Part of what makes starting a business complicated is the legal implications to consider. Fortunately, there are plenty of legal resources available to small businesses both online and through hired legal counsel. Use this list as a jumping off point to cover the legal requirements for starting a small business.
1. Select a business entity.
Choosing the right business entity is crucial because it affects personal liability, what you pay in taxes and the ability to take on investors. Possible structures include:
Once you decide which structure is best for your company, you’ll need to register it through your secretary of state.
Most small businesses start out as sole proprietorships or partnerships because these require minimal paperwork and setup time. However, these types of businesses also don't offer sufficient liability protection for business owners. A corporation or LLC is generally a better choice as your business grows, particularly if you're planning to secure a business loan or raise venture capital.
» MORE: LLC vs. corporation
2. Obtain licenses, permits and registrations.
Licenses, permits, and registrations come in many variations. Examples include local business licenses, building permits, health safety-related permits, permits for home-based businesses, fire permits, industry-related permits (like running a legal practice, hospitality, construction, or manufacturing business) and liquor licenses.
Make sure to do thorough research — perhaps with the help of a business attorney — on what you need to be compliant with the law in your area. Your city or county's business licensing agency is a good place to start.
3. Pay business taxes.
Every business owner is legally required to pay taxes. This includes income tax, self-employment taxes and, for some businesses, sales tax. It may be helpful to hire an accountant or tax advisor to ensure you are compliant with all tax laws. Accounting software can also help you figure when to file taxes and what forms to fill out.
The IRS has a pay-as-you-go tax schedule for businesses, requiring business owners to pay estimated taxes on a quarterly basis. Make sure you check the IRS requirements for your business type to avoid any fines and back taxes.
4. Do proper bookkeeping.
In most places, you are required by law to record all business transactions using a specific accounting method. Check what’s required for your industry and location in terms of record-keeping obligations, and set up a filing and bookkeeping system for all documents and transactions. This will help you later when filing taxes or if you run into other legal issues.
5. Write a founders’ agreement.
If your business has multiple owners, it’s important that each person understands their rights and responsibilities within the business. You’ll need the following agreements based on your business structure:r
- Corporation: A shareholder agreement, bylaws and articles of incorporation.
- LLC: Articles of organization and an LLC operating agreement.
- Partnership: A certificate of partnership and partnership agreement.
6. Get an employer identification number (EIN).
To open a corporate bank account and file business tax returns, you may need an employer identification number (EIN). You can request one for free from the IRS over the phone or by using an online application on the IRS website. Only sole proprietorships and single-member LLCs with no employees are exempt from this requirement.
You need the Social Security number of the person completing the form for the company (usually the president or CEO). Include information on your business entity and date of incorporation. Make sure to keep a signed copy of this application in your files.
7. Protect intellectual property (IP).
IP includes patents, copyrights, trademarks and trade secrets. File patents as soon as possible — the process can take more than five years. Protecting intellectual property will ensure that you have exclusive rights to reproduce your work.
8. Classify workers.
It’s important to know how to classify workers you’re hiring — essentially, the difference between an independent contractor vs. employee.
- Independent contractor: A self-employed worker who is responsible for completion of work but retains control over how the work gets done.
- Employee: A worker in which the employing company retains control over what the work is and how it will get done.
This classification is important for tax reasons because if you misclassify an employee as an independent contractor, you could be on the hook for costly penalties and back wages.
9. Purchase workers' compensation insurance.
In all states but Texas, most businesses with employees are legally required to purchase workers' compensation insurance. Coverage should begin from the first day an employee starts working. This insurance covers medical and legal costs associated with work-related employee injuries and illnesses. State laws about workers' compensation vary, so make sure you check your state's rules.
10. Hire legal counsel.
Working with legal counsel early can help you avoid costly mistakes and protect your business as it grows. A business attorney can help you choose the right entity, set up contracts and policies and reduce risk around taxes, employment and compliance before small issues turn into expensive problems.
A version of this article originally appeared on JustBusiness, a subsidiary of NerdWallet.
