Estimated Read Time: 10 minutes
Last Updated: October 29, 2020
There is a lot that goes into starting a successful small business. The early stages come with a substantial checklist:
- Finding the right store location
- Selecting the best products for inventory
- Designing your store layout
- Planning your grand opening
- Choosing a name and logo
- Securing proper SMB financing
- Determining a retail marketing strategy
- Submit a formal business plan
- And a whole lot more
Fortunately, a lot of the process can be accomplished through the passion and energy that all entrepreneurs share. Despite a lot of hard work, most of it is pretty fun.
But there is one crucial area that all new businesses must abide by that isn’t always so much fun: following the law. In most places, you’ll find many legal requirements for starting a small business. While they may give you more of a headache than some of the other steps involved, they are the most critical. Failure to follow proper procedure can delay or even prevent a business from opening. So take a look at these key legal requirements to consider so that you can check them off your list while starting your new business.
Table of Contents
- Register Your Business Name with the Government
- Legally Protect All Intellectual Property (IP)
- Set Up Your Employer Identification Number (EIN)
- Determine Tax Requirements for Federal, State, and City Governments
- Get All Necessary Small Business Permits and Licenses
- Obtain a Founders Agreement and Vesting Schedule
- Classify Your Workers and Buy Workers’ Comp Insurance
- Create a Company Handbook
- Hire a Lawyer to Advise on Legal Requirements for Starting a Small Business
First, check any potential business names with the U.S. Patent and Trademark Office (USPTO) to be sure that the name isn’t trademarked by any other business.
Registering the name of your small business is a relatively easy place to start. Most small businesses with register a name under either the “Doing Business As” (DBA) or “Fictitious Business Name” (FBN) labels.
This name will not be the official legal title of your business but will be the name by which consumers know your business. For instance, you could start a coffee shop with a DBA of Center City Roasters but with a legal business name that is simply the owner’s full name.
If you’re starting a limited liability company (LLC) or corporation, the naming process will be slightly more complex and you’ll need to get additional naming rights.
DBAs do not provide you with trademark protection outside of the state in which you operate. For most small businesses, trademarking your name is a costly unnecessary additional step – a business sharing your name in another state is unlikely to provide any competition.
If you do decide that it will be worth trademarking your business name, this will be included in any efforts to protect your intellectual property.
IP can include patents, creative work, products, copyrights, trademarks (including your name and logo), and more. If there is any part of your business that you are worried may be copied or stolen, consider getting it protected by the USPTO.
The IP field is vastly complicated from a legal perspective, so it’s advised that you seek proper legal counsel.
Another part of registering your business entity with the federal government is to secure an EIN. Unless you’re operating a sole proprietorship with no employees or a single-member LLC, and EIN is a requirement. If in doubt, check with the IRS (generally good life advice).
These are actually pretty easy to obtain. Applications can be completed over the phone or online, and you’ll only need your social security number, business entity type, and the exact date that your business was incorporated.
The biggest determinant in this process is your type of business entity. Your business structure will determine the paperwork you’ll file to start the business as well as your tax structure. There are 5 major business entities that small businesses can register as:
- Sole Proprietor – This means that a single person owns the company. Taxes will be paid directly through the personal income tax return of the sole owner.
- Partnership – Almost identical to sole proprietorships, partnerships include two or more equal owners and taxes will be paid through the combined personal income returns of each owner.
- Limited Liability Company – An LLC has the same tax structure as a partnership, but it protects the owners from certain liabilities.
- Corporation – With no specific owner or owners, a corporation pays taxes directly through the corporation itself.
- Non-Profit – Most non-profit organizations are exempt from paying taxes, but come with many other legal obligations to maintain its entity status.
Corporate and non-profit structures are the most complicated and often require the assistance of experts. Once you’ve determined which business entity is best, file accordingly through your state’s secretary of state office. Below is a helpful chart from the Small Business Administration differentiating the major business entities.
While the EIN and business entity are essential for any person or group conducting business, many industries require additional licenses and permits in order to legally operate. Though far from exhaustive, below is a list of some of the most common business niches that need further approval prior to opening its doors:
- Agriculture – See U.S. Department of Agriculture (USDA)
- Alcohol & Tobacco – See Alcohol, Tobacco and Firearms (ATF) or Alcohol and Tobacco Tax and Trade Bureau (TTB)
- Aviation – See the Federal Aviation Administration (FAA)
- Broadcasting – See the Federal Communications Commission (FCC)
- Financial Advising – See the federal Securities and Exchange Commission (SEC)
- Firearms – See ATF or TTB
- Interstate Commerce – See the U.S Department of Commerce (DOC)
- Mining – See the Bureau of Safety and Environmental Enforcement (BSEE)
- Shipping – See the Federal Maritime Commission (FMC)
- Wildlife – See the U.S. Fish and Wildlife Service (FWS)
Additional licensing, most commonly for liquor, cannabis, or tobacco is required from city and state governments, too. Local governments will also enforce zoning and construction permits. Even minor construction will need approval from the fire department. For more major projects, you may need to consult local air, water, electric, and gas divisions. Any small business selling food or drink will need proper licenses from the local health department. Most cities even ask businesses to register for any signage on their storefront.
Like many of these requirements for general business operation, it’s often wise to seek professional legal advice.
This is especially important for partnerships and multi-member LLCs. It’s important to have the legal framework in place from the beginning.
A founders’ agreement lays out the rights and responsibilities for each member of ownership/management. The exact specifics depend on the type of business entity you open. For instance, a corporation requires a shareholder agreement and Articles of Incorporation; an LLC requires an Articles of Organization; a sole proprietorship requires no additional paperwork. These all vary based on the state in which your business operates, so check with your local government to keep all appropriate information.
If you’re starting up a corporation, set up a vesting schedule to protect your business from early investors selling all stock immediately. Stock ownership should accrue over time rather than all at once.
Be very clear from the beginning of any employment to distinguish between contractors and employees. In general, contractors provide professional part-time services for a limited period of time. The key legal difference between the two involves, you guessed it, taxes.
Employers or business owners must withhold income, SSN, and Medicare taxes from each employee paycheck.
Contractors are responsible for paying their own taxes to federal and state governments at the end of each year.
Workers’ compensation should be obtained for all employees to protect your business against any catastrophes at the workplace. Independent contractors, on the other hand, are required to purchase their own insurance, leaving businesses not liable for any accidents of injuries on the job. It’s vital to protect yourself with the right business insurance.
Your business must rely on employees adhering to the law, too.
Use a company handbook to highlight all areas that affect employees. They should understand any liabilities to which your business is subjected. A violation from any member of your team is comes with the same consequences as any violation that comes from you.
Additionally, employee handbooks help establish company culture, ground rules, job expectations, procedural operations, and other human resources issues.
Privacy policies outline what a business can do with any customers’ personal or financial information. You must make clear the purposes of any data collection, where that data is stored, who has access to the data, how long the data is held, and where it is sold.
There are now 30 states considering consumer data privacy bills similar to the California Consumer Privacy Act of 2018, an increase compared to 2019, with a few already enacted. Check to make sure you are updated on your state’s requirements regarding current consumer data privacy legislation.
Violation of privacy laws can result in steep fines that will almost surely bankrupt most small businesses. Not many of us can afford a casual $5 billion fine. Make sure it is easily accessible on your website.
In the words of the great Saul Goodman, “Get a lawyer, kid!” It can never hurt to seek legal advice on any of these matters. Build legal fees into the initial budget of your business plan so that you feel confident protecting your business in its earliest stages. Don’t let preventable issues ruin your dream of starting your own business.
For more business advice check out the rest of our blog! And if you’re opening a new business and need a small business POS system, give us a shout at KORONA. We’ll help you get business operations up and running smoothly.
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