Starting a business is an exciting and invigorating time! But you need more than just a catchy name, good financials, and a business plan to get the ball rolling. You also need to make sure you don’t run into any potential legal hurdles before founding your first business.
Unfortunately, there are a lot of hurdles. Let’s take a look at thirteen small business legal requirements to know before starting a business so you’re equipped to begin your enterprise with your paperwork fully in order.
Settle on a Business Structure
First and foremost, you must legally settle on a business structurein order to create a new enterprise of any kind. The main types of business structures are:
Sole proprietorship, which is owned and operated by a single individual. A sole proprietorship is not a legally distinct entity from its owner.
A partnership, which is formed by at least two owners who agree on how to start and operate a business. Again, a partnership is not a separate legal entity from its owners.
Corporation, which is further segmented into S, C, and B corporations. Corporations are legally distinct entities that pass on all the income, losses, credits, and deductions to the tax returns of their shareholders.
Limited liability companies or LLCs. These businesses protect the legal liabilities of their owners from debts and other liabilities, so they combine partnership and corporation attributes.
Nonprofits, which channel the revenue they generate into various causes like charities.
Determine the type of business you want to run, as well as the advantages and disadvantages of the above structures, before settling on one for your organization.
Register Your Business Name
Next, you’ll need to register your new business’s name with your state business registrar’s office. An ideal business name should be memorable, easy to spell, and related to your industry or services. In addition, every business name must be unique. Therefore, you should Google potential business name ideas before trying to use one for your own enterprise.
Get an EIN
If your business is ever to have employees, you’ll need an employer identification number or EIN. Think of this as a federal tax ID for your business. The EIN is necessaryso you can pay business taxes, open a business bank account, and hire and pay future employees.
You always have to have an EIN if your business is a partnership or corporation or if it uses a tax-deferred pension plan/withholds taxes on employee wages. Note that you receive an EIN from your state's Secretary of State office – the same place where you register your business name and other critical information.
Get Business Permits/Licenses
Every business requires the right permits and licenses to operate legally. Unfortunately, each state has its own licenses and permits, so you'll need to contact your local Secretary of State's office to find out what licenses you need to start a new business.
Most of these licenses and states require you to pay a fee to apply for licensure, as well as an annual or ongoing fee after that.
Understand Business Taxes
Remember, you will need to pay business taxes of some type, no matter the size or organization of the company. Therefore, you should research your business tax requirements. These are usually determined by your business structure. You’ll need to pay one or several of the below five types of business taxes:
You can check out this IRS breakdown on business tax requirements for more information.
Protect Your IPs
An IP or intellectual property is anything you make that is protected by the law, so others can’t use it without your authorization. Depending on what you produce or how you build your business, you may have certain IPs to protect, like patents to your products, trademarks for your company’s logo and name, copyrights, trade secrets, and more.
You'll also want to pursue business insurance. Business insurance is necessary for most states, and it protects you from having to pay for damages your employees cause to the property of others. It also covers you from damage done to your business by customers, clients, and other individuals.
The main types of insurance to have as a business owner are:
General liability insurance - protects your organization from claims like personal injuries or bodily injuries.
Professional liability insurance - provides coverage against claims of negligence from clients or customers
Workers’ compensation insurance - covers your employees if they are injured on the job.
Life Insurance - provides to your family in the event of your death or disability, which is especially reassuring to have if you are the sole individual running the business or if the business could not operate without you (consider a couples life insurance policy if you and your spouse are operating the business)
Commercial property insurance - protects your physical assets from fire, damage, theft, or vandalism
Draw Up a Founders Agreement
If you start your business with several others, you'll need to draw up a founders’ agreement. This outlines what each founder receives in terms of dividends, stock options, etc. It's important to have a lawyer look over your founders’ agreement before everyone signs it to ensure that there aren’t any loopholes or liabilities you may have missed.
Classify Your Workers
If you have employees, you’ll need to classify your employees as exempt or nonexempt employees. According to the Fair Labor Standards Act, exempt employees don’t get overtime pay, but nonexempt employees must earn minimum wage for all the hours that they work.
Always classify your employees so you properly comply with federal employment and labor laws.
Write an Employee Handbook
Should you choose to hire employees, you’ll need a dedicated employee handbook so your future workers know what to expect from your business and the responsibilities and rules they are expected to abide by. Your employee handbook can outline:
Employee rules and regulations
Your rights as an employer
What employees are expected to do
Get a Business Bank Account
It’s always wise to keep your business and personal finances separate. To that end, be sure to start a business bank account at the earliest opportunity. A business bank account should hold all the revenue you earn from your business, plus be used to pay for your business taxes later down the road. Later, you can open several investment accounts, so your excess revenue still works for your company.
Practice Good Accounting
Lastly, always remember to practice good accounting once you have your business account up and running. Solid bookkeeping is important in case you ever get audited by the IRS. Should the IRS find something improper about your books, you could face heavy fees and other penalties.
It’s wise to practice good accounting even without the threat of an IRS audit. Smart accounting will help you better understand your finances, business options, and available cash to spend on expansion and debt repayments.
There you have it – thirteen smart legal requirements to keep in mind as you start your business. Be sure to check these off your to-do list as a founder, and you’ll steer well clear of legal issues.