What are the legal requirements for starting a small business?
ComplianceSeptember 07, 2023

What are the legal requirements for starting a small business?

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If you’re starting a small business, you must comply with legal obligations. These differ based on the nature of your business and where it’s located.

To ensure compliance, it’s essential that you research federal, state, and local guidelines and regulations, including zoning, licensing, employment, permits, and tax laws.

To help you navigate the complexities of how to legally start a business, here are 12 common small business legal requirements to be aware of.

1. Choosing a legal business name

Every business is required to have a legal name. Depending on the structure of your business, this may be the name of the owner or the name listed on your formation documents.

When choosing a business name, you need to understand business naming laws. For example, LLCs and corporations must register their legal entity’s name with the state. This happens during the formation process. However, you can also reserve your business name by filing a form with your formation state.

There are also naming rules and requirements for the type of business structure you choose. If you form a corporationlimited liability company (LLC)limited partnership (LP), or limited liability partnership (LLP), you must comply with the name requirements of the governing entity statute. For example, one of the rules concerning the name of an LLC is that it must include the words "limited liability company", the letters "L.L.C." or “LLC”, or some other phrase indicating that the entity is a limited liability company. 

Even sole proprietorships and general partnerships are subject to certain restrictions, like not having a name that is misleading.

Read more about naming your startup business and how to register a business name for your LLC.

2. Registering your business with the state

If you choose to form an LLC or corporation, you must register your business with the state. Both legal entities provide benefits such as protection of your personal assets, tax advantages, and more credibility for your business.

Forming an LLC or corporation involves filing a formation document with the office of your Secretary of State (or the equivalent agency that handles business entity formation).

Sole proprietorships and general partnerships don’t typically need to formally file paperwork to legally start or operate. Note: Certain states, including Alaska and Washington, require for-profit organizations, including sole proprietorships and partnerships, to register with the state.

Read more in:

3. Appointing a registered agent

If you operate an LLC, corporation, LLP, LP, or nonprofit, most states require you to appoint a registered agent in your business’ formation state. If your company has registered to conduct business in another state (aka foreign qualification), you typically need a registered agent in the state(s) of qualification as well.

A registered agent is responsible for receiving important legal and tax documents on behalf of your company, such as service of process (or Notice of Litigation), franchise tax forms, and annual report forms.

Not anyone can be a registered agent. Your company’s agent must meet the appropriate criteria. For more information, read: What is a registered agent?

4. Obtaining an EIN

Almost all businesses, including LLCs, corporations, and businesses with employees, require an Employer Identification Number (EIN), also known as a Federal Employer Identification Number (or FEIN).

An EIN is issued by the IRS. You must use it to identify your business on tax filings and tax-related documents, much like a Social Security Number. It is also required by banks and financial institutions, business credit card issuers, and vendors. Visit the IRS website for more information.

5. Registering for a state tax ID

If your business sells goods or services, you may need to register with your state Department of Revenue and apply for a sales tax ID number. Because each state is different, refer to your state website for specific requirements.  For more information, see the U.S. Small Business Administration website.

6. Reporting beneficial ownership information (BOI)

Many small businesses will soon need to report information about their beneficial owners to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

A beneficial owner is any individual who directly or indirectly exercises substantial control over the reporting company or who owns or controls at least 25% of its ownership interests.

This reporting requirement goes into effect on January 1, 2024

FinCEN has more information on this new requirement: Beneficial Ownership Information Reporting FAQs.

7. Registering a trademark

A trademark can provide legal protection for your brand, logo, products, and services. Trademarks are registered with the U.S. Patent and Trademark Office (USPTO). Trademark registration can include your brand name, slogan, logo, or dominant goods and services. Read more in What is a trademark?

8. Filing a DBA

If you choose to do business under a name different from your entity’s legal name, you can file a “doing business as” or DBA name. A DBA is also known as a trade name, assumed name, or fictitious business name. Sole proprietors and partnerships who are not registered legal entities can opt to use a DBA following the same process. They may also be required to do so before opening a business bank account.

A DBA filing is made with your state and/or county. Some jurisdictions give you the option of filing for a DBA in the county where your business is located or in all counties in the state.

For more information, see What is a DBA? (And how to register one).

9. Zoning regulations

Local zoning regulations impact all businesses, even home-based businesses. They may even prevent you from operating a business out of your home.

Before you start your business, inquire about zoning ordinances with your city or town government. If you have any questions, consult an attorney. They can help you interpret the ordinance and understand what is enforceable.

10. Obtaining business licenses and permits

Most businesses need a license and/or permit to operate. Licenses are issued by the federal government and state, county, city, and local governments. Refer to your state and local government website for more information about general business licenses, home business licenses, and more. Federal licenses are typically only required if your business is regulated by a federal agency, such as the Bureau of Alcohol, Tobacco, and Firearms.

In addition, you may need to obtain a professional or occupation license and permit. These apply to businesses such as pharmacies, construction companies, architecture firms, medical practices, and hair salons.

11. Understanding your legal responsibilities as an employer

Hiring employees brings additional responsibilities, such as compliance with labor and employment laws. As an employer, you must pay employees properly and withhold employment taxes, maintain records, adhere to rules regarding the employment of minors, provide eligible workers with unpaid or medical leave, and more.

Here’s a breakdown of important employment laws:

  • The Fair Labor Standards Act (FLSA): The federal wage and hour law covers issues such as minimum wage, overtime, child labor, and equal pay for equal work.
  • The Occupational Safety and Health Act (OSHA): Requires you to provide a safe and healthy work environment.
  • Payroll taxes: Employers have various federal tax obligations such as withholding and paying FICA payroll taxes (Social Security and Medicare tax withholdings) and Federal Unemployment Tax Act (FUTA) taxes.
  • The Employee Retirement Income Security Act (ERISA): This law impacts certain administrative aspects of employee benefits and retirement plans.
  • The Consolidated Omnibus Budget Reconciliation Act (COBRA): If you have 20 or more employees, you must offer individuals who lose benefit protections the option of continuing to have group health care plan coverage.
  • The Family and Medical Leave Act (FMLA): Requires employers with 50 or more employees to allow workers to take unpaid leave under certain circumstances.

State-level requirements may include:

  • Registering with the state for Workers’ Compensation
  • Registering for state unemployment insurance
  • Reporting new hires to the appropriate state agency
  • Providing disability and paid family leave benefits coverage
  • Offering some form of health insurance benefit

Note: States may have their own laws regarding minimum wage, classification of workers, and more.

12. Obtaining business insurance

In addition to state unemployment insurance, you may need to obtain general liability insurance, professional liability insurance, and commercial auto insurance.

Additional legal considerations

The following may apply to your business. Check with an attorney if you’re not sure.

1. Filing for foreign qualification

If you conduct business in more than one state, you must form your business in your home state and then file for foreign qualification in each state where your business is active. For more information, see Doing business in another state (foreign qualification).

2. Filing annual reports and franchise tax

If you operate an LLC or corporation, you must file annual reports and pay associated fees and/or franchise tax. Some states also require that LLCs file initial reports soon after formation. For more information, see What is an LLC annual report and how to file one for your business.

Ready to start your small business?

BizFilings is dedicated to making business easier so you can focus on doing what you love. For more information check out our Incorporation Wizard or contact us today.

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