be a huge boon to your business but also a bane if you don’t have your affairs in order. Outside workers expose you to liability, particularly if you’re not smart about the hiring process.
After defining the role and conducting the interview process, it’s essential that you perform a background check on any new potential employee. This screens their criminal, employment, and credit history and is your way of confirming that the new employee is not being deceitful about their past. Taking such precautions protects your business from liability, shielding employees and customers alike.
Once you’ve checked that their record is squeaky clean, you must verify that they’re legally allowed to work within America. Your employees will need to do the following:
Bring in a valid form of identification
Fill out the first section of an I-9 form.
Get Business Insurance
Business insurance is one of the best ways you can protect yourself from liability. There are a variety of insurance options you can select from and you should be aware that not all of them are legally mandated. That said, even if it’s not legally required, you should ensure that your business is adequately covered. All it takes is one natural disaster or lawsuit to ring the death knell for your small business.
Types of insurance you may want to consider include:
Worker’s compensation – If you have employees (whether W-2 or independent contractors, depending on the applicable law), you’re legally obligated to obtain worker’s comp. This protects employees who might get hurt on the job and accomplishes the following:
Provides medical coverage and benefits for incapacitated employees
Provides monetary payments to hurt employees who are unable to work
Keeps you protected from injury lawsuits
Failure to obtain a policy can result in fines, fees, or the total shut down of your business.
General liability insurance – A must-have, general liability safeguards your small business from any lawsuits having to do with malfunctioning or misrepresentative goods or services that somehow caused injury or damage to property. Naturally, every policy will vary depending on the small business’ particular needs.
Property insurance – If you’re either renting or purchasing a location to operate your business out of, you’ll want to obtain property insurance. This protects the property, your inventory, and equipment from common disasters such as:
Rarer disasters such as floods or tornados will require special insurance, so it’s wise to consult with your insurance company to discuss the best plan for your specific area.
Home-based business – A large percentage of small businesses first start out of a garage or home. Your homeowner’s insurance won’t cover damaged equipment or inventory in the cases of disaster, which is why it’s recommended to purchase a home-based business insurance policy.
Errors and Omissions insurance – If you have an occupation that’s considered to be professional, professional liability insurance protects you from liability related to improper or spoilt services. Professional occupations can include:
Once you have made your first hire, there are certain obligations you must follow. The first requirement is that you register with the department of labor. Reporting your employee to your state labor agency will require that you also pay state unemployment compensation taxes.
After this, you’ll need to hang Labor Law Posters. These should cover all the employee rights and laws as stated by state laws, federal laws, and OSHA. Staying compliant with updated labor laws informs your employee of their worker’s rights and protects you from violations and/or fines.
Hire Solid Legal Counsel
The legal requirements discussed above are but a few of the steps you’ll have to take to warrant that your business is legally compliant. Naturally, the steps you’ll take depend on your business entity, your particular business, and the state you operate in. Therefore, it’s wise to hire experienced business lawyers, so that they can help you handle any complicated legal issue from the get-go.
Startups regularly make the mistake of “not hiring a lawyer until they need one” when in the business planning process. By then, it’s already too late and the business is in jeopardy. Simply put, the relatively small upfront costs are well worth preventing the much larger price of going to court (or being fined heavily).
Briggs law has protected and counseled small business owners for more than 20 years. It’s our goal to help you navigate this exciting, nerve-wracking time. We have handled a wide variety of business matters and even offer several tangential services, knowing that small businesses are often family owned. You can trust us to ensure that your business meets all its legal obligations and is protected from whatever obstacles might come your way. Be safe, not sorry.
For more information on small business law, visit our website or talk to one of our informative attorneys today.
“This blog article is for informational purposes only, and is not a substitute for client- and fact-specific legal advice from a qualified attorney.”
U.S. Small Business Administration. Choose a Business Structure. https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
IRS. EIN Assistant. https://sa.www4.irs.gov/modiein/individual/index.jsp
Entrepreneur. Hiring Your First Employee. https://www.entrepreneur.com/article/83774