13 Legal Requirements When Launching a Business
You have a long list of legal requirements to keep track of when launching a business. Missing one or 2 is a mistake many new business owners make, and errors can be costly!
What you need is a reliable checklist. That way, you can better protect yourself and gain an advantage over your competitors.
So, don’t stress when launching your business; this post is your checklist!
1. Choose and Form Your Business Entity
To launch any business, you must designate a business entity for liability and tax purposes.
The term business entity refers to an organization created to conduct business. Each entity offers a different structure that affects how you register and run your business, pay tax, and your level of liability protection.
The 5 most common business entities for small to medium businesses are:
- Sole proprietorship: A structure that suits solo entrepreneurs; there aren’t any filing requirements or limited liability.
- General partnership: Similar to a sole proprietorship regarding filing requirements, partners share profits and liability and pay tax on their tax return, known as pass-through or designated entity.
- Limited liability partnership: LLPs are separate legal entities that provide partners with limited liability restricted to their investment in the business.
- S-corporation: An s-corporation is a hybrid of an LLC and a partnership; it provides liability protection and has a beneficial pass-through tax structure that avoids double taxation.
- Limited liability company: With a limited liability company your business can have unlimited owners with beneficial pass-through taxation and liability protection.
Single-member and multi-member LLCs are a common choice for SMBs because of the personal liability protection, easy-to-use taxation system, low set-up costs, and credibility.
And if you start with a single-member LLC, you can always change it to a multi-member when the time is right.
2. Create a Founder’s Agreement
A founder’s agreement outlines the owner’s rights and responsibilities relative to how you’ll run the business and share company profits. It’s an essential document for multi-member businesses as it removes confusion or disagreements in case of member disputes.
How you create your founder’s agreement depends on your chosen business entity. For example, corporations need articles of incorporation and a shareholder agreement, while LLCs need articles of organization and an operating agreement.
An operating agreement is like a founder’s agreement. It outlines the owners, their investment, percentage share of profits, administrative and voting rules, and other terms and conditions relative to the LLC structure.
And because it’s a legal document, an operating agreement acts as a recognized contract between you and your co-owners.
3. Register Your Business Name
Your new business needs a name that suits your marketplace and attracts your target audience. But it also needs one so your local, state, and federal government can track your business and its profits.
Sole proprietors and general partnerships automatically use their names without filing requirements. To have a business name, they’ll need to register a Doing Business As (DBA) with your state government or county clerk’s office.
LLCs, corporations, and limited partnerships register their business name when forming their business entity and submit articles of organization with their Secretary of State. Still, they can also use a DBA for branding purposes.
There are 4 ways to register your business, each serving a specific purpose:
- A domain name: Most businesses need a website, so ensure your name’s available as a domain by searching on websites like Godaddy.
- An entity name: Protects your business from anyone else using your name within your state.
- A Doing Business As: No legal protection comes with a DBA and you’re not required to have one. Still, your business might need a catchy business name to succeed!
- A trademark: A state trademark protects your business name within your state; you’ll need a federal registration, the ® symbol, for the rest of the United States.
We also use trademarks to protect our intellectual property, so let’s look at how you do it next.
4. Protect Your Intellectual Property
Intellectual property refers to any design, symbol, sound, name, or unique image you use to promote your brand’s goods or services.
Your intellectual property is how you advertise your brand so consumers grow to recognize you. It’s essential to protect them by registering a trademark, copyright, or patent so other businesses don’t steal or copy your marketing creations.
Let’s look at your options.
A trademark protects intellectual property such as business logos, names, symbols, words, slogans, jingles, phrases, or any visual or sound unique to your business.
There are 3 different trademarks:
- ™: This symbol is for unregistered trademarks representing goods.
- SM: The SM symbol is for an unregistered trademark that represents services.
- ®: This symbol is for a trademark registered with the United States Patent and Trademark Office at the federal level.
Patents protect inventions, such as a formula used to create a product or a system that provides a service unique to your business; patents require re-registration every 20 years.
The word copyright © means the right to copy. It protects how you express something rather than an actual product or service, such as music, literary arts, movies, sound recordings, art, and photography.
Only one entity can hold and use copyright at one time. Unlike other trademarks, copyright lasts the lifetime of its creator plus another 70 years.
5. Get an Employer Identification Number
An Employer Identification Number (EIN) identifies a business for tax, similar to how your Social Security Number (SSN) identifies you. Any business with employees or multiple members needs an EIN. Even if that’s not you, getting one for your new business is always a good idea.
For example, you can use an EIN to open a business bank account, apply for business licenses, hire employees, file employment tax returns, and use a tax-deferred pension plan.
To get an EIN, you must meet the following:
You can apply for an EIN using the IRS website or take the simple route and use our EIN application service.
6. Apply for the Correct Licenses and Permits
Business licenses are any license you might need to operate your business. Local, state, and federal agencies issue them to ensure you follow your industry regulations. Your license requirements depend on your business entity, type, location, and industry.
Most businesses need some form of license or permit to trade in their city, county, or state. In contrast, others require specific federal and professional licenses and permits.
Let’s look at why you might need licenses or permits:
A ‘business license’ and ‘business licenses’ are two different things. A business license is a local government document allowing you to do business in your state. In contrast, business licenses are specific documents that other business types must get to trade.
You can find out which business license you might need by contacting your Secretary of State or county clerk’s office.
Professional occupational license
A professional occupational license applies to businesses under specific categories like lawyers, accountants, daycare centers, mechanics, and establishments serving food or alcohol.
While a business license allows your business to operate, permits are additional requirements that enable you to provide a specific product or service. Some standard permits businesses need to operate are health, building, signage, fire inspection, and building permits.
You can get permits from your town hall, clerk’s office, or local government municipalities.
Federal business licenses
Businesses operating within restricted industries require licenses at a federal level; the Small Business Administration website provides a list outlining standard federal business licenses and the contact details for the governing agencies.
You can also visit the Small Business Administration to see which licenses and permits you might need.
7. Figure Out Your Taxes
Business owners have to pay taxes—which and how much depends on your business structure and location. Most small business owners need to pay one or more of the following taxes:
Estimate tax allows small business owners to pay quarterly taxes through the IRS pay-as-you-go system, avoiding one hefty tax bill come the April tax return date.
Don’t guess your tax requirements; research the U.S. Small Business Administration to find what taxes you’ll pay.
And check the IRS requirements for your specific business type to avoid fines and back taxes.
8. Open Your Business Banking Account
A business bank account is essential for most businesses as it enables you to separate personal and business transactions. That’s important for several reasons. For instance, it makes bookkeeping more manageable, removes stress come tax time, reduces potential liability if audited, and helps prevent breaking the corporate veil.
Any business entity owner requiring limited liability protection should know that breaking the corporate veil can lose its liability protection if the owner commingles its personal and business finances.
Most states require you to have an EIN and any founding documents proving ownership to open a business bank account.
I told you an EIN would come in handy!
9. Keep Up-to-Date Financial Records
Efficient record-keeping of your transactions and documents helps you stay on top of your finances and tax compliances. Both are essential requirements when launching a business because they ensure a positive cash flow and protect you against back taxes and late filing fees.
For many new small business owners, bookkeeping can be daunting; if that’s you, consider hiring a bookkeeper, accountant, or tax advisor. If those are outside your budget, many easy-to-use accounting software systems can help you comply with tax laws.
Here are 5 of the best accounting software tools:
10. Tax and Employees
You must create tax withholding records to collect and pay federal payroll taxes when hiring employees.
Payroll taxes are a percentage of your employee’s wage paid equally by you and your employee to the government towards Social Security and Medicare.
As an employer, your tax liability depends on whether you hire full-time, part-time, or independent contractors. Regardless of whether your employees are full or part-time, you’ll need to complete the following 2 government forms:
- Federal income tax withholding: Any new employees must complete the W-4 employee tax withholding form, showing any federal income tax you withheld from their paychecks, which you then send to the IRS.
- Federal wage and tax statement: Employers must also complete a W-2 Form reporting their employee’s total annual wage and any state, federal, and other taxes withheld from their paychecks.
11. How to Hire the Right People the Right Way
Hiring employees is tricky when launching a business; it’s a balancing act between productivity and profitability.
On the one hand, you’ll need employees to fulfill all the work you’ll get. Still, those employees must suit the role to help decrease your staff turnover rates (reducing costs) and increase productivity (increasing profits).
Don’t hire at first sight; give your first employee a trial basis, conduct personality tests, and get their previous employment history to ensure you hire the right people.
Now the legal part. As an employer, you must run a background check on successful applicants to ensure they’re allowed to work in the U.S.
Register with the U.S. Department of Labor to comply with labor laws to ensure your employee’s safety and protect your liability.
Speaking of liability, let’s look at your insurance requirements next.
12. Get Adequate Business Insurance
Business insurance is how you protect yourself from possible liability and comes in various policies that cater to different industries and services.
Even if your business isn’t required to have insurance, it’s a good idea to have adequate protection in case of lawsuits, accidents, and natural disasters. The most common business insurance for new business owners includes:
Any business with employees is obligated to have workers’ compensation to protect employees in case of accidents at work.
Workers’ compensation insurance provides:
Failure to have workers’ compensation can result in fines, fees, or the possible closure of your business.
General liability insurance
Most small businesses have general liability insurance as it safeguards you from lawsuits involving injury to clients at your place of business and misrepresentation. It also protects you if any services or goods malfunction causing customer injuries or damage to their property. General insurance policies and costs vary depending on a business’s specific needs.
Property insurance protects your business location (owned or leased), equipment, and inventory against fire, smoke damage, theft, and vandalism.
Natural disasters such as tornadoes or floods often require special insurance; you can find out more by consulting with insurance companies to discuss adequate cover for your location.
Many entrepreneurs who start a small business launch it from home; Microsoft, Amazon, and Apple did.
While that cuts your costs, your homeowner’s insurance doesn’t cover business inventory or equipment damage or loss; for that, you’ll need a home-based business policy.
13. Comply With Securities Laws
Owners and investors of corporations, limited partnerships, and LLCs are subject to state and federal securities laws.
Security laws protect against trading and insider trading fraud. While those might not apply to your new business, you’re still obligated to provide accurate and reliable information regarding your business to the Securities and Exchange Commission (SEC).
Not complying can result in your business repurchasing its shares at the issuance price, even if you go out of business.
Launching a business is hard, especially when it comes to all things legal. However, by understanding and implementing this checklist, you could save yourself from legal and financial problems down the line.
Many of the legal requirements are ones you can do yourself, others are more complicated, and some require a registered professional. So seek professional consultation when needed.
If you’d like to know more about launching a business, check out my post 17 Common Mistakes New Business Owners Make (And How to Avoid Them).
This portion of our website is for informational purposes only. Tailor Brands is not a law firm, and none of the information on this website constitutes or is intended to convey legal advice. All statements, opinions, recommendations, and conclusions are solely the expression of the author and provided on an as-is basis. Accordingly, Tailor Brands is not responsible for the information and/or its accuracy or completeness.