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9 Legal Requirements for Starting a Small Business

Legal requirements for starting a small business
(Last Updated On: November 15, 2023)

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Starting a small business is indeed an exciting time. However, a new business brings with it several challenges that one has to overcome. One of these challenges is to take care of all the legal obligations of your small business. There are numerous legal requirements for starting a small business and it’s beneficial, as a new business owner, to be aware of what they are.

This includes compliance with tax laws, employment laws, financial regulations, and so on. Failing to fulfill these obligations could cause a small business massive damage, perhaps even shutting it down completely.

Every business is unique and might have specific legal requirements, but there are some common ones that all businesses should follow. Here’s a list of the common legal requirements for starting a small business.

  • Create a legal business structure
  • Register your business name
  • Get an EIN / Federal tax ID number
  • Obtain business permits and licenses
  • File state and federal business taxes
  • Get business insurance
  • Open a business bank account
  • Secure intellectual property
  • Develop an operating agreement

One of the many crucial legal requirements for starting a small business is to choose your business structure. Ask yourself these important questions: What are your business goals? Will you be hiring people to work for you? Will you offer goods or services? What are your business’s financial requirements?

By answering these questions, you will be able to figure out your ideal business structure. The business structure you choose will help in determining your federal tax requirements. You can get more information regarding taxes and forms from the US Small Business Administration (SBA).

Listed below are the common business structures you can choose from: 

  • Sole proprietorship: This business is considered to be an enterprise that is controlled by one person. There aren’t any legal distinctions between the owner and their business.
  • Partnership: This form of business structure consists of an agreement that’s made between two or multiple individuals. They are responsible for managing and operating the business and splitting the profits they earn.
  • Limited Liability Company (LLC): This is known as a private limited company, which is responsible for creating a legal distinction between the owner and their business. Read more: What is an LLC.
  • C-Corporation: This is a corporation in which the business and the owner are responsible for paying taxes separately. 
  • S-Corporation: This is a business structure where a corporation reports the revenue and losses instead of paying taxes. The shareholders are responsible for keeping a record of everything within their personal tax filings. 

2. Register Your Business Name

Of course, your business will need a name by which it’s recognized and the government can keep a track of it. You are required to register a ‘Doing Business As’ (DBA) or a ‘Fictitious Business Name’ (FBN), if you’re not a registered business and don’t want to operate under your personal name. 

Read our article on how to register your business in the US to learn more if you’re looking to register your company.

Moving on, the name you choose will get registered with the county, state, or parish. Next, you will be able to file taxes and operate under your new business name. Consider the following before choosing your business name:

  • Check to see if your chosen business name is available
  • File your business name, once it’s chosen at the county clerk’s office
  • Pay the necessary filing fees
  • Get your new business name published

If you’re having trouble choosing a catchy name for your business, look at our article on how to come up with a business name.

3. Get an EIN / Federal Tax ID Number

One of the most important legal requirements for starting a small business is to get your EIN (Employer Identification Number). This number is basically the Social Security Number of your business. It’s used for tax purposes, to open a business bank account, and to apply for business licenses. You can apply for your specific EIN directly from the IRS website.

In order to be eligible for an EIN, you need to meet the following criteria:

  • Be the owner of the business
  • Should operate your business within the United States or its territories
  • Get a legal TIN (Taxpayer Identification Number)
  • Complete the IRS form SS-4

When it comes to the federal tax ID number, you need to do research to see if your specific small business needs one or not. You are required to have a federal tax ID number if your state collects taxes from businesses. Every state has its own tax obligations. Therefore, it’s best to visit the official website of your state and check the local laws there.

Get Your EIN with ZenBusiness!

4. Obtain Business Permits and Licenses

Applying for business permits and licenses is one of the ways on how to make your business legal. You have to obtain these documents at the federal level and your state’s government level. However, you will also need specific licenses based on your industry and its location. You can find a list of common federal business licenses based on industry on SBA’s website. 

The industries that require a federal license or permit include agriculture, broadcasting, transportation, natural resources, and alcoholic beverage production plus sales. You might also need a local or state license or permit in other business categories too, for example, you are required to have a seller’s permit if your state collects sales tax. 

5. File State and Federal Business Taxes

Filing taxes are one of the highly important legal requirements for starting a small business. In addition to income tax, you must pay different types of taxes based on your business, such as self-employment tax

The type of taxes and the amount depends on the business structure you have chosen. You can get additional information regarding tax requirements from the IRS website. Generally, small business owners have to pay some or all of the following federal taxes:

  • Self-employment tax
  • Income tax
  • Excise tax
  • Estimated tax
  • Employer tax
  • Sales tax

6. Get Business Insurance

Getting business insurance is one of the many ways on how to make your business legal. When your business structure’s personal liability protections aren’t enough, that is when business insurance comes in. Business insurance protects both your personal and business assets.

Certain insurance types are required by law, like disability and unemployment insurance. Listed below are some of the common business insurance types you can choose for your small business:

  • General liability insurance: It keeps your business safe from all types of financial losses, like medical issues, property damage, and lawsuit settlements, to name a few.
  • Product liability insurance: This insurance will keep your business safe in case your product injured a customer or is defective. 
  • Commercial property insurance: This keeps your business safe from damage or loss to company property due to accidents, vandalism, or natural disasters. 
  • Workers’ compensation insurance: You are legally required to get workers’ compensation if people work for you. This protects your employees in case they get hurt. Plus, incapacitated employees get medical benefits. It keeps you safe from injury lawsuits as well.
  • Home-based business insurance: If you work from home, this insurance policy will cover things like damaged inventory, defective equipment, and so on.

7. Open a Business Bank Account

Having a separate business bank account makes it easier to conduct business-related transactions and keep a track of all expenses. You can set up your business bank account prior to getting payments from clients. However, it’s better if you open your account from the very beginning. Read our article on how to open a business bank account to learn more.

There are numerous banks that offer business bank accounts, and you will definitely find one that’s perfect for your small business. This is one of the crucial legal requirements for starting a small business. Plus, keeping your personal and business bank accounts separate makes things easier when it comes to taxes. 

The following is an example of some of the documents you will need to open your business bank account:

  • Your business’s license
  • Your EIN or SSN, if you have a sole proprietorship business
  • The ownership agreement documents of your business
  • Your business’s formation documents

8. Secure Intellectual Property

Intellectual property consists of things that are created by the human intellect and should be protected from unauthorized use by law. If used, the original creator will receive recognition or financial compensation for their inventions.

You can learn how to start a business legally when you know how to take care of your inventions. If your invented product or service is something original, you need to keep it protected so that others don’t copy it. Or else, anyone can use your inventions for their own benefit.  

Listed below are the intellectual property rights you should be aware of:

  • Trademark
  • Copyright, or author’s right
  • Patent
  • Trade secrets
  • Industrial design
  • Geographical indication

You can get in touch with an intellectual property attorney to get more guidance when it comes to choosing the correct intellectual property rights or knowing if you need one at all. 

9. Develop an Operating Agreement

An operating agreement is known as a legal contract for a Limited Liability Company (LLC). This agreement is one of the essential legal requirements for starting a small business, as it consists of certain processes, provisions, and rules that control how a business works internally. 

All 50 states in the US require written operating agreements to create an LLC. It’s crucial to include all details regarding the workings of an LLC company. Omitting important details could put business members at risk. 

Some of those details include information like member responsibilities and rights, ownership percentages, detailed information of each member, certificate and articles of organization, purchasing and selling rules, and so on. 

In conclusion, knowing how to start a business legally requires an understanding of what your business needs. After you have completed the above-mentioned requirements, the next step is to spread the word about your business. You can do this by developing a stellar marketing strategy and creating a business website.

Creating a business plan is essential before you take any legal steps to start your business. 50% of businesses fail within the first five years due to improper business planning. After understanding your business goals, you will be better able to complete all the legal requirements that are specific to your business.

Are you still unsure about what business to start? Read our article on the most profitable businesses or choose from our list of small business ideas

About the author

Dr. Gabriel O'Neill, Esq., a distinguished legal scholar with a business law degree and a Doctor of Juridical Science, is a leading expert in business registration and diverse business departments. Renowned for his academic excellence and practical insights, Dr. O'Neill guides businesses through legal complexities, offering invaluable expertise in compliance, corporate governance, and registration processes.

As an accomplished author, his forthcoming book is anticipated to be a comprehensive guide for navigating the dynamic intersection of law and business, providing clarity and practical wisdom for entrepreneurs and legal professionals alike. With a commitment to legal excellence, Dr. Gabriel O'Neill, Esq., is a trusted authority dedicated to empowering businesses within the ever-evolving legal landscape.