Legal Requirements for Starting a Business
Starting a business requires creativity and determination along with the ability to research and make key financial decisions. Unless you plan carefully, you could overlook some important legalities that keep you from legitimizing the business. It is important to understand the process of starting a new venture as well as the legal requirements involved before you decide to move forward.
Obtain Your Business License
No matter where you live, you must get a business license. States have different rules when it comes to licensing and permits, so research your city and county for specific information. You can start by visiting your city’s (or county’s) website. If you’re not sure where to start, simply enter your business’ location plus the phrase “business license” into your favorite search engine. In most cases, you will be able to apply and pay for your business license online.
Depending on your industry, you may also be required to register your business at the federal level. Federal licenses and permits are required if your business involves activities regulated by a federal agency. These activities include:
- Alcoholic beverages
- Firearms, ammunition and explosives
- Fish and wildlife
- Commercial fisheries
- Maritime transportation
- Mining and drilling
- Nuclear energy
- Radio and television broadcasting
- Transportation and logistics
If your business activities fall under any of these categories, visit the U.S. Small Business Administration’s website for more information on which issuing agency you will need to contact to obtain your federal licenses and permits.
Get a Professional License if Needed
Certain professions require you to obtain a professional or occupational license before you can go into business. Professional licenses allow people to legally practice as doctors, lawyers, teachers, accountants, engineers, architects, dentists and other professions. Aside from professional licenses, some states require tradespeople to obtain occupation licenses. This requirement can affect hair stylists, auto mechanics, tax preparers and real estate agents, just to name a few.
In some cases, you will need to take out a professional or occupational license yourself. In others, the license is issued to the business. There’s no way to guess which occupation requires a license through your state, so it’s best to err on the side of caution and ask. You may also find this information on your state’s website or trade association website.
The procedures associated with getting your professional or occupational license vary, but they typically involve showing some sort of training in your field. You may also need to pass an exam. Keep in mind that some licenses require you to continue your education in the field, and some are only good for a limited time before you need to re-test.
Complete Your Tax Registration
If you plan to sell products, you will need to get a seller’s permit or sales tax license. This is true even if your state doesn’t have a sales tax because you still owe money on taxable sales. States that don’t have a general sales tax in place include:
- New Hampshire
Even though these states do not impose a general sales tax, some cities and counties within those states may require a state sales permit. For example, several local governments in Alaska do have their own sales tax, while other states might have areas that impose sales-type taxes on certain transactions. This is why it’s so important to research the information provided by your state tax agency and city or county website for the specifics.
Decide How You Want to Structure Your Business
Do you want to start a limited liability company (LLC) or a corporation? Would a sole proprietorship work for your purposes? Who else will be involved in the business? These are some crucial questions you should ask yourself early on because the choice affects how your business will be taxed, whether you can seek funding and your business liability impact.
Sole proprietorships are the most common business structure because they’re easiest to form. There’s only one business owner allowed, hence the name, and you are required to register with the Department of Trade and Industry (DTI) only if you are using a name other than your own as a business name. Benefits include affordability and preferable taxation treatment, but keep in mind that your personal assets are at risk should your business fall into debt or deal with a lawsuit.
A partnership is similar to a sole proprietorship, but it is owned by two or more people who run it for profit. Partnerships are easy to form with minimal costs associated with getting started, and each person contributes their skills, labor and money in exchange for a stake in the business. There’s also a certain amount of personal liability involved in partnerships, and owners don’t always agree on what’s best for the business, which can lead to legal battles. If a partnership works best for your business, implement a partnership agreement from the beginning to minimize your risks. You can register your partnership with the Securities and Exchange Commission (SEC).
LLCs have been around for only a few decades, but they offer flexibility and practicality which makes them a popular choice for entrepreneurs. LLCs have the limited liability that corporations enjoy with the tax benefits of smaller partnerships. The main drawback, however, is that an LLC might cease to exist if the owner dies or leaves the business. If forming an LLC, you should register it with your state.
There are two types of corporations for those who want to aim higher: C corporations and S corporations. C corporations are in the big league. Both require you to register with the SEC. They’re the entities on the stock exchange with shareholders and mega profits. C corporations, however, are subject to double taxation because the profits are taxed at the corporate level, and then shareholders are taxed individually. S corporations provide a small-business alternative, combining the limited liability protection of C corporations with similar taxation benefits to partnerships and sole proprietorships. Only certain businesses are eligible for S corporation status, so consider your options carefully.
Register Your Business Name
Whether you’re coming up with an official business name or a fictitious “doing business as” name, you must register it. First, you will need to make sure your legal business name isn’t already in use or protected by a trademark. Search your preferred business name online and on the United States Patent and Trademark Office (USPTO) website. If nothing similar comes up in the search results, you can register the name with the appropriate authorities.
In some cases, you may want to conduct business under a fictitious name which doesn’t match the business name you already have on file with the state. This is also called a DBA (“doing business as”) or trade name. Depending on your business’s location, you may be required to register an assumed name with the state, but most business owners will register with their county clerk.
It’s important to note that a DBA name is required for a sole proprietorship or general partnership that wishes to use a name that is different from your own name.
Research Employee Laws
If you plan on hiring employees, you should brush up on employment laws before your first interview. There are many obligations you must fulfill as an employer, and failing to meet them can leave you open to legal action. You will also need to understand self-employment taxes, state and federal payroll and withholding taxes, OSHA regulations, anti-discrimination laws, wage and hour requirements in your state, workers compensation rules and unemployment insurance.
When forming a small business that will have employees other than yourself, consult with an employment law professional to make sure you’ve covered all your bases.
Research Zoning Restrictions
Whether you operate your business from a home office or you want to build a commercial space, you need to account for zoning restrictions. Many homeowner associations have strict rules against running a business out of your home, so if you live in a neighborhood with an HOA or condominium association, familiarize yourself with these restrictions before trying to sell goods out of your garage.
In general, a home-based business where you are providing services via the internet is not going to pose a problem with the neighbors. If you’re selling products or providing in-person services from your home office, there could be issues with traffic, and a neighbor might contact the local zoning board. The last thing you want is for your business to come to a halt over zoning problems.
Visit your local municipal building for ordinances that apply to home-based occupations. You don’t want to say the word “business” because this can raise some red flags. In cases where your HOA won’t allow businesses to operate, ask for a special exception hearing.
Abide by Environmental Regulations
As a small business owner, it’s important to consider if and how your activities might contaminate the environment. If your equipment vents any type of emissions, produces hazardous waste, or stores or discharges wastewater, you will need a special permit.
For example, dry cleaners, stained glass makers, farmers and photo processors are vastly different occupations, but they all need to know how to dispose of chemicals or dangerous metals. There are also merchandising compliance regulations for retailers, as the Environmental Protection Agency (EPA) prohibits the sale of any item that could potentially harm the environment.
Open a Business Account
When you’ve registered your business name, you can officially open a bank account to start building business credit. Many entrepreneurs rely on their personal savings, mortgage, credit cards and auto loans when getting their business off the ground, which can affect your ability to take out a business loan. Keeping your business account separate from your personal bank accounts will help avoid any credit hits in the event you miss a car payment.
You need to open an account in the name of your business using either its legal name or DBA name. Before qualifying for a business loan, your bank account should show a positive cash flow capable of handling the new debt.
If you simply cannot start your business without taking out a loan, reach out to potential investors or co-signers. You may also qualify for a program through the Small Business Administration.
Purchase Business Insurance
With so many risks that can derail your company early on, you need business insurance from the get-go. There is no such thing as a single small business insurance policy because different policies cover different types of risks, and your business won’t require all of them.
Some of the insurance options business owners might consider include:
- General liability insurance
- Workers compensation insurance
- Professional liability insurance
- Errors and omissions insurance
- Cyber liability insurance
- Business Owner’s Policy (BOP)
A Business Owner’s Policy is a popular option because it combines general liability insurance and commercial property insurance, but you only need a BOP policy if your business operates in a commercial space. The right insurance will protect you from financial risks associated with customer injuries, property damage, defamation, slander, copyright infringement, equipment damage and other unexpected occurrences.
Form a Non-Disclosure Agreement
There are many aspects of your business operations that should remain private, such as financial records, customer lists and pricing plans. Having a non-disclosure agreement helps protect this information by creating a confidential relationship between your business and its employees, partners and contractors. When an NDA is involved, both parties who sign the document understand their privileges and duties, so you can rest assured your trade secrets are kept secret.
A non-disclosure agreement should specify the effective date, the period of time in which the NDA is effective and the protected information. It should also detail the consequences of breaking the agreement. For instance, an NDA might state that a party can be sued for damages if disclosing private information.
There are a lot of bases to cover when starting your own business, so you want to familiarize yourself with the legal requirements involved so you don’t leave yourself open to risks. If you need additional support forming your small business and helping it succeed, consider taking out a small business loan from an online lender.