What Legal Requirements Are Needed to Start a Business? 8 Tips for Startups
When starting a new business venture, entrepreneurs should make sure they’re complying with all the legal obligations of running a small business. There are a range of legal requirements for new businesses and startups, including financial regulations, tax obligations and employment laws. Make sure your new company complies with all its legal responsibilities so you can get back to focusing on growing your business.
These topics will walk you through the legal requirements for starting a business:
What Are the Legal Requirements for Starting a Business?
You may have a terrific new business idea, but in order to get your startup off the ground, you first have to make sure you comply with all the legal requirements involved in starting a business. Here’s an easy-to-follow guide for starting your business legally:
Create a LLC or Corporation
The first legal requirement you’ll need to meet as a new business owner is to choose the business structure of your company. You can choose between forming a LLC or a corporation. There are advantages and disadvantages to both structures, so do your research before selecting a business structure for your startup.
- LLC: A LLC, or Limited Liability Company, protects you from personal liability under most circumstances. This means that if your business is sued or if it declares bankruptcy, your personal assets including your home and vehicle won’t be at risk. With a LLC you’ll be able to file your business income as part of your personal income taxes, but you will likely need to pay self-employment tax.
- Corporation: A corporation, or C corp, is a company that is legally a separate entity from its owner or owners. Corporations offer the greatest level of personal protection from liability out of all business structures. However, they’re more expensive and complicated to form. Corporations file separate income tax on their profits.
The Small Business Administration created a helpful guide on the different business structures, along with the advantages and disadvantages of each option.
Register Your Business Name
Once you’ve decided on a business structure, you’ll need to register your business name. Choose a name that reflects your brand and make sure it hasn’t already been claimed. You can then choose to register your business. There are four ways to register it, each serving its own purpose:
- An entity name: legally protects your business at a state level
- A trademark: legally protects your business at a federal level
- A DBA (Doing Business As): doesn’t offer legal protection, but may be required, depending on your location and business structure
- A domain name: claims your business’s web address
Apply for a Federal Tax ID Number
Your federal tax identification number is known as an Employer Identification Number (EIN) and it allows you to legally hire employees, pay federal taxes, apply for business licenses and open a business bank account. You can apply for an EIN through the IRS website. Your business will need an EIN if you plan on doing any of the following:
- Hiring and paying employees
- Filing employer tax returns
- Operating as a corporation
- Using a tax-deferred pension plan
Determine If You Need a State Tax ID Number
Do some research to find out whether your startup needs a state tax ID number. You’ll only need one if the state you operate in collects taxes from businesses. Since tax obligations vary from state to state, it’s best to visit your own state’s website and check the local laws related to your income and employment tax obligations.
Obtain Business Permits and Licenses
You will need to apply for business licenses and permits at the federal and state government level, but the specific licenses you need depend on the industry you work in and your business location. The Small Business Administration has a list outlining common federal business licenses required based on industry, which is a good starting point for your research. At the state level, the licenses and permits needed and the fees owed will depend on where you’re located and what your primary business activities are. Research requirements at the state and local levels based on where you do business.
Protect Your Business with Insurance
Business insurance can protect you in cases where the personal liability protections offered by your specific business structure aren’t enough. Business insurance can protect not just your personal assets, but your business assets as well. Some types of insurance are required by law, such as unemployment and disability insurance. It’s also a good idea to purchase business insurance to protect your startup from other potential risks. Some common business insurance options include:
- General liability insurance: Protects your business from various forms of financial loss, including property damage, injury, medical issues, lawsuit settlements or judgements
- Product liability insurance: If your business sells products, this insurance protects you in the case that one of your products is defective and injures a customer
- Commercial property insurance: Protects your business from loss or damage to company property, as a result of natural disaster, accidents or vandalism
Open a Business Bank Account
From a legal perspective, it’s important that you separate your personal and business finances before you start collecting payments from clients. Choose a bank that’s convenient and serves your needs, maybe by offering lower banking fees for small business clients. When you’ve chosen a banking institution, you’ll need to provide some information about your business to open an account, including:
- Your Employer Identification Number (or Social Security Number, in the case of a sole proprietorship)
- The formation documents for your business
- Your business license
- Ownership agreement documents
Consult the Professionals
To ensure you’ve covered all your legal responsibilities as a new business, it’s a good idea to consult professionals for advice. Consider sitting down separately with both a lawyer and an accountant to make sure that your company is covered from a legal and a financial standpoint before opening for business.
Can I Start a Business Without Registering It?
You need to first register your business name in order to use that name for your business. If you don’t have a business name that’s registered with the secretary of state, you can only conduct business under your personal name. Before filing for your business name, make sure it’s not currently in use by someone else. Then, register the name online through the IRS.