Starting a small business is an inspiring time in your life. It’s your chance to be your own boss and to show everyone what you’ve got to offer. The sky’s the limit, and you have all the freedom in the world, but the opportunity doesn’t come without potential severe 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 have done all the planning for your business, you will have to consider any legal requirements you must fulfil to operate lawfully. This might involve anything from obtaining permits and licenses to securing the proper insurance.
The most common legal requirements for starting a small business include:
- Create a business structure.
- Registering the business name.
- Obtaining an Employer Identification Number (EIN).
- Figuring out Federal Taxes.
- Obtaining required business permits and licenses.
- Create a Compliance Plan.
- Getting business insurance.
- Create a business structure
For tax and liability purposes, you must designate the appropriate business entity for your small business. Doing so can impact your personal liability, tax payments, and ability to fundraise.
The most common business entity structures you have to choose from are:
- Sole proprietors – A sole proprietorship is an enterprise that’s owned and operated by one person. There are no legal distinctions between the business and the person. Additionally, there are several possible consequences you should consider concerning this sole proprietorship structure, including the possibility of forfeiting your personal property if found liable, reporting business losses in personal income, and having 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 partnership agreement, 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 – A Limited Liability Company (LLCs) is a private limited company that is 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 governments 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 file the business name, 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, Corp. Inc., Incorporated, and LLC.
- 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, Address, DBA, Business address, Full legal names of registered owners, State business ID number, and Business type. 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 designating the business entity and registering the business name, entrepreneurs must 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, and filing tax returns.
To qualify for an Employer Identification Number, 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 is 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, visit the U.S. Small Business Administration portal to identify what forms and taxes you’ll be paying. Typically, small business owners are required to pay some combination of the following federal taxes:
- Income tax
- Self-employment tax
- Excise tax
- Employer Tax
- Estimated tax
- Sales tax
As a small business owner, 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.
Additionally, small business owners will also need to pay state and local taxes along with federal taxes. These state and local taxes may include:
- Property tax
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.
- Obtain Required Business Permits and Licenses
Just like any other business, independent contractors must obtain proper permits and licenses. Depending on your industry and where your business is located, you may need to be licensed on the federal level as well as on the state or local level. Federal licenses are required for businesses involved in any sort of activity that is supervised and regulated by a federal agency. State licensing and permits will vary depending on location.
- Create a Compliance Plan
Even as a small business owner, you’re subject to some of the laws and regulations that apply to large corporations. These include advertising, marketing, finance, intellectual property, and privacy laws. For companies that have employees, there are additional state and federal regulations that may need to be followed situationally.
- 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.
The different types of business insurance for new business owners to consider include:
- Workers’ Compensation
If you have employees (whether W-2 or independent contractors, depending on the applicable law), you’re legally obligated to obtain a worker’s comp. Workers’ compensation 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: Smoke damage, Fires, Theft, and Vandalism.
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 case 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 covered by professional liability insurance can include:
- Money managers