The fact that small business legal requirements exist should encourage you to pursue your dreams. These rules must be adhered to at all costs. They are defined to protect you and your stakeholders in the future. Being legally compliant will ensure that your business does not come to a standstill because of legal challenges, whether caused intentionally or unintentionally.
Why do you need to pay attention to small business legal requirements?
New enterprises cannot enjoy the luxuries that larger companies do. The latter employ teams of legal consultants internally and externally, conduct large-scale audits, and have ample bandwidth to dedicate resources in case a legal conflict arises.
Being new, you should focus on small business legal requirements from the beginning because doing so can save you the cost, energy, and peace of mind you could spend on legal tangles.
What are the legal requirements for starting a business?
If you are anxious about getting everything right, here’s the best place to begin. We have put together eight steps you should follow to protect your business legally. Even if you have spent years building your business without protecting its legal interests, it’s never too late to start.
1. Decide on your business structure
While you may define your business by the products and services it offers, the legal system has its own set of definitions for your business. These definitions represent the way you structure your business.
Your business could be owned independently or controlled and operated by an external party, where you perform the role of a shareholder. Each of these ownership types has its own set of rules. Here are five of the most common business structures.
Limited Liability Company (LLC)
A Limited Liability Company (LLC) protects the owner's personal interests. The owner and their assets are protected by law if the company is sued or declares bankruptcy.
The separation between the person and their business has proven to protect several business owners who have taken business risks and lost their enterprise from losing self-owned assets.
When you declare your business as an LLC, you will be able to file the income from your business as your personal income during tax calculations. You may need to pay self-employment tax to the government for this privilege.
This form of ownership is simple. You’re the king of the palace: the sole owner of everything within the business. The business is filed under your personal Social Security Number. By applying for a Taxpayer Identification Number (TIN), the IRS will recognize you as a legally registered business.
Sole proprietors run their businesses under their names. If you want to give your business another name, you must register a Doing Business As (DBA), which informs the authorities of the business's actual owner.
Partnerships are businesses run by two or more parties. Their small business legal requirements are similar to those of a sole proprietor. They share the profits, losses, penalties, and other aspects of the business as defined by their partnership contract. The roles and responsibilities of each partner can differ significantly.
Some well-known examples of successful partnerships in recent years include the partnership between Amazon and Whole Foods, and the partnership between Apple and IBM for enterprise solutions.
There are three types of corporations you can set up. S Corporations pass their income, profits, losses, and deductions on to their shareholder tax returns. C Corporations and their shareholders pay a separate tax. B Corporations are committed to creating general public benefits while earning profits.
Corporations are expensive to form but offer the best personal protection to their owners. Building a successful corporation typically involves a combination of factors, such as a strong business model, a clear vision and strategy, effective leadership, and a dedicated team. However, there are no set steps or formulas to guarantee success.
Additionally, building a strong corporate culture and fostering positive relationships with customers, employees, and other stakeholders can also be important for success.
As the name suggests, non-profit organizations are formed to earn revenue that is used for a noble cause. These organizations do not chase earnings to fill their coffers. Instead, they direct all their funds toward the cause that they stand for. Non-profits, too, need small business legal requirements.
Building a successful non-profit organization is a complex and multifaceted process that can involve a combination of factors such as a clear mission, effective leadership, a dedicated team, and a sustainable business model.
2. Register your business name
Naming your new business is an exciting step. But simply deciding on a name, inscribing it on signage, and sticking it above your door does not cut it. When you are considering small business legal requirements that can protect your name from being misused or stolen, you must register it at the state level.
Once you claim the name and register it, no other business can use it. If you want to give your business name national exclusivity, then trademark it. This practice ensures that no business in the country can replicate or use your name to represent themselves.
As soon as you register the name of your business, go online and purchase a unique domain name that comes closest to the name you selected.
3. Trademark your logo design
Your logo design represents your business name. It becomes the visual mnemonic by which the world will acknowledge and recognize your business.
Trademarking your logo keeps other businesses from imitating your business and misrepresenting it. You spend money and energy creating your business's unique logo and identity. Trademarking the logo design gives you a legal advantage over any business that copies it.
4. Apply for a Federal Tax ID number
A Tax Identification Number (TIN) is how tax authorities recognize your business. A federal TIN is the employer identification number (EIN). It enables you to pay your taxes, open a bank account for your business, hire employees and pay them a salary, and apply for licenses and permits required to run your business.
An EIN is required in cases where the business is a partnership or a corporation. It is also necessary when your business withholds taxes charged on employees' wages. If there is any change in your tax status, name, management, or address, your EIN will also need to be updated.
5. Obtain business permits and licenses
Any kind of business requires a set of permits and licenses to operate. Permits require regular inspections to be carried out and last for a limited time. Licenses can be permanent or last for extended periods and are less restrictive than permits.
The specific permits and licenses required for starting a business can vary depending on the location, industry, and type of business. However, some common permits and licenses that may be required include:
- Business license: A general business license is usually required by the local government to operate a business within a specific jurisdiction.
- Sales tax permit: A permit is required if the business will be selling goods or services and collecting sales tax.
- Zoning permit: A permit may be required to ensure that the business is in compliance with local zoning regulations.
- Health department permit: A permit may be required if the business is involved in food service or handling, such as a restaurant or bakery.
- Professional licenses: Some businesses, such as healthcare providers, attorneys, and accountants, may require a professional license from the relevant state board or regulatory agency.
- Industry-specific licenses: Depending on the industry, there may be additional licenses or certifications required, such as for construction, transportation, or manufacturing.
- Employer Identification Number (EIN): A federal tax identification number is required for businesses that have employees or for certain types of businesses, such as partnerships or corporations.
It's important to check with your local government and state and federal authorities to determine which licenses and permits are required for your specific business.
The permits and licenses you require to run your business can differ from state to state, depending on your business.
6. Protect your business with insurance
Business insurance can be a lifesaver if you are faced with dire consequences. Depending on the challenges you may face, there are different kinds of business insurance that you could pick off the shelf.
Some common types of business insurance that many companies may consider include:
- General Liability Insurance: This type of insurance protects the business against third-party claims of bodily injury or property damage.
- Professional Liability Insurance: This type of insurance protects the business against claims of negligence or errors made by the company or its employees.
- Workers' Compensation Insurance: This type of insurance is required by law in most states and provides coverage for employees who are injured or become ill as a result of their work.
- Business Owners Policy (BOP): This type of insurance is a bundle of coverage that includes general liability, property, and business interruption insurance.
- Cyber Liability Insurance: This type of insurance provides protection against losses resulting from data breaches, cyber-attacks, and other digital threats.
- Product Liability Insurance: This type of insurance protects the business against claims of injury or damage caused by a product that the business manufactures, distributes, or sells.
- Vehicle Insurance: If your business uses vehicles, you may need to purchase commercial auto insurance.
- Directors and Officers Liability Insurance: This type of insurance protects the directors and officers of a company from claims of wrongful acts or misconduct.
You can even insure your business for a time when you may be unable to pay your workers a salary. Yet another kind of insurance is one where you cover your machines and building areas. Getting business insurance is essential because you need to predict what may occur in your growing business and hamper regular operations.
7. Open a business bank account
No matter what kind of business you run, always create a separate bank account for your business. It is a small business legal requirement because it simplifies the taxation, audit, and accounting processes that every business and all authorities must monitor.
Before picking a business bank account, identify which banking features are most advantageous to your business and compare the offerings these bank accounts give you. Pick one that delivers maximum value and convenience.
You may have come across privacy policies defined by businesses on their websites. What is it, and why do companies invest their efforts into defining these policies? Privacy policies are legal statements that declare how the business will deal with the personal information of its partners and customers.
You hold your customers' names, addresses, phone numbers, and other sensitive information as a company. The policy assures your customers that their information is safe when shared with members of your company.
Some examples of businesses that are known for having strong privacy policies include major technology companies such as Apple, Google, and Microsoft, as well as privacy-focused companies like DuckDuckGo.
Frequently asked questions about small business legal requirements
What are some commonly asked questions about small business legal requirements? Get your questions answered with these three FAQs.
1. What is the simplest legal structure for a small business?
The easiest business legal structure is probably a sole proprietorship. This is because it requires the least amount of paperwork and has the fewest legal formalities. With a sole proprietorship, you are the sole owner of the business and are personally liable for all debts and obligations.
2. What is the cheapest legal form to start a business?
The cheapest business legal structure is likely a sole proprietorship. There are no annual or ongoing fees to maintain the structure, and you do not need to file any special taxes for the business separate from your personal taxes.
It's worth noting that a Limited Liability Company (LLC) is also relatively inexpensive and easy to set up and offers some protection to your personal assets in the event that the business is sued or incurs debt. However, it is slightly more complex than a sole proprietorship and may involve some additional paperwork and fees.
3. Can you sell without a business permit?
No, it is highly discouraged. Keep in mind that you can't run your small business without a valid, up-to-date business license, or you could face penalties like fines and jail time.
As you tighten your grip on your imagination, which has now taken root as a full-fledged business, you will realize how necessary these legal requirements can be. They create a protective sheath around your business, even when it is stretching its wings to expand globally.
It’s always better to be on the right side of the law.