How to Complete the Legal Legwork when Launching a Small Business
Ready to launch your new business? Learn how to tackle the legal requirements, including creating a business entity
Starting a small business is more than just an idea. You have a host of details to work out, including how you’ll get funding, develop your product or service, and hire help.
But there are also legal requirements you have to follow to move forward. These include creating a legal entity and following all necessary guidelines for successful operation.
Here’s everything you need to know about the legal side of launching your new business.
Creating the right legal entity
You first need to decide which type of business structure you want to set up. It’s crucial to know the pros and cons of each type. Here are the basics:
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Limited Liability Company (LLC): An LLC is pretty simple to form. Creating this business entity means that you will not be personally liable if the business is sued or has to declare bankruptcy. However, you still file business income as personal income.
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C corporation: This type of corporation is legally separate from the owner, giving you even greater personal liability protection. These entities can be more complicated to form and can be much more expensive than an LLC. You will have annual meeting requirements, and the business will be taxed on any profits the company makes. This is a smart option if you plan to take your business public in the future, or you’re looking for venture capital funding.
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S corporation: An S corporation also separates personal and company assets and debts and provides liability protection. A benefit of this kind of entity is that you avoid double taxation.
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Partnership: If you and at least one other individual is starting the business together, you could form a partnership. In a general partnership, partners have equal shares, and a limited partnership gives one owner more control over operations. These are pretty easy to form, and shared partnership income is reported on individual tax returns.
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Sole proprietorship: Some businesses decide to form the simplest entity – the sole proprietorship. This is when one person is responsible for everything within the business. There are generally only minimal costs involved, and you may receive more tax deductions. However, you and your business are considered a single entity.
These are the basics of the most common types of small businesses. Working with a legal or tax professional can be helpful so you know which one is right for you, and you can better understand the tax implications of each.
Registering your business
Unless you’re going to operate under your own name, you need to register the business name with the Secretary of State’s office and the IRS. You also need to make sure the name isn’t being used by someone else. You can conduct a search online to find out if there’s another business under that name already registered in your state.
It also may be wise to search through registered federal trademarks so you can use the name nationally.
You probably will not need to register your business on a federal level except to get a tax ID. However, you may decide you want to also file for trademark protection. If you’re creating a nonprofit organization, you will apply for tax-exempt status with the IRS.
The tax ID you’ll need is the Employer Identification Number (EIN), similar to a social security number. This is a requirement with the IRS to run a business unless you run a sole proprietorship.
To file documents for your business, you’ll need to provide basic information like name, location, ownership, leadership structure, and number and value of shares if it is a corporation. Requirements will vary based on your state.
Obtaining licenses or permits
Another legal requirement is applying for any applicable licenses and permits. The steps you take will be based on your industry and what the governing agencies require. The SBA provides a list of types of business activities, like selling alcoholic beverages or broadcasting content, and which agencies you’ll need to research to learn what’s required of you.
Licenses and permits will also depend on your state and city. For example, there are probably specific zoning laws within your area you need to be aware of.
Learning applicable laws for employers
If you will be hiring employees, there are guidelines and obligations to follow. There are over 180 federal laws related to employment, according to the Department of Labor. These laws govern a wide range of workplace and employer activities, including the following:
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Requirements for paying payroll and employment taxes
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Anti-discrimination laws
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Standards for wages and overtime pay
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Health and safety in the workplace
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Workers’ compensation
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Employee benefits
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Labor unions
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Family and Medical Leave Act
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Industry-specific regulations
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And others
Because these laws can be challenging to understand, always meet with a professional who can walk you through your obligations and help you set up an employee handbook with clear workplace policies.
Obtaining business insurance
Finally, you will need to obtain business insurance, which will vary based on the type of business you’re launching. Common insurance needs include general liability, product liability, and commercial property insurance. Note that disability and unemployment insurance are required.
When you’re ready to open for business, make sure you’ve taken all of these legal steps first. When you need assistance setting up your small business, understanding your tax requirements, or setting up an accounting strategy, Franco Blueprint is here to help.
Get in touch with our team to ensure you’re taking all the necessary steps for your new business.