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16 Important Legal Requirements for Starting a Small Business

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Starting a new business is a challenging pursuit. Part of what makes it so complicated is all the legal implications that come with starting a business. As a business owner, you want to make sure you have covered all your legal bases to avoid any fines, lawsuits, or—worst case—even jail time.

Fortunately, there are plenty of legal resources available to small businesses both online and through hired legal counsel. Use this list as a jumping off point, covering the legal requirements for starting a small business. Checking these off your to-do list will help you ensure that you don't run afoul of any laws. The sooner you take care of these things, the sooner you can focus on what you do best—selling your product or service.

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16 legal requirements for starting a small business

1. designate the proper business entity..

First things first. Choose the proper business entity or structure for your startup. This is crucial because it affects your personal liability, what you pay in taxes, and your fundraising ability. Possible structures include sole proprietorship, general and limited partnership, C-corporation, S-corporation, and limited liability company. Once you decide which structure is best for your company, you need to officially designate it through your secretary of state.

Most small businesses start out as sole proprietorships or partnerships because these require minimal paperwork and set up time. However, these types of businesses also don't offer sufficient liability protection for business owners. A corporation or LLC is generally a better choice as your business grows, particularly if you're planning to secure a business loan or raise venture capital.

» MORE: LLC vs. corporation

2. Check which licenses, permits, and registrations your business needs.

Depending on your type of business and where it’s located, you might need specific business licenses and permits from your country, state, county, or city. Licenses, permits, and registrations come in many variations. Examples include local business licenses, building permits, health safety-related permits, permits for home-based businesses, fire permits, industry-related permits (like running a legal practice, hospitality, construction, or manufacturing business), liquor licenses, and more.

The possibilities are many, so make sure to do thorough research—perhaps with the help of your counsel—on what you need to be compliant with the law in your area. Your city or county's business licensing agency is also a good place to start.

3. Make sure you are paying proper business taxes.

Every business owner is legally required to pay taxes. This includes income tax, self-employment taxes, and for some businesses, sales tax. It's wise to hire an accountant or tax advisor to make sure you are compliant with all tax laws. Accounting software for startups can also help you figure when to file taxes and what forms you need to fill out.

Most small business owners can't wait until March or April to pay taxes. The IRS has a pay-as-you-go tax schedule for businesses, requiring business owners to pay estimated taxes on a quarterly basis. Make sure you check the IRS requirements for your business type to avoid any fines and back taxes.

4. Do proper bookkeeping.

In most places, you are obligated by law to record all business transactions according to a specific accounting method. See what’s required of you for your industry and location in terms of record-keeping obligations, and set up a proper filing and bookkeeping system for all documents and transactions. This will greatly help you down the line in doing taxes or if you ever run into other legal troubles.

5. Get a founders agreement in writing.

If your business operates with multiple business owners, it’s important to make sure that each person knows and understands their rights and responsibilities in relation to the business. How this comes about depends on your business structure. If you form a corporation, you need a proper shareholder agreement and articles of incorporation. If you form an LLC, you will need articles of organization and an LLC operating agreement. You also need designated legal counsel to make sure the agreements and articles are sound.

6. Set a vesting schedule for all founders and early employees.

This is a practical measure many startups often overlook when they’re just starting out and excited about getting off the ground. But this will protect your business down the line and ensure a certain level of commitment each founder or early employee brings to the table.

Creating a vesting schedule upon incorporation states that stock ownership will vest over time, preventing investors from selling all their stock whenever they please. Note that most investors require this measure before they'll make any initial investments.

7. Get your employer identification number (EIN).

In order to open a corporate bank account and to properly file your business tax returns, many businesses need an employer identification number (EIN). You can easily request one for free from the IRS over the phone or by using an online application on the IRS website. Only sole proprietorships and single-member LLCs with no employees are exempt from this requirement.

You need the social security number of the person completing the form for the company (usually the president or CEO). Include information on your business entity and date of incorporation. Make sure to keep a signed copy of this application in your files.

8. Protect your intellectual property (IP).

Intellectual property is the bread and butter of many businesses. IP includes patents, copyrights, trademarks, and trade secrets as well. Be sure to file any patents as soon as possible—a process that can take more than five years. Protecting your intellectual property will be attractive to investors—but it will also help you sleep easier at night. Having exclusive rights to reproduce and display your work will make your life much, much easier down the line and ensure that no one tries to rip any IP rugs out from under you.

IP can be vastly complicated from a legal standpoint, so it might be wise to consult an experienced IP attorney who can help you through the process and provide you the greatest protection.

9. Classify your workers properly.

Many startups often misclassify their early employees. It’s important to know what kind of worker you’re hiring—essentially, the difference between an independent contractor vs. employee. This is important for tax reasons for both you and the employee and will help clarify what is and isn’t expected from you and the employee. If you misclassify an employee as an independent contractor, you could be on the hook for costly penalties and back wages.

10. Purchase workers' compensation insurance.

In all states but Texas, most businesses with employees are legally required to purchase workers' compensation insurance . Coverage should begin from the very first day your employee starts working. This insurance covers medical and legal costs associated with work-related employee injuries and illnesses. State laws about workers' compensation vary, so make sure you check your state's rules.

11. Make sure you’re in compliance with securities laws.

Founders and investors of LLCs, C-corporations, and partnerships are subject to federal and state securities laws. These laws were made to require companies to provide reliable and accurate information about their businesses to enable a fair market. They also protect from insider trading and trading fraud.

Failure to comply with these laws can result in the startup having to repurchase all of its shares at the issuance price, even if the company has lost all of its money.

12. Follow email regulations.

Email marketing is a huge part of many businesses. When you send emails to your customers or when you are targeting potential customers via email campaigns, you need to find out what the applicable email regulations are. Note that each country has its own set of rules.

Aspects covered by these rules generally include opt-in versus opt-out, B2B or B2C emails, unsubscribe rules, and minimum information to be included in your emails.

13. Make sure your investors are accredited.

The current definition of an accredited investor under the Securities and Exchange Commission rules includes eight categories of investors, but the most general investor accreditation means that the person:

Has at least $1 million in the bank

Has at least $200,000 in annual income

Understands and is willing to take the investment risk

The SEC has guidelines for what constitutes “reasonable efforts” on these accounts. It’s possible to raise funds outside the narrow limitation of accredited investors, but it will open up a Pandora’s box in terms of securities and compliance enforcement. So, if you want to be the most legally sound you can possibly be, go through accredited investors.

14. Establish a privacy policy.

A privacy policy is a legal statement that specifies what a business does with the personal data collected from users or customers, along with how the data is processed and why. Violation of privacy laws can lead to criminal liability—depending on your state, this can mean hefty fines—so it’s important that startups have proper privacy policies in place and carefully adhere to them. The Small Business Administration has a great guide for establishing an appropriate privacy policy for your business.

15. Create a company handbook.

Once you have all the legal headaches sorted out and sounded, make sure everyone in the company is aware and understands your company’s legal liabilities just as well as you do—as a business owner, you could be liable for anything your employees do while representing your organization.

Company or employee handbooks are a great way to instill the values and legal boundaries of your company. It can also help to establish what is and isn’t appropriate behavior internally and externally. Have your legal counsel look this over well or even help you write it, and then get the company together to go over the material.

16. Hire competent legal counsel.

In case this hasn’t been clear throughout, work with lawyers on these complicated legal issues from the start. Startups are often so concerned about expenses that they overlook the importance of sound legal advice that could save them thousands, if not millions, down the line. You really can’t put a price on having the right attorneys on your side.

Ideally, you’ll hire an experienced business attorney on employment law, contract law, securities law, and intellectual property law. You could hire a “general counsel” on your staff at some point, but it’s common for the work to be spread out between different firms and attorneys. The cost is worth avoiding any legal trouble.

The bottom line

Starting a business is hard—don’t let anyone tell you otherwise. But if you are meticulous about getting your startup legal checklist in order, you’ll save yourself from some serious headaches down the line. Some of these items are things you can take care of yourself. But for more complicated tasks, or if you run into questions, it's important to hire a competent attorney to help you.

This article originally appeared on JustBusiness, a subsidiary of NerdWallet.

On a similar note...

Legal Requirements To Start A Small Business In 2024

Updated: Apr 17, 2024, 11:52am

With a fledgling business, passion for a product or service usually comes easily. Less exciting are the legal requirements for operating legitimately. Requirements vary dramatically depending on the industry, type of business and location. While there’s no substitute for advice from experienced legal counsel, this guide outlines some of the most important legal requirements to start a small business in 2024. Be sure you understand what’s needed before getting too far into your business planning.

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Business Structure and Designation Requirements

Once the mission and strategy of a business become clear, an important next step is to decide on the business’s legal structure. The choice you make can affect everything from the way you operate the business to the liabilities you’ll face to the way you pay taxes. Here are the most common options for small business owners:

Sole Proprietorship

The simplest structure for a one-owner business is a sole proprietorship. As a sole proprietor, a business owner has relatively few regulatory burdens and a high degree of control and flexibility. There’s no paperwork required to establish a sole proprietorship–it’s automatically created as soon as you start doing business. However, if you’ll be using a business name other than your own name, you’ll probably need to register your business name as a DBA with your state or locality.

A sole proprietorship does not form a distinct business entity, which means that there’s no legal difference between the business’s assets, debts and other liabilities and those of the owner. This creates a risky situation for owners, as they’re on the hook for any legal or financial failures of the business. You can’t take on partners and remain a sole proprietorship, and your ability to get a loan for your business will hinge on your personal credit. Sole proprietors report business income and expenses on their personal tax returns, and they pay income and self-employment taxes on their profits. Some business founders use sole proprietorships to test a business idea before committing to a more formal structure and paying the higher fees associated with those structures.

Partnership

There are several kinds of partnerships. If you go into business with other people and don’t set up a formal business entity, your business is automatically considered a general partnership. Like sole proprietors, partners in a general partnership are fully liable for all business debts and obligations. They’re also liable for actions taken by their partners–a major reason why most lawyers encourage businesses to form an LLC or corporation rather than remain a general partnership. General partnerships are taxed similarly to sole proprietorships, with partners reporting their share of income, expenses, credits, profits and losses on their personal tax returns.

Other kinds of partnerships include:

• A Limited Partnership or LP, which stipulates that at least one “general partner” assumes personal liability for the business’s affairs, while other partners are passive investors with limited liability. Limited partnerships are common in certain industries such as real estate development.
• A Limited Liability Partnership or LLP, also provides limited liability for partners, but the specifics vary by state. In some states the liability protection is the same as for an LLC, but in other states the protection only extends to liability for other partners’ negligence. Some states require one general partner to remain fully liable. And some states restrict LLPs to certain licensed professionals like doctors, lawyers and architects.

Related: Limited Liability Partnership vs Limited Liability Company

Limited Liability Company

A Limited Liability Company or LLC balances the relative ease and flexibility of a partnership structure with the increased risk protection and potential tax advantages of a corporate structure. LLC owners (known as “members”) aren’t personally liable for business obligations. By default, LLC members are considered self-employed, and they file and pay taxes in the same way as owners of a general partnership or sole proprietorship. But an LLC can also elect to be taxed as a corporation. To set up an LLC, you must file articles of organization with your state.

An LLC should also have an operating agreement that details how the LLC will be run and the rights and responsibilities of the members.. Many small business owners choose LLCs for their simplicity and flexibility.

Corporation

With a corporation, the owners’ liability for business obligations is limited to the amount they have invested in the company–business creditors can’t go after their personal assets. Corporations have a well-defined organizational structure that includes a board of directors, officers, and owners, who are known as shareholders. A corporation may pay corporate income tax as a C-corp, or it may be eligible for pass-through taxation as an S-corp. Corporations tend to have more rigorous recordkeeping and reporting requirements than LLCs.

A corporation is formed by filing articles of incorporation with the state. Corporations should also have bylaws. Because corporations have a predictable structure and their shares are easy to transfer, corporations are well-suited to businesses hoping to attract outside investment.

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Business Name Registration Requirements

Business owners should explore several different ways to register and protect a business name:

Entity Names

If you form an LLC, corporation or other type of business entity, your business name will be registered with the state. The state won’t allow another business to be formed with the same name as yours.

A federal trademark helps protect a business name nationwide. You can apply for a trademark through the US Patent and Trademark Office . Though trademarks are not required to operate a business, registering a name may be a good idea to protect the exclusivity rights that come with a registered trademark.

A “doing business as” (DBA) is often also known as a “trade name” or an “assumed name.” You usually must register a DBA if your business is using a name other than its official legal name. Sole proprietorships and partnerships don’t need a DBA if they’re doing business under the owners’ names. LLCs and corporations don’t need a DBA if they’re using the business’s official name. It’s possible for multiple businesses in the same state to share the same DBA name. Depending on your state and the type of business you have, you may need to file your DBA with the state or with your locality.

A domain or web address is unique to the buyer and can be essential to a business’s online presence. Though there is no legal requirement to have a domain, obtaining a domain name that matches your business name can help you brand your business and minimize the chance your business will be confused with another business online. Having a domain name does not establish a business entity or fulfill any other legal requirements, nor does it give you the exclusive right to use your business name.

Tax Identification Numbers

A federal tax identification number, also known as an Employer Identification Number (EIN) is a nine-digit number for businesses. Almost all businesses must get an EIN, though sole proprietors and single-member LLCs with no employees may be able to use the owner’s Social Security number instead. You can get an EIN for free at the IRS website, which offers specific, detailed information about requirements on its EIN application page.

Licenses and Permits

Business owners should anticipate potential requirements from all levels of government:

A federally-issued license or permit is required for many businesses whose activities fall within a federally-regulated field, such as transportation, agriculture, alcoholic beverage production and sales, broadcasting and use of natural resources.

A state or local license or permit may be required in a variety of business categories as well, all depending on state and local law. For example, if you sell goods in a state that collects sales tax, you’ll need a seller’s permit. Most localities require businesses to obtain a general business license or permit. And you may have additional state or local licensing requirements that apply to your specific industry. City or county business licensing agencies can be good places to learn what special permits or licenses might be necessary.

Business Insurance

No matter how well a business is run, liability risks can never be eliminated. Risk is part of the cost of doing business, and it pays to be prepared. Depending on the circumstance, certain insurance policies may actually be legally required as a safeguard, much like personal auto insurance is.

Many businesses rely on an insurance broker to help determine the appropriate “coverages” (and amounts of coverage) for their situation, such as these common types:

General liability insurance is recommended as the bare minimum of coverage for any business. It insures against near-universal liabilities like damage to company property or personal injuries that occur as a result of doing business.

Product liability insurance covers alleged harm from defective products and might be important for businesses that produce and distribute goods of any kind.

Professional liability insurance , also known as “errors and omissions insurance,” covers claims of professional negligence on the part of any business employee.

Commercial property insuranc e offers additional coverage for land and facilities that could suffer damage from issues like fire, flood and vandalism.

Workers’ compensation insurance covers employees who get hurt on the job and is required for any businesses with employees in all states but Texas.

Auto liability insurance covers accidents involving company-owned vehicles and employees driving on company time.

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The Bottom Line

Depending on the location and type of business, getting a new small business properly registered, named, licensed and insured can be a daunting process. Doing this work right can prove worthwhile as legal troubles can pile up quickly—from regulatory agencies, other businesses, customers and even a company’s own employees. Business founders take on significant risks when starting a small business venture , but much of this risk can be mitigated by ensuring legal requirements to starting the business are taken care of as early as possible.

Frequently Asked Questions

How do i setup an llc.

Setting up your own limited liability company (LLC) can be done in 7 steps:

• Decide a business name
• Designate a Registered Agent
• Get a copy of your state’s LLC Articles of Organization Form
• Prepare the LLC Article of Organization Form
• File the Articles of Organization Form.
• Create an Operating Agreement
• Keep your LLC Active

What's the difference between an LLC and a corporation?

Limited liability companies (LLCs) and corporations are similar, but distinctly different business structures that come with their own strengths and weaknesses. In general, corporations have more standardized and rigid operating structures with more recordkeeping and reporting requirements.

What is the best business structure?

The best business structure for your business will depend entirely on what kind of company you form, your industry and what you want to accomplish. But any successful business structure will be one that will help your company set realistic goals and follow through on set tasks.

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Jane Haskins practiced law for 20 years, representing small businesses in startup, dissolution, business transactions and litigation. She has written hundreds of articles on legal, intellectual property and tax issues affecting small businesses.

Chauncey grew up on a farm in rural northern California. At 18 he ran away and saw the world with a backpack and a credit card, discovering that the true value of any point or mile is the experience it facilitates. He remains most at home on a tractor, but has learned that opportunity is where he finds it and discomfort is more interesting than complacency.

13 small business legal requirements and tips for launch

There are many small business legal requirements to keep track of when you start a business. Save yourself the extra stress and use this checklist to monitor your progress.

Ready to start your business? Plans start at $0 + filing fees.

by   LegalZoom staff

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Updated on: May 7, 2024 · 7 min read

Establish and define your business

Get your financial and tax-related legal requirements in order, protect your business.

Legal requirements and best practices for starting a small business center around licensing and registration, tax liability, human resources (HR), and insurance coverage. By checking off the 13 steps in the following list, your business could have better legal protection and a stronger edge against potential competition.

You'll also want to get the scoop on common small business legal mistakes, which you can view in our infographic below:

Licensing requirements or mandated registrations are meant to help your business flourish wherever it operates. Each state governs small business formation differently, and requirements can change if you plan to do business across state lines.

Legally forming your business , coming to an agreement with your business partners, securing licenses to operate, and protecting your name, slogan, and other assets are all requirements for launching a successful company. Read on to explore each of these steps in detail.

1. Sign a founders' agreement

Properly documenting the rights and responsibilities of each owner is crucial if your small business is the result of an agreement with another party. A founders' agreement makes clear the breakdown of duties and liabilities between business partners. This is one of many important legal documents for startups that could protect you and your share of company profits in the event of a dispute.

2. Form your business entity

You may operate one of four types of businesses when you officially form your entity: a sole proprietorship, partnership, S corporation, or limited liability company (LLC). Each offers a different structure and unique protections to you as the business owner.

• Sole proprietorship: A structure for solo entrepreneurs that carries no filing requirements to form in most states and has increased liability exposure.
• Partnership: Either a limited, limited liability, or general partnership with basic filing requirements and possible liability exposure.
• S Corporation: A corporation that shields owners from liability and has a beneficial tax structure.
• LLC: A company that can be owned by unlimited individuals or entities, boasting greater liability protection.

LLCs and S corporations offer greater personal liability protection, which can save you time and money as the owner. Meanwhile, starting a partnership if you have multiple owners can be simpler than forming another entity, depending on the arrangement.

3. Register your business name

Excluding sole proprietorships that allow you to operate under your legal name, each business entity requires its own unique name that you file with the state. Once you determine that your business name is available, register and make it official:

• A trademark solidifies your business name and prevents other businesses from using it in every state.
• A Doing Business As (DBA) registration clarifies that the business name is fictitious and separate from your name or the official business name.

These two terms go hand-in-hand when announcing your business name to the world, but they don't carry equal protections. In fact, a DBA doesn't carry protections at all—it's just a name.

4. File protections for slogans and logos

In addition to protecting your business name, trademarks can protect intellectual property that brands your business. You can trademark slogans, catchphrases, logos, and any other names associated with your business.

The U.S. Patent and Trademark Office (USPTO) handles trademark applications at the federal level. The cost to trademark your business name averages $300 and changes depending on your state.

5. Secure the proper licenses and permits

After obtaining your DBA and registering your business, you'll need to secure operating permits and licenses. These vary widely depending on which state is home to your business, whether you do business in multiple states, whether you do business with a federal agency, or whether your business is in an industry with heavy federal oversight.

The Small Business Administration details industry-specific contact information for federal business permits as well as a database for state permit questions. If you have questions about the laws in your state, a professional can help you sort out your business queries .

Determine a vesting schedule if you plan to issue stock, and comply with tax laws by claiming the proper employer status. Tackle these steps to ensure you're on top of your finances and prepared for your taxes.

6. Open a business banking account

Record your business finances separately from your own. This not only ensures that you properly keep your records but also decreases your personal liability in the event of an audit. To open a business bank account, you'll need an EIN and founding documents that prove your ownership.

7. Get an Employer Identification Number

While it's possible that you will operate your business without hiring any employees, if and when you do hire anyone, you'll need to pay them. To pay your employees, you'll need to obtain an Employer Identification Number (EIN) that associates your business as an entity the Internal Revenue Service (IRS) recognizes. Keep in mind that you might also need a state tax identification number (TIN) depending on your state.

Even if you don't have employees, you still might want to obtain an EIN. EINs act like Social Security numbers for your business so you can avoid submitting yours on official documents. This small step can protect your business against identity theft and shield your information from view.

8. Decide on a vesting schedule

If your small business is classified as a corporation and issues stock, you can protect its value with a vesting schedule for early investors. A vesting schedule determines:

• When your investors can begin selling their shares
• What percentage of their stock investors can sell

This process protects the interests of your investors by ensuring that control and ownership remain only with people actively involved in ongoing business. Many investors demand a vesting schedule before making a commitment, so be sure not to overlook this preventative step.

Without proper protection, your newly formed small business is vulnerable to legal challenges and intellectual property theft. Business insurance and proper oversight in the hiring process both protect from liability, albeit in different ways.

Follow these preventative steps to up the legal defenses of your business.

9. Acquire adequate insurance coverage

Businesses protect their owners' personal liability but are vulnerable themselves to legal challenges. Protect your business with adequate insurance coverage to reduce business liability on several fronts. Some types of insurance are mandatory, while others are optional in some states. Here are common types of business insurance:

• General liability insurance: Guards your business and assets from several damage claims
• Commercial property insurance: Protects physical property (buildings, tools, and equipment) in the event of theft or, in some cases, damage
• Workers' compensation insurance: Covers your employees if they become sick or hurt as a result of their job; mandatory (except in Texas)

There are many other types of business insurance that can protect your investments against specific threats, like earthquakes, floods, and even data breaches. Consider all the potential risks you're facing before writing off a particular type of insurance.

10. Hire the right people

Hiring your first employees is an exciting step that signals growth. It's also a step that demands a high degree of attention to detail. By performing background checks and verifying employment eligibility, you'll assure regulators that your hiring is legal.

Many states have laws about at-will employment that govern employee terminations. In certain states, it's much more difficult to release an unfit employee, so do your homework before hiring someone you're unsure is a good fit for the job.

11. Follow proper onboarding protocols

As an employer, you must register with the U.S. Department of Labor. Complying with labor laws is important to protect your liability and ensure the safety of your employees. Requirements include:

• Displaying the correct labor posters
• Establishing an employee handbook
• Creating a labor compliance checklist

Labor law posters and employee handbooks are transparent measures that empower your employees to know their rights. In the same way, a labor compliance checklist empowers you to get ahead of potential issues that could lead to labor disputes or strikes.

12. Keep good records

As you begin to conduct business, government agencies will require records detailing your operations and profits. The law demands that you keep accurate accounting records specific to your industry, so if you have questions about proper business reporting , consult with a professional who can guide you with relevant advice.

13. Seek professional consultation to answer questions

You don't have to make any moves you're unsure about. Legal counsel and professional advice can help guide you through the business formation process so that all your individual needs and legal requirements are met.

To prepare yourself for launch and to ensure seamless operations, you can download the interactive checklist below to identify any legal requirements you might've missed. Use each step to think about your industry, location, employees, and anything else that might determine regulations that affect your business.

Once you meet the legal requirements to form a business, you're ready to launch. Running your business smoothly isn't a solitary job, even if you're forming a sole proprietorship or a single-member LLC. Remember that preparation is your biggest asset—the more prepared you are for launch, the more likely your small business will succeed.

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• How to Draft an Effective Business Plan Considering the Legal Implications

The road to the creation of a new business is a long one that is often filled with unexpected challenges and accomplishments. While the unpredictable nature of starting a business can be appealing to some, for many there is value in developing a plan to help guide new owners through the first months and years of operation. For this reason, one of the most important steps that entrepreneurs can take when starting out is to carefully and thoughtfully develop a comprehensive business plan.

What Is a Business Plan?

A business plan is both a map and a marketing tool for your business. A business plan helps you carefully set forth the purpose, goals, and priorities of your new business, along with guideposts to help ensure that you stay on the right path. For instance, a business plan may require you to consider what the primary purpose of your business is, or the good or service you intend to provide, who your potential customers are, and how you intend to reach them in an effective and efficient manner. A business plan also allows you to make an honest evaluation of the current status of your business and what you will need to do to get to where you would like to be. This includes taking the time to compile your business balance sheet, analyze existing income and expenses, and determine anticipated financial needs.

Creating a detailed business plan can help business owners acquire outside funding .

In addition, a business plan serves as a marketing tool for new business owners who are attempting to gain financial backing, operational support, or mentoring for their new business. The financial aspects of a business plan lets potential funders or lenders analyze your current income streams and the likelihood of repayment, while the detailed explanation of your business objectives and operational plans helps to convince interested parties that you have taken the time to carefully plan your business endeavors and are invested in the success of your company.

How to Write a Business Plan

There is no one specific way to write a business plan. However, there are key components that most business plans should include, and these are good starting points when working on your own plan. It may also be worth reaching out to an experienced corporate attorney to help you review and revise your business plan before presenting it to others in the business community.

Business plans typically start with a summary of the business and its objectives, and then they describe the operations of the business, the good or service it will be providing, and potential income streams in more detail. Business plans should also include a detailed description of the proposed management structure of the business, including officers or directors and possibly the envisioned composition of the board. Additionally, business plans typically include extensive financial documentation, such as balance sheets, income projections or growth model projections, any pending loan applications, tax returns of the entity, and copies of any relevant legal agreements. If the business has already been in operation for some time, the business plan may also include financial records for the months of operation.

• Summarize the business and its objectives
• Outline how the business is organized and managed
• Describe what the business sells
• Identify potential income streams
• Include financial information, such as balance sheets and projections

Using Your Business Plan

Once you have completed a business plan that you are happy with, you will find that you will often continue to refer to your plan even months or years after it was initially completed. In the initial stages, you can use your business plan to attract investors, partners, board members, or other advisors who are interested in the model you have proposed and would like to contribute to its success. As your business develops, you can continue to refer to the plan to guide you in business decisions, as well as to track timelines or certain goals that you hoped to meet. Even after your business is well-developed, returning to your business plan can help guide your yearly planning for your company, allowing you to modify your goals as they are achieved.

Last reviewed October 2023

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8 Legal Requirements When You Start A Business Here's what entrepreneurs need to do to avoid costly mistakes down the line.

By Chris Porteous Edited by Jessica Thomas Feb 25, 2020

Opinions expressed by Entrepreneur contributors are their own.

Many people aspire to start their own business, but succeeding in the commercial marketplace is easier said than done. Companies led by inexperienced people unfamiliar with the legal requirements they need to fulfill are particularly susceptible to failure. Nevertheless, many business owners jump into the competitive marketplace without doing enough research when it comes to covering their legal bases.

Don't start a business without first thoroughly preparing yourself. Here are eight legal requirements you need to fulfill when you start a business, and the costs associated with letting these important concerns fall by the wayside.

1. Protect your personal assets

The most important thing to consider when launching your own business is how you intend to protect your personal assets. No budding business owner wants to think about failure, but the truth of the matter is that many new companies struggle to earn a profit and collapse. Even those that are successful might find themselves the victim of an unjust lawsuit that eats up time, money and energy.

To avoid a lawsuit being the end of not only your business but also your personal financial security, it's imperative to protect your assets by forming an LLC. A limited liability company, as the name implies, limits the degree to which you as the business owner are liable for damages incurred by customers. Thus, a customer who sues your company after receiving a faulty product or inadequate service won't be able to touch your personal finances or bank account.

Related: Nine Common Legal Mistakes Small Business Owners Make

Take plenty of time to research forming an LLC, as this is a lengthy process but an essential one that must be done by the books.

2. Check if you must publicize your company

Depending on where you live and where you intend to open your business, you may face extra hurdles when forming an LLC or similar legal entity. Some states and cities require that you publicize news that you've formed a company by posting a statement in a local newspaper, for instance. Failing to take this step could result in a stiff fine or a refusal on behalf of state authorities to recognize your new business.

At least three states have newspaper publication requirements: Arizona, Nebraska and New York. Residents of those states should pay special attention to the rules.

3. Understand you must insure your workers

In most states, business owners (particularly those with more than five employees) are legally required to insure their workers in a number of ways. Offering worker's compensation insurance to those who are injured on the job and incapable of providing for themselves, for instance, is required in most of the United States. Many amateur business owners attempt to cut down on the costs associated with running a company by mitigating their insurance rates, but understand that skimping out on worker's comp could seriously backfire and cost you dearly.

Related: The Top 7 Legal Documents for Every Startup

Wise entrepreneurs would do well to check out a state-by-state comparison of worker's compensation requirements and should not delegate this responsibility to someone else. Some small businesses may be exempt, but when you start growing, keep in mind that you'll need to think about worker's compensation soon.

4. Don't skimp out on general liability insurance

If you thought worker's compensation claims would be the only thing you needed insurance for, think again. General liability insurance is perhaps the most important time of insurance coverage any business can have, as it keeps you safe from generic claims of wrongdoing and will ensure you can keep the lights on should you be sued.

If a customer is walking between the aisles of your store before slipping and injuring their back, your general liability insurance is going to be what kicks in to protect you after they sue you for damages. Similarly, if one of your products is defective and harms the user, general liability insurance will guarantee that your business doesn't have to close its doors while reworking its entire manufacturing and logistics process.

5. Ensure you're not violating trademarks

Trademark and copyright violations aren't something that can or should be shrugged off, so every budding entrepreneur should take time to ensure that the name they've chosen for their business isn't already trademarked. If you launch a new company and begin advertising your operations without checking if your name is already taken, you could receive a cease and desist form or even a subpoena in the mail.

Formally register your name with the U.S. Patent and Trademark Office if you want to sleep soundly at night, convinced that your business' name is yours and yours alone.

6. Don't forget about federal taxes

Now that you've clarified that your name is permitted and you've purchased expensive insurance, it seems only natural that you should get down to business. Before you can open your doors, however, you need to address the issue of how you'll be paying federal taxes. Unless you want the IRS knocking on your door, you'll need to apply for an Employer Identification Number online via a holding company, which will allow the U.S. government to differentiate between your business and others when collecting what it's owed.

Take some time to browse the EIN page on the IRS website if you've not taken care of this already.

7. Check if your industry needs licensing

These days, there are few generic businesses left, as specialization is the key to success in the modern economy. Certain industries require you to attain a license before opening your doors, however, so don't think you can leap straight into a specialized area without doing your homework beforehand.

Related: How to Choose the Best Legal Structure for Your Startup

Check out a list of professions that require licensing across the United States and ensure that your documents are up to date if you want to avoid legal trouble. Medical professionals, legal experts and other professionals in important industries should take special precautions when checking their licensing requirements. Malpractice lawsuits can be ludicrously expensive, so don't skip this step.

8. Hire a good lawyer

Finally, every business needs a good lawyer to call upon when things inevitably go wrong. In this day and age, it's only a matter of time until you're dealing with a lawsuit, and when the subpoenas arrive you're going to want solid legal expertise to rely on. Thoroughly vet the lawyers in your area and don't be afraid to ask them why they're the best choice for your business.

Always remember that lawyers who can't answer your questions in a satisfactory manner won't be capable of seriously defending your business. Invest plenty of time, energy and money in finding the right legal experts to help protect your business, and your new company will be up and running in no time.

Related: 5 Legal Tips for Small Businesses and Startups

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Minimum Legal Requirements for Starting a Business

Last reviewed or updated 07/21/2023

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What is the bare minimum required to start a business?

While not necessarily recommended, it is technically possible for you to start a business without engaging in any preliminary setup aside from actually running the business. This approach, however, can lead to considerable risks depending on the type of business you have, and may result in potential financial penalties. Nonetheless, it's fairly common for freelancers or independent contractors to formalize their business after they get their first big client or contract. Even if you plan to bootstrap your business, having a Business Plan is a critical component to success.

Until your business is formally established as a separate entity, it will be considered a sole proprietorship . While you may take steps to set your business up for success, if nothing is done to structure the business as a separate entity, it will more than likely be considered a sole proprietorship legally and for tax purposes. This means that you will be personally responsible for any debts, property damage, or personal injuries that occur as a result of doing business. You will also  pay the business's taxes through your own personal tax return.

For many industries, there may be legal regulations, or a minimum requirement to be licensed or insured. For example, offering legal services requires meeting specialized licensure requirements. If you plan to hire employees, there are many more federal and state requirements that you may need to meet, as not doing so can lead to costly fines. State and local laws sometimes also require businesses to register with local authorities, and if a business owner fails to do so, it can lead to fines.

What are the minimum best practices when starting a business?

At a minimum, you will want to check to see if you are required to formally register your business with state and local government authorities. These registrations often have rather minimal costs, while the penalties for not registering can be burdensome.

Next, consider getting an Employer Identification Number (EIN) from the IRS if you plan to hire employees. Your business will use its EIN when filing taxes and opening a bank account.

It is a best practice to start a separate bank account for your business and avoid having personal transactions in your business bank account. Mixing personal and business transactions makes it more difficult to prepare your accounting and may also lead to legal trouble if your business is sued or audited.

If you own your own home, or have other significant assets, you may want to  set your business up as a separate legal entity . Forming a separate legal entity for your business, such as a limited liability company (LLC) or corporation, helps reduce the risk that you will be personally liable if your business is sued. There may be tax benefits to being organized as a corporation or LLC, and certain banks and lenders may require it as well.

If you are bringing on employees, it may be important that your business follow some basic hiring practices, such as performing background checks and checking references . In addition, as part of the hiring process, there are a variety of documents that you may want an employee or contractor to sign, such as an Offer Letter , Employment Contract , Noncompete Agreement or Independent Contractor Agreement .

You may also be required to get or want to consider business insurance. The exact type and amount of insurance that you may need generally depends on the business you operate. Experienced insurance brokers, including our trusted partner Simply Business , can help you find the right policies and coverage for your business.

What if I do not meet the minimum requirements before opening my business?

Doing business without going through the proper channels can be risky. To limit personal exposure, it is generally recommended that you conduct business activities in a limited liability company, limited partnership , corporation , or some other business structure that reduces the risk to your personal assets. If you were to get sued without having a separate legal entity set up for your business, for example, your personal assets, such as your home, car, and savings may be in jeopardy because of your business activities.

If you choose not to form a separate business entity, you may want to increase your business insurance coverage so it is high enough to cover possible lawsuits. Although it may be wise to always consider obtaining business insurance, the need may be even greater if your personal assets are at stake.

Failing to register the business with your state or local government may also negatively impact your taxes and result in penalties or fines.

If you do not obtain an EIN for your business, and you have employees, then you may be required to use your own Social Security number, if you are sole proprietor. Before hiring your first employee, you may want policies that are in line with federal, state and local employment laws.

A business may get into legal trouble if it fails to:

• Withhold and remit state and federal payroll taxes  when required.
• Register with state agencies.
• Obtain worker's compensation insurance, if required.

The penalties for failing to follow employment laws range from fines, penalties, back taxes, to being forced to stop conducting business in a particular state or city.

What are the next steps after starting a business?

After starting your business, it is important to focus on following your Business Plan. Making adjustments along the way may be necessary, but if you start from a solid plan, your next steps will have already been created by you.

After you have been in business for several months, or a year, you may want to make sure that the fundamental parts of your business remain in good standing and fit your needs. For example, it is good practice to file and pay taxes on time. Most states require corporations to submit annual or biennial entity reports to the state. Failure to submit those reports can cause your business to face penalties, suspension, or even to be dissolved.

Learning how to maintain the books or hiring someone to do your bookkeeping is another important step after starting a business. This will make your life easier when tax season comes around. Keeping accurate books may also help you track how your business is performing, so you can make changes more quickly if you notice that the business is underperforming.

From time to time, you may want to check that your contracts, business structure and tax structure are still appropriate for your needs. Tax laws and business laws change frequently, and the structure that is best for your business may change over time. Having a lawyer review your business structure and contracts annually is a good way to ensure that you are keeping up with any recent changes in the law, or your industry. Similarly, it can often be beneficial to meet with an accountant before the end of each year to determine if there is anything that you can do to lower your tax liability or better position the business for the future.

To learn more about the legal requirements of starting and operating a business, reach out to a Rocket Lawyer network attorney for affordable legal advice.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer .

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12 legal requirements for starting a small business.

When starting a new business venture, small business owners and entrepreneurs should comply with all the legal requirements for starting a small business. New businesses and startups have various legal obligations, including financial regulations, tax obligations, and employment laws. Ensure your new company complies with all its legal responsibilities so you can focus on growing your business.

Key Takeaways

• Registration is essential for legally running your business operations. 
• Choose a clear and memorable business name and register it through the IRS before you begin operating, so you can separate your business from your personal name.
• Keeping detailed accounts of your registrations and transactions helps you comply with tax laws, keep track of what stage you’re at in registering your business, and enables you to manage any renewals for names and trademarks. 
• Research what type of business setup is right for your company, and learn your local business and labor laws to protect yourself from liabilities and keep your employees safe. 

Here’s what we’ll cover:

What Are the Legal Requirements for Starting a Business?

Can i start a business without registering it.

Frequently Asked Questions

You may have a terrific business idea, but to get your startup off the ground, you first have to make sure you comply with all the legal requirements involved as a business owner. Here’s an easy-to-follow guide for starting your business legally:

1. Create an LLC or Corporation

The first legal requirement you’ll need to meet as a new business owner is to choose your company’s business structure. The following four business structures are the most common and will offer different advantages depending on the size and aims of your company:

• Sole Proprietorship : Sole proprietorship is the simplest structure owned by only one person responsible for taxes and liability. This is often the most affordable structure to set up; however, it means that you and your business are one business entity from a legal and taxation perspective. This places greater liability risk on your personal assets.
• Partnership: A partnership structure shares ownership between you and one or more business partners, meaning that liability, workload, and profits are typically shared. Substructures like Limited Liability Partnerships provide additional security against liability for the actions of your business partner.
• LLC: A LLC , or Limited Liability Company, protects you from personal liability under most circumstances. This means that if your business is sued or if it declares bankruptcy, your personal assets, including your home and vehicle, won’t be at risk. With an LLC, you can file your business income as part of your personal income taxes, but you will likely need to pay self-employment tax.
• Corporation: A corporation , or C corp, is legally a separate entity from its owner or owners. Corporations offer the most significant personal protection from liability out of all business structures. However, they’re more expensive and complicated to form. Corporations file separate income taxes on profits.

2. Register Your Business Name

Once you’ve decided on a business structure, you’ll need to register your business name. Choose a name that reflects your brand and make sure it hasn’t already been claimed. You can then choose to register your business. There are four ways to register it, each serving its own purpose:

• An Entity Name: Legally protects your business at a state level
• A Trademark: Legally protects your business at a federal level
• A DBA (Doing Business As): Doesn’t offer legal protection but may be required, depending on your location and business structure
• A Domain Name: Claims your business’s web address

3. Trademark your Slogans and Logos

Create a clear and identifiable brand for your business by trademarking your slogans and logos. This helps to protect your intellectual property against other companies with similar phrases and visual branding. Choose simple, memorable slogans and logos that are easy to understand and effectively represent your business. 

4. Apply for a Federal Tax ID Number

Your federal tax identification number is an Employer Identification Number (EIN). It allows hiring employees legally, paying federal taxes, applying for business licenses, and opening a business bank account . You can apply for an EIN through the IRS website . Your business will need an EIN if you plan on doing any of the following:

• Hiring and paying employees
• Filing employer tax returns
• Operating as a corporation
• Using a tax-deferred pension plan

5. Determine If You Need a State Tax ID Number

Do research to determine whether your startup needs a state tax ID number. You’ll only need one if your state collects taxes from businesses. Since tax obligations vary from state to state, it’s best to visit your own state’s website and check the local laws related to your income and employment tax obligations. 

6. Obtain Business Permits and Licenses

You will need to apply for business licenses and permits at the federal and state government level, but the specific licenses you need depend on the industry you work in and your business location. The Small Business Administration lists common federal business licenses required based on industry, which is a good starting point for your research. At the state level, the licenses and permits needed and the fees owed will depend on your location and your primary business activities. Research requirements at the state and local levels based on where you do business.

Below are the three licenses and permits you need to look for depending on your industry:

• Federal Licenses And Permits
• State Licenses And Permits
• Local Licenses And Permits

7. Protect Your Business with Insurance

Professional liability insurance can protect you in cases where the personal liability protections offered by your specific business structure aren’t enough. Business insurance can protect not just your personal assets but your business assets as well. Some types of insurance are required by law, such as unemployment and disability insurance. Purchasing business insurance to protect your startup from other potential risks is also a good idea. Some common business insurance options include:

• General Liability Insurance: Protects your business from various forms of financial loss, including property damage, injury, medical issues, lawsuit settlements, or judgments.
• Product Liability Insurance: If your business sells products, this insurance protects you in the case that one of your products is defective and injures a customer.
• Commercial Property Insurance: Protects your business from loss or damage to company property as a result of natural disasters, accidents, or vandalism.

8. Hire and Classify your Employees Properly

Correctly classifying your employees is key to providing fair compensation and filing your taxes correctly. The employees you hire will typically be classified into four categories:

• Employees: This is the most protected category and includes both part-time and full-time employees. Depending upon your location and industry, the people you hire in this category will need benefits and overtime as well as their salaried or hourly compensation. 
• Contractors: Contractors deliver a service for your business but are not classified as employees. They typically manage their own hours, and you are usually not responsible for their insurance or benefits. 
• Interns: Interns may be paid, or unpaid depending upon your arrangement but are regulated by special rules regarding their hours and what you can ask of them. Internships allow interns to develop real-world career skills and provide short-term labor for your company. 
• Volunteers: Volunteers are often involved with charitable work and are also governed by specific rules. Your business may have to meet certain requirements to qualify for volunteers from volunteer agencies. 

Also Read: Business With Less Manpower

9. Comply With Labor Laws

Labor laws are essential to protect the rights and safety of employees in your workplace. These can cover everything from fair wages and hours to healthcare and worksite safety. Some labor laws may be federal, while others are specific to your region and industry. Research your local labor laws to understand how they apply to your small business so that you can operate safely and legally. 

10. Open a Business Bank Account

From a legal perspective, separating your personal and business finances is important before you start collecting clients’ payments. Choose a convenient bank that serves your needs by offering lower banking fees for small business clients. When you’ve chosen a banking institution, you’ll need to provide some information about your business to open an account, including:

• Your Employer Identification Number (or Social Security Number, in the case of a sole proprietorship)
• The formation documents for your business
• Your business license
• Ownership agreement documents

11. Keep Good Records

Documenting your small business transactions is essential for taxation and measuring your growth and progress. Maintaining clear and accurate business records is also important for legality, as good records enable you to demonstrate your business’s compliance. If your business is ever subject to a tax audit, keeping your records organized makes it quick and easy to comply.

Discover a clear and simple way to keep your records with FreshBooks’ bookkeeping services . It helps you organize your sales, invoicing, and payments with free downloadable templates to manage your accounts. Click here to sign up for your free trial and learn more about how FreshBooks can support your small business.

12. Consult the Professionals

To ensure you’ve covered all your legal responsibilities as a business, it’s a good idea to consult professionals for advice. Consider sitting down separately with a lawyer and an accountant to ensure your company is covered legally and financially before opening for business.

You need to register your business name in order to use that name for your business. If you don’t have a business name registered with the Secretary of State, you can only conduct business under your personal name. Before filing for your business name, ensure it’s not currently used by someone else. Then, register the name online through the IRS.

Starting a small business requires several administrative steps to ensure that you’re legal to operate. Most businesses begin by registering important information like names, logos, and slogans. This helps protect your company’s brand identity and meet IRS requirements.

As you go through the steps to start a small business, remember to keep detailed records of all your information so you’re prepared when the time comes to renew any licensing. Thorough research of your industry is essential for complying with local business laws. Being prepared is the easiest way to protect yourself and your employees when operating a small business.

FAQs on Starting a Small Business Legal Requirements

What documents should a small business have.

When you start your own business, remember to keep document records of your:

• Tax numbers
• Business name registration
• Incorporation number
• Employer identification number
• A partnership agreement, depending upon your business structure
• Unanimous shareholder agreement

Can I run a small business without registering?

While you can run your small business under your personal name, to legally operate it under any other name, you’ll need to register that business name officially. 

Does a small business need a permit?

Most small businesses will need at least one type of permit to operate legally. The permits you need will depend on your region and business type.

How do you structure a small business?

Small businesses can be structured in several ways. You can choose to operate as a sole proprietorship, partnership, limited liability company, or corporation.

What are the tax obligations for a small business? 

Your small business tax obligations will depend upon where you live, but you’ll typically have to make a minimum level of profits before you’re required to register for GST. 

What is a legal compliance checklist?

A legal compliance checklist is a list of items designed to ensure a business meets all regulatory requirements. The items on a compliance checklist will depend on your industry but will typically include required documentation that needs to be submitted, as well as non-compliance items to be avoided.

Michelle Alexander, CPA

About the author

Michelle Alexander is a CPA and implementation consultant for Artificial Intelligence-powered financial risk discovery technology. She has a Master's of Professional Accounting from the University of Saskatchewan, and has worked in external audit compliance and various finance roles for Government and Big 4. In her spare time you’ll find her traveling the world, shopping for antique jewelry, and painting watercolour floral arrangements.

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10 Legal Requirements for Starting a Small Business

• Following legal requirements is important to ensure your business remains compliant and profitable.
• Obtaining required permits and insurance are key steps to landing your first contracts.
• Learning about your tax obligations will help keep your business legally compliant.

Starting a small business involves several legal steps, and following legal requirements is important to ensure your business remains compliant and profitable. As a small business owner, it’s up to you to research applicable laws and follow them. This process can be daunting at first, so we’ve put together a checklist of basic legal requirements you’ll want to review before starting your small business.

1. Choose a Business Structure

A business structure is a legal structure that determines important components of your business such as how you pay taxes, if and how you are allowed to raise capital, who owns the company, and how profits are distributed. When considering which business structure to choose, start by asking yourself a few questions:

• What are my short- and long-term business goals?
• What type of services am I providing?
• Do I plan to hire employees in the future, or will this be a solo business venture?
• What capital do I have available and what future financial requirements do I have?

Gathering this information will help inform your choice. Every individual has different needs for their business, and legal entities are not a one-size-fits-all solution. While some individuals may feel their work carries little risk of legal action, others may choose to position their company for bigger growth that could carry more risk.

Four business structure options to consider when starting a small business:

1. Sole Proprietor

Many independents begin their journey as sole proprietors. For tax purposes, sole proprietors generally operate under their personal Social Security number, but you can apply for a Taxpayer Identification Number (TIN) for your business instead. This business structure requires minimal paperwork and offers flexibility if you decide to freelance part-time.

2. Limited Liability Company (LLC)

A LLC (Limited Liability Company) is a business structure that provides a middle ground between operating a corporation and a sole proprietorship: it allows for the pass-through taxation of a sole proprietorship while also providing the limited liability of a corporation. LLCs are popular due to their simplicity, while providing strong legal protections of a corporation that shield personal assets. Think of it as the next step above a sole proprietorship.

3. S Corporation

With an S Corporation, or S-Corp, profits and losses pass through to the shareholder’s personal tax return, so the business itself is not taxed. The shareholder must be paid a fair market value, but any additional profit is not subject to self-employment tax.

4. C Corporation

With a C Corporation, or C-Corp, you are the majority shareholder of your company. This business structure provides limited liability, separating your personal and professional assets. While this structure is one of the most complex business arrangements available, it is also the most sophisticated, making it an attractive option for independents.

2. Register Your Business Name

If you choose to run your business as a Sole Proprietor, the name of the business will default to the name of the owner’s legal name. For example, if your name is Rachel Smith and you form a consulting company, the legal name of the business will be “Rachel Smith.” However, if you decide to name your company “Rachel Smith Consulting,” you’ll need to register this as a DBA name.

This process lets your state or local government know the name you are operating your business under. This allows you to create and use the name you want for branding purposes without having to incorporate. Specific DBA registration rules  vary from state to state .

For those who are filing a legal entity, an application must be filed with your state for either Articles of Incorporation or Articles of Organization. Whether you choose an LLC, S Corp, or C-Corp in step one above, you will need to file a name for the company with your state.

3. Trademark Names, Logos, or Slogans

If you are planning on operating nationally or providing online services, you may want to consider getting your business name trademarked. A DBA name or incorporated business name will not offer brand protection in the 49 states where your business is not registered. While trademarking is not a requirement, it will provide stronger protection for your brand. This process involves applying for a trademark with the U.S. Patent and Trademark Office. If you do want to pursue a trademark, start by  conducting a comprehensive search  to make sure the name you want to use is available.

Check out: 9 Ways to Build a Personal Brand for Small Business

4. Get an Employer Identification Number (EIN) from the IRS

Any business that operates as a corporation or partnership or has employees will be required to have an Employer Identification Number (EIN) from the IRS. An EIN identifies your business for tax purposes—think of it as a Social Security number for your business—and you can use to open a business bank account, file tax returns, and apply for business licenses.

The easiest way to apply for an EIN is online via the  IRS EIN Assistant . If you operate as a sole proprietorship or single member LLC, you are not required to obtain an EIN, although obtaining one is a way to create additional separation between business and personal liability and it will shield your social security number on business documents and help protect against identity theft.

5. Learn About State and Local Taxes

Income tax is likely not the only tax you are responsible for paying into, so it’s important to understand other tax requirements you may have. The majority of independent contractors are considered to be self-employed and are therefore subject to paying Self-Employment (SE) Tax in addition to income tax. SE Tax is both the employer and employee halves of Social Security and Medicare (FICA).

However, there are circumstances in which your tax situation may differ. For example, how your business is structured may affect which taxes you are required to pay into. In addition, whether or not your business made a significant profit during the past year could also be a factor. More information about  tax requirements can be found on the  IRS website .

Learn more: Filing Independent Contractor Taxes: 4 Best Practices

6. Obtain Required Business Permits and Licenses

Just like any other business, independent contractors must obtain proper permits and licenses. Depending on your industry and where your business is located, you may need to be licensed on the federal level as well as on the state or local level.  Federal licenses are required  for businesses involved in any sort of activity that is supervised and regulated by a federal agency. State licensing and permits will vary depending on location.

7. Create a Compliance Plan

Even as a small business owner, you’re subject to some of the laws and regulations that apply to large corporations. These include advertising, marketing, finance, intellectual property, and privacy laws. For companies that have employees, there are additional state and federal regulations that may need to be followed situationally. The SBA has helpful advice for keeping your small business compliant .

Additionally, small businesses must ensure that they are free and clear of contractor misclassification concerns. Not only is this a threat to your business itself, but also your future clients.

Don’t miss: 5 Tips for Staying Legally Compliant as a Small Business

8. Open a Business Bank Account

Legally, having a separate bank account for business transactions will enable you to better track and report on your income and expenses. It is advisable to set up a business bank account before you start receiving payments from clients but it’s even better if you do so once you start setting up your business. Do your research and find a bank that best fits your needs. You will often need several pieces of information when opening a business bank account, such as:

• Your EIN (Employer Identification Number) or your social security number if your business is a sole proprietorship
• Formation documents for your business
• Your ownership agreement documents
• Your Business License

9. Obtain Business Insurance

The decision to start a small business means that you are responsible for ensuring the legal and financial well-being of your company. Remember that you  are your business—if any legal or financial problems arise that affect your company, they will also affect you directly. It’s important to protect your business against the risk of liability losses not just because many clients will require you to have these insurances, but it also to protect yourself and your future security.

Of course, the types of insurance that are right for your business will vary greatly and depend on your industry, the size of your business, and the type of clients you work with, among other factors. Here are a few common types of business insurance that many independent contractors carry:

1. General Liability Insurance

General liability insurance is often necessary for independents. This insurance covers a wide range of incidents, including accidental damage to a client’s property, claims of libel or slander, and the cost of defending lawsuits.

2. Errors and Omissions Insurance

Errors and omissions insurance, also known as professional liability insurance, provides protection in the instance that a client incurs financial harm due to an error or omission—that is, a failure on your behalf to perform an integral part of your responsibility on a project.

3. Home-based Business Insurance

While an insurance policy for a home-based business doesn’t apply to everyone, it’s relevant for independents who choose to work out of a home office. Most homeowners’ insurance policies do not cover losses sustained out of a home office, but an insurance policy for a home-based business can provide the protection you and your clients need.

Check out: Business Insurance Requirements for Independent Consultants

10. Consider How You Will Handle Your Back Office

Back-office management consists of all of the administrative and support tasks that need to be done to run your business. This includes filing paperwork, tracking expenses, filing taxes, and billing clients. While managing your back office is not technically a legal requirement , how you choose to manage these tasks can have legal implications down the road.

Some independents choose to hire administrative support help while others go the do-it-yourself route using online tools and tech to generate invoices, track expenses, and bill clients. Planning for how you will manage these responsibilities is a smart move as a new small business owner and will allow you to focus your time and attention on clients rather than routine business maintenance.

The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs.  Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.  

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How to Choose the Best Legal Structure for Your Business

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Choosing the right legal structure is a necessary part of running a business. Whether you're just starting out or your business is growing, it's crucial to understand the options.

Table of Contents

Your business’s legal structure has many ramifications. It can determine how much liability your company faces during lawsuits. It can put up a barrier between your personal and business taxes – or ensure this barrier doesn’t exist. It can also determine how often your board of directors must file paperwork – or if you even need a board. [Related article: What to Do if Your Business Gets Sued ]

We’ll explore business legal structures and how to choose the right structure for your organization. 

What is a business legal structure?

A business legal structure, also known as a business entity, is a government classification that regulates certain aspects of your business. On a federal level, your business legal structure determines your tax burden. On a state level, it can have liability ramifications.

Why is a business legal structure important?

Choosing the right business structure from the start is among the most crucial decisions you can make. Here are some factors to consider:

• Taxes: Sole proprietors, partnership owners and S corporation owners categorize their business income as personal income. C corporation income is business income separate from an owner’s personal income. Given the different tax rates for business and personal incomes, your structure choice can significantly impact your tax burden.
• Liability: Limited liability company (LLC) structures can protect your personal assets in the event of a lawsuit. That said, the federal government does not recognize LLC structures; they exist only on a state level. C corporations are a federal business structure that includes the liability protection of LLCs.
• Paperwork: Each business legal structure has unique tax forms. Additionally, if you structure your company as a corporation, you’ll need to submit articles of incorporation and regularly file certain government reports. If you start a business partnership and do business under a fictitious name, you’ll need to file special paperwork for that as well.
• Hierarchy: Corporations must have a board of directors. In certain states, this board must meet a certain number of times per year. Corporate hierarchies also prevent business closure if an owner transfers shares or exits the company, or when a founder dies . Other structures lack this closure protection.
• Registration: A business legal structure is also a prerequisite for registering your business in your state. You can’t apply for an employer identification number (EIN) or all your necessary licenses and permits without a business structure.
• Fundraising: Your structure can also block you from raising funds in certain ways. For example, sole proprietorships generally can’t offer stocks. That right is primarily reserved for corporations.
• Potential consequences for choosing the wrong structure: Your initial choice of business structure is crucial, although you can change your business structure in the future. However, changing your business structure can be a disorganized, confusing process that can lead to tax consequences and the unintended dissolution of your business. 

Types of business structures

The most common business entity types are sole proprietorships, partnerships, limited liability companies, corporations and cooperatives. Here’s more about each type of legal structure.

Sole proprietorship

A sole proprietorship is the simplest business entity. When you set up a sole proprietorship , one person is responsible for all a company’s profits and debts.

“If you want to be your own boss and run a business from home without a physical storefront, a sole proprietorship allows you to be in complete control,” said Deborah Sweeney, vice president and general manager of business acquisitions at Deluxe Corp. “This entity does not offer the separation or protection of personal and professional assets, which could prove to become an issue later on as your business grows and more aspects hold you liable.”

Proprietorship costs vary by market. Generally, early expenses will include state and federal fees, taxes, business equipment leases , office space, banking fees, and any professional services your business contracts. Some examples of these businesses are freelance writers, tutors, bookkeepers , cleaning service providers and babysitters.

A sole proprietorship business structure has several advantages.

• Easy setup: A sole proprietorship is the simplest legal structure to set up. If you – and only you – own your business, this might be the best structure. There is very little paperwork since you have no partners or executive boards.
• Low cost: Costs vary by state, but generally, license fees and business taxes are the only fees associated with a proprietorship.
• Tax deduction: Since you and your business are a single entity, you may be eligible for specific business sole proprietor tax deductions , such as a health insurance deduction.
• Easy exit: Forming a proprietorship is easy, and so is ending one. As a single owner, you can dissolve your business at any time with no formal paperwork required. For example, if you start a day care center and wish to fold the business, refrain from operating the day care and advertising your services.

The sole proprietorship is also one of the most common small business legal structures. Many famous companies started as sole proprietorships and eventually grew into multimillion-dollar businesses. These are a few examples:

• Marriott Hotels

Partnership 

A partnership is owned by two or more individuals. There are two types: a general partnership, where all is shared equally, and a limited partnership, where only one partner has control of operations and the other person (or persons) contributes to and receives part of the profits. Partnerships can operate as sole proprietorships, where there’s no separation between the partners and the business, or limited liability partnerships (LLPs), depending on the entity’s funding and liability structure.

“This entity is ideal for anyone who wants to go into business with a family member, friend or business partner – like running a restaurant or agency together,” Sweeney said. “A partnership allows the partners to share profits and losses and make decisions together within the business structure. Remember that you will be held liable for the decisions made as well as those actions made by your business partner.”

General partnership costs vary, but this structure is more expensive than a sole proprietorship because an attorney should review your partnership agreement. The attorney’s experience and location can affect the cost. 

A business partnership agreement must be a win-win for both sides to succeed. Google is an excellent example of this. In 1995, co-founders Larry Page and Sergey Brin created a small search engine and turned it into the leading global search engine. The co-founders met at Stanford University while pursuing their doctorates and later left to develop a beta version of their search engine. Soon after, they raised $1 million in funding from investors, and Google began receiving thousands of visitors a day. Having a combined ownership of 11.4% of Google provides them with a total net worth of nearly $226.4 billion.

Business partnerships have many advantages. 

• Easy formation: As with a sole proprietorship, there is little paperwork to file for a business partnership. If your state requires you to operate under a fictitious name ( “doing business as,” or DBA ), you’ll need to file a Certificate of Conducting Business as Partners and draft an Articles of Partnership agreement, both of which have additional fees. You’ll usually need a business license as well.
• Growth potential: You’re more likely to obtain a business loan with more than one owner. Bankers can consider two credit histories rather than one, which can be helpful if you have a less-than-stellar credit score.
• Special taxation: General partnerships must file federal tax Form 1065 and state returns, but they do not usually pay income tax. Both partners report their shared income or loss on their individual income tax returns. For example, if you opened a bakery with a friend and structured the business as a general partnership, you and your friend are co-owners. Each owner brings a certain level of experience and working capital to the business, affecting each partner’s business share and contribution. If you brought the most seed capital for the business, you and your partner may agree that you’ll retain a higher share percentage, making you the majority owner.

Partnerships are one of the most common business structures. These are some examples of successful partnerships:

• Warner Bros.
• Hewlett-Packard
• Ben & Jerry’s

Limited liability company 

A limited liability company (LLC) is a hybrid structure that allows owners, partners or shareholders to limit their personal liabilities while enjoying a partnership’s tax and flexibility benefits. Under an LLC, members are shielded from personal liability for the business’s debts if it can’t be proven that they acted in a negligent or wrongful manner that results in injury to another in carrying out the activities of the business.

“Limited liability companies were created to provide business owners with the liability protection that corporations enjoy while allowing earnings and losses to pass through to the owners as income on their personal tax returns,” said Brian Cairns, CEO of ProStrategix Consulting. “LLCs can have one or more members, and profits and losses do not have to be divided equally among members.”

According to Wolters Kluwer , the cost of forming an LLC comprises the state filing fee and can vary depending on your state. For example, if you file an LLC in New York, you must pay a $200 filing fee, a $9 biennial fee, and file a biennial statement with the New York Department of State .

Although small businesses can be LLCs, some large businesses choose this legal structure. The structure is typical among accounting, tax, and law firms, but other types of companies also file as LLCs. One example of an LLC is Anheuser-Busch, one of the leaders in the U.S. beer industry. Headquartered in St. Louis, Anheuser-Busch is a wholly owned subsidiary of Anheuser-Busch InBev, a multinational brewing company based in Leuven, Belgium.

Here some other well-known examples of LLCs:

• Hertz Rent-a-Car

Corporation 

The law regards a corporation as separate from its owners, with legal rights independent of its owners. It can sue, be sued, own and sell property, and sell the rights of ownership in the form of stocks. Corporation filing fees vary by state and fee category. 

There are several types of corporations, including C corporations , S corporations, B corporations, closed corporations, and nonprofit corporations.

• C corporations: C corporations, owned by shareholders, are taxed as separate entities. JPMorgan Chase & Co. is a multinational investment bank and financial services holding company listed as a C corporation. Since C corporations allow an unlimited number of investors, many larger companies – including Apple, Bank of America and Amazon – file for this tax status.
• B corporations: B corporations, otherwise known as benefit corporations, are for-profit entities committed to corporate social responsibility and structured to positively impact society. For example, skincare and cosmetics company The Body Shop has proven its long-term commitment to supporting environmental and social movements, resulting in an awarded B corporation status. The Body Shop uses its presence to advocate for permanent change on issues like human trafficking, domestic violence, climate change, deforestation and animal testing in the cosmetic industry.
• Closed corporations: Closed corporations, typically run by a few shareholders, are not publicly traded and benefit from limited liability protection. Closed corporations, sometimes referred to as privately held companies, have more flexibility than publicly traded companies. For example, Hobby Lobby is a closed corporation – a privately held, family-owned business. Stocks associated with Hobby Lobby are not publicly traded; instead, the stocks have been allocated to family members.
• Open corporations: Open corporations are available for trade on a public market. Many well-known companies, including Microsoft and Ford Motor Co., are open corporations. Each corporation has taken ownership of the company and allows anyone to invest.
• Nonprofit corporations: Nonprofit corporations exist to help others in some way and are rewarded by tax exemption. Some examples of nonprofits are the Salvation Army, American Heart Association and American Red Cross. These organizations all focus on something other than turning a profit.

Corporations enjoy several advantages. 

• Limited liability: Stockholders are not personally liable for claims against your corporation; they are liable only for their personal investments.
• Continuity: Corporations are not affected by death or the transferring of shares by their owners. Your business continues to operate indefinitely, which investors, creditors and consumers prefer.
• Capital: It’s much easier to raise large amounts of capital from multiple investors when your business is incorporated.

This structure is ideal for businesses that are further along in their growth, rather than a startup based in a living room. For example, if you’ve started a shoe company and have already named your business, appointed directors and raised capital through shareholders, the next step is to become incorporated. You’re essentially conducting business at a riskier, yet more lucrative, rate. Additionally, your business could file as an S corporation for the tax benefits. Once your business grows to a certain level, it’s likely in your best interest to incorporate it.

These are some popular examples of corporations:

• General Motors
• Exxon Mobil Corp.
• Domino’s Pizza
• JPMorgan Chase

Learn more about how to become a corporation .

Cooperative 

A cooperative (co-op) is owned by the same people it serves. Its offerings benefit the company’s members, also called user-owners, who vote on the organization’s mission and direction and share profits.

Cooperatives offer a couple main advantages.

• Increased funding: Cooperatives may be eligible for federal grants to help them get started.
• Discounts and better service: Cooperatives can leverage their business size, thus obtaining discounts on products and services for their members.

Forming a cooperative is complex and requires you to choose a business name that indicates whether the co-op is a corporation (e.g., Inc. or Ltd.). The filing fee associated with a co-op agreement varies by state. 

An example of a co-op is CHS Inc., a Fortune 100 business owned by U.S. agricultural cooperatives. As the nation’s leading agribusiness cooperative, CHS reported a net income of $422.4 million for fiscal year 2020. These are some other notable examples of co-ops:

• Land O’Lakes
• Navy Federal Credit Union
• Ace Hardware

Factors to consider before choosing a business structure

For new businesses that could fall into two or more of these categories, it’s not always easy to decide which structure to choose. Consider your startup’s financial needs, risk and ability to grow. It can be challenging to switch your legal structure after registering your business, so give it careful analysis in the early stages of forming your business. 

Here are some crucial factors to consider as you choose your business’s legal structure. You should also consult a CPA for advice.

Flexibility 

Where is your company headed, and which type of legal structure allows for the growth you envision? Turn to your business plan to review your goals and see which structure best aligns with those objectives. Your entity should support the possibility for growth and change, not hold it back from its potential. [Learn how to write a business plan with this template .]

When it comes to startup and operational complexity, nothing is more straightforward than a sole proprietorship. Register your name, start doing business, report the profits and pay taxes on it as personal income. However, it can be difficult to procure outside funding. Partnerships, on the other hand, require a signed agreement to define the roles and percentages of profits. Corporations and LLCs have various reporting requirements with state governments and the federal government.

A corporation carries the least amount of personal liability since the law holds that it is its own entity. This means creditors and customers can sue the corporation, but they can’t gain access to any personal assets of the officers or shareholders. An LLC offers the same protection but with the tax benefits of a sole proprietorship. Partnerships share the liability between the partners as defined by their partnership agreement.

An owner of an LLC pays taxes just as a sole proprietor does: All profit is considered personal income and taxed accordingly at the end of the year.

“As a small business owner, you want to avoid double taxation in the early stages,” said Jennifer Friedman, principal at Rivetr. “The LLC structure prevents that and makes sure you’re not taxed as a company, but as an individual.”

Individuals in a partnership also claim their share of the profits as personal income. Your accountant may suggest quarterly or biannual advance payments to minimize the effect on your return. 

A corporation files its own tax returns each year, paying taxes on profits after expenses, including payroll. If you pay yourself from the corporation, you will pay personal taxes, such as those for Social Security and Medicare, on your personal return. 

If you want sole or primary control of the business and its activities, a sole proprietorship or an LLC might be the best choice. You can negotiate such control in a partnership agreement as well.

A corporation is constructed to have a board of directors that makes the major decisions that guide the company. A single person can control a corporation, especially at its inception, but as it grows, so does the need to operate it as a board-directed entity. Even for a small corporation, the rules intended for larger organizations – such as keeping notes of every major decision that affects the company – still apply.

Capital investment

If you need to obtain outside funding from an investor, venture capitalist or bank, you may be better off establishing a corporation. Corporations have an easier time obtaining outside funding than sole proprietorships.

Corporations can sell shares of stock and secure additional funding for growth, while sole proprietors can obtain funds only through their personal accounts, using their personal credit or taking on partners. An LLC can face similar struggles, although, as its own entity, it’s not always necessary for the owner to use their personal credit or assets.

Licenses, permits and regulations

In addition to legally registering your business entity, you may need specific licenses and permits to operate. Depending on the type of business and its activities, it may need to be licensed at the local, state and federal levels.

“States have different requirements for different business structures,” Friedman said. “Depending on where you set up, there could be different requirements at the municipal level as well. As you choose your structure, understand the state and industry you’re in. It’s not ‘one size fits all,’ and businesses may not be aware of what’s applicable to them.”

The structures discussed here apply only to for-profit businesses. If you’ve done your research and you’re still unsure which business structure is right for you, Friedman advises speaking with a specialist in business law.

Max Freedman and Matt D’Angelo contributed to the writing and reporting in this article. Source interviews were conducted for a previous version of this article.

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The U.S. is home to 33.2 million small businesses, which drive over 43% of GDP.   If you are looking to start a business, there are key factors to consider—from market research and creating a business plan to scaling your business. These factors are critical to your journey and can make a big difference no matter what stage of the process you are in.

Entrepreneurs who take concrete action can differentiate themselves from competitors, innovate, and grow. For successful entrepreneurs, the execution of the business is often what means the most. 

Key Takeaways

• Starting a small business involves extensive market research of your target audience, competitors, and gaining a deep understanding of the industry.
• It is important to build a comprehensive business plan that includes the product or service description, your target customers, financial projections, and all other key details.
• Understanding the legal requirements of starting your business involves knowledge of business registration, permits, licensing, and other regulatory requirements.
• There are various types of funding channels for starting a business, including financing it yourself, securing external funding from your network, and applying for government and corporate grants and loans. 

Being clear about your business goals involves doing your research. Successful entrepreneurs often do extensive research on their field. This includes understanding their prospective customers, the technical aspects of the industry, and the challenges other businesses are facing. 

Understanding how other players operate in an industry is important. Attending conferences, joining associations, and building a network of people involved in the field can help you learn how decisions are made. Often, comprehensive market research takes six months to a year. 

Understanding Your Target Audience

Knowing your target market is critical for many reasons. These are the customers who are most likely to purchase your product, recommend it to friends, and become repeat buyers. Apart from driving your bottom line, having a strong understanding of your target audience will allow you to tailor your offering more effectively, reach your customers more efficiently, and manage customer expectations.

Compiling demographic data on age, family, wealth, and other factors can give you a clearer understanding of market demand for your product and your potential market size.

It’s important to ask, “Why would someone buy this and part with their discretionary income?” or “Will someone love this enough to tell someone about it?” At the heart of these questions is understanding whether your business solves a key problem, as well as whether it delivers the “more” that connects to your audiences’ human emotions.

Assessing Market Trends and Opportunities

To find an advantage in a given market, look at key market trends in customer behavior and the business landscape. Explore the state of business conditions and consumer spending, along with the economic environment and how interest rates may affect financing and business growth.

Several resources are available to dive into market trends across industries, such as Statistics of U.S. Businesses and the U.S. Census Business Builder . To analyze the competitive landscape, and in turn, identify key opportunities, Porter's 5 Forces is a classic model to help businesses build their competitive strategy.

A business plan is a road map for achieving your business goals. It outlines the capital that you need, the personnel to make it happen, and the description of your product and prospective customers.

There are a number of models for creating a business plan. The Small Business Administration (SBA) , for instance, provides a format that includes the following nine sections:

• Executive summary: This should be a description of your company and its potential for success. The executive summary can cover your mission statement, employees, location, and growth plan.
• Company description: This is where you detail what your business offers, its competitive advantages, and your strengths as a business.
• Market analysis: Lay out how your company is positioned to perform well in your industry. Describe market trends and themes and your knowledge of successful competitors.
• Organization and management: Who is running your company, and how is your business structured? Include an organizational chart of your management team. Discuss if your business will be incorporated as a business C or S corporation, a limited partnership, a limited liability company, or a sole proprietorship. 
• Service or product line: Here is where you describe how your business will solve a problem and why this will benefit customers. Describe how your product lifecycle would unfold.
• Marketing and sales: Detail your marketing strategy and how this will reach your customers and drive return on investment. 
• Funding request: If you're looking for financing, lay out the capital you’re requesting under a five-year horizon and where, in detail, it will be allocated, such as salaries, materials, or equipment. 
• Financial projections: This section shows the five-year financial outlook for your company and ties these to your request for capital.

Having a coherent business plan is important for businesses looking to raise cash and crystallize their business goals.

Setting Goals and Strategies

Another key aspect of a business plan is setting realistic goals and having a strategy to make these a reality. Having a clear direction will help you stay on track within specified deadlines. In many ways, it allows companies to create a strategic plan that defines measurable actions and is coupled with an honest assessment of the business, taking into account its resources and competitive environment. Strategy is a top-down look at your business to achieve these targets.

Financial Projections and Budgeting

Often, entrepreneurs underestimate the amount of funding needed to start a business. Outlining financial projections shows how money will be generated, where it will come from, and whether it can sustain growth. 

This provides the basis for budgeting the costs to run a business and get it off the ground. Budgeting covers the expenses and income generated from the business, which include salaries and marketing expenses and projected revenue from sales.

Another important aspect of starting a business are the legal requirements that enable you to operate under the law. The legal structure of a business will impact your taxes, your liability, and how you operate.

Businesses may consider the following structures in which to operate:

• Corporation
• Limited Liability Company (LLC)
• Partnership
• Sole Proprietorship

Each has different legal consequences, from regulatory burdens to tax advantages to liability being shifted to the business instead of the business owner.

Registering Your Business

Now that you have your business structure outlined, the next step is registering your business . Your location is the second key factor in how you’ll register your business. In many cases, small businesses can register their business name with local and state government authorities. 

If your business is being conducted under your legal name, registration is not required. However, such a business structure may not benefit from liability protection, along with certain legal and tax advantages. Often, registering your businesses costs $300 or less.

Before filing, a business structured as a corporation, LLC, or partnership requires a registered agent in its state. These agents handle the legal documents and official papers on your behalf.

Businesses that are looking to trademark their product, brand, or business, can file with the United States Patent and Trademark Office.

Understanding Permits and Licenses

If your business conducts certain activities that are regulated by a federal agency, you’re required to get a permit or license. A list of regulated activities can be found on the SBA website, and includes activities such as agriculture, alcoholic beverages, and transportation.

There are many different ways to fund a business. One of the key mistakes entrepreneurs make is not having enough capital to get their business running . The good news is that there are several channels to help make this happen, given the vital role entrepreneurs play in creating jobs and boosting productivity in the wider economy.

Self-Funding vs. External Funding

Bootstrapping, the term commonly used to describe self-funding your business, is where companies tap into their own cash or network of family and friends for investment. While the advantage of self-funding is having greater control, the downside is that it often involves more personal risk.

External funding involves funding from bank loans, crowdfunding, or venture capital , among other sources. These may provide additional buffers and enable you to capture growth opportunities. The drawback is less freedom and more stringent requirements for paying back these funds.

Grant and Loan Opportunities

Today, there are thousands of grants designed especially for small businesses from the government, corporations, and other organizations. The U.S. Chamber of Commerce provides a weekly update of grants and loans available to small businesses. 

For instance, Business Warrior offers loans between $5,000 and $50,000 to small business owners.  As another example, The Accion Opportunity Fund offers $5,000- $250,000 in loans to entrepreneurs, along with mentorship and educational resources. In particular, it supports companies run by women and people of color in addition people with low-to-moderate income.

When it comes to marketing, there is a classic quote from Milan Kundera: “Business has only two functions—marketing and innovation." In order to reach customers, a business needs a marketing strategy that attracts and retains customers and expands its customer base.

To gain an edge, small businesses can utilize social media, email marketing, and other digital channels to connect and engage with customers.

BIPOC and LGBTQIA+ small business owners can now apply for a chance to win $250,000 in advertising and consulting services from Good Impressions.

Branding Your Business

Building a successful brand goes hand in hand with building a great experience for the customer. This involves meeting the expectations of your customer. What is your brand offering? Is it convenience, luxury, or rapid access to a product? Consider how your brand meets a customer's immediate need or the type of emotional response it elicits. Customer interaction, and in turn loyalty to your brand, is influenced, for example, by how your brand may align with their values, how it shifts their perception, or if it resolves customer frustration.

Digital Marketing and Social Media

We live in a digital-first world, and utilizing social media channels can help your business reach a wider audience and connect and engage in real time. Given that a strong brand is at the heart of successful companies, it often goes without saying that cultivating a digital presence is a necessity in order to reach your customers. 

According to HubSpot’s 2024 report, The State of Consumer Trends, 33% of the 700-plus consumers surveyed discovered new products on social media and 25% bought a product there in the past three months.

Managing a business has its challenges. Finding the right personnel to run operations, manage the day-to-day, and reach your business objectives takes time. Sometimes, businesses may look to hire experts in their field who can bring in specialized knowledge to help their business grow, such as data analysts, marketing specialists, or others with niche knowledge relevant to their field.

Hiring and Training Staff

Finding the right employees involves preparing job descriptions, posting on relevant job boards such as LinkedIn, and effectively screening applicants. Careful screening may involve a supplemental test, reviewing a candidate's portfolio, and asking situational and behavioral questions in the interview. These tools will help you evaluate applicants and improve the odds that you'll find the people you are looking for.

Once you have hired a new employee, training is the next essential step. On average, it takes about 57 hours to train new employees. Effectively training employees often leads to higher retention. While on-the-job training is useful, consider having an onboarding plan in place to make the transition clear while outlining expectations for the job.

Scaling Your Business

Growing your business also requires strategy. According to Gino Chirio, executive vice president at the consultancy group Maddock Douglas, there are six ways that companies can grow their business to drive real growth and expansion:

• New processes: Boost margins by cutting costs.
• New experiences: Connect with customers in powerful ways to help increase retention.
• New features: Provide advancements to your existing product or service.
• New customers: Expand into new markets, or find markets where your product addresses a different need.
• New offerings: Offer a new product.
• New models: Utilize new business models, such as subscription-based services, fee-for-service, or advertising-based models.

With these six ways to grow a business, it is important to consider the risk, investment, and time involved. Improving your margins through new processes is often the most straightforward way to grow. Offering new features is also effective since it is tailored to your existing market with products you have already delivered.

By contrast, offering new products may involve higher risk since these have not been tested in the market. However, they may offer higher reward, especially if you have a first-mover advantage and release your product in the market before the competition.

A good place to start building a business is to understand the following core steps that are involved in an entrepreneur's journey : market research, creating a business plan, knowing the legal requirements, researching funding options, developing a marketing strategy, and business management.

A business plan is made up of a number of primary components that help outline your business goals and company operations in a clear, coherent way. It includes an executive summary, company description, market analysis, organization and management description, service or product line description, marketing and sales plan, funding requests (optional), and financial projections.

Business growth can fall into the following six categories, with each having varying degrees of risk and investment: new processes, new experiences, new features, new customers, new offerings, and new models.

Knowing how to start a small business involves the key steps of market research, setting up a business plan, understanding the legal requirements, exploring funding options, crafting a marketing strategy, and managing your business. 

For aspiring small business owners, these steps can help you successfully deliver your product or service to the market, and ultimately grow. While it can take a considerable amount of work, the payoffs are manifold: independence of work, personal fulfillment, financial reward, and following your passion.

U.S. Chamber of Commerce. " The State of Small Business Now ."

U.S. Small Business Administration. " Market Research and Competitive Analysis ."

U.S. Small Business Administration." Write Your Business Plan ."

U.S. Small Business Administration. " Choose a Business Structure ."

U.S. Small Business Administration. " Register Your Business ."

U.S. Small Business Administration. " Apply for Licenses and Permits ."

U.S. Small Business Administration. " Fund Your Business ."

Accion Opportunity Fund. " About Accion Opportunity Fund- Support for Small Businesses ."

Ogilvy. " Behind Every Brand Is a Great Experience, and Vice Versa—Why Today's Customer Expects Synergy ."

HubSpot. " Consumer Trends Report 2024 ."

Training Magazine. " 2023 Training Industry Report ."

Harvard Business Review. " The Six Ways to Grow a Company ."

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10 legal requirements for starting a small business

Start your company in a few clicks and get ready to charge customers, hire your team, and fundraise.

• Introduction

1. Identify your business structure

2. register your business name, 3. apply for a federal tax id number or ein, 4. register with the state revenue office, 5. obtain business licenses and permits, 6. register for state employer taxes, 7. obtain insurance, 8. file organizational documents with the state, 9. create an operating agreement, 10. register any applicable trademarks or patents.

• Get started with Stripe 

Starting a small business involves more than just a solid business plan, strong market demand, and financial readiness. It also entails a comprehensive understanding of the complex legal requirements that come with business ownership. Each form you fill out, registration you complete, and contract you prepare shield your organization from potential legal liabilities and missteps. Ignoring these requirements, tedious as they may be, is not an option.

But legal compliance isn’t an insurmountable challenge. With a thorough grasp of the regulations and procedures, you can establish your business on solid legal footing. In this article, we’ll outline the key legal requirements for starting a small business, providing a comprehensive guide to help you lay a strong foundation for your venture.

What’s in this article?

• Identify your business structure
• Register your business name
• Apply for a federal tax ID number or EIN
• Register with the state revenue office
• Obtain business licenses and permits
• Register for state employer taxes
• Obtain insurance
• File organizational documents with the state
• Create an operating agreement
• Register any applicable trademarks or patents

When you’re establishing your startup, one of the important early decisions is determining the legal structure of your business . This isn’t merely a bureaucratic step—it has profound implications for your startup’s future growth, scalability , potential for attracting investment , liability, and tax implications. Here are some of the common entity structures you can choose from:

Sole proprietorship If you’re a solopreneur launching a low-risk business, a sole proprietorship can be a cost-effective and straightforward option. However, you’ll be personally liable for business debts and legal issues. This could be risky if your startup operates in a litigious industry or one where debt is common.

Partnership If you’re cofounding the startup, a partnership may seem like a natural choice. It allows shared responsibility, profit, and loss. However, conflicts can arise in partnerships, so it’s vital to draft a partnership agreement outlining roles, responsibilities, and processes for dispute resolution. An often overlooked drawback is that you may be personally liable for your partner’s actions.

Corporation Corporations—most commonly S corps and C corps —are more complex to set up and manage due to regulatory requirements. However, they offer a major advantage for startups seeking venture capital: they allow for an easy division of ownership through the issuance of shares. This makes it much more straightforward to bring in investors. But they can be more expensive to establish and maintain, and they lead to double taxation—first on corporate income, and then on dividends to shareholders.

Limited liability company (LLC) LLCs are often a good choice for startups. They combine the liability protection of corporations with the tax advantages and operational flexibility of partnerships. Unlike corporations, profits and losses can be passed through to owners without taxation at the corporate level. However, investors may prefer corporations, particularly C corps, because they allow for preferred stock.

Choosing a business entity requires a deep understanding of each of these structures—and how each might impact your startup’s long-term strategy. Before committing to one structure, consider your plans for scaling, funding, and your personal risk tolerance. While the advice of professionals such as attorneys or CPAs can be invaluable, founders should also have a solid grasp of these implications, as they’ll impact many aspects of your startup’s journey.

Establishing an original, recognizable name for your startup is important, for branding, marketing, and legal purposes. The process involves several steps and depends on the business structure you’ve chosen.

Doing business as (DBA) If you’re a sole proprietor or a partnership, and you want to do business under a name that’s different from your personal name or your partners’ names, you’ll need to register a DBA, also known as a “fictitious name” or “trade name.” This process varies by state, but typically involves searching to make sure the name isn’t already in use , and then registering it with a specific state agency.

Corporate or LLC name If you’ve formed a corporation or an LLC, the name you chose when you filed your articles of incorporation or organization is already registered and protected in your state. However, if you want to conduct business under a different name, you’ll also need to file a DBA.

Trademarks If you want to prevent other businesses from using your business name in ways that could confuse your customers, you should consider registering it as a trademark. This is a more complex process, often requiring the assistance of a trademark attorney. You can register a trademark at the state level, but for the broadest protection—especially if you plan to do business or have an online presence outside your own state—you should register it with the United States Patent and Trademark Office (USPTO).

Choosing and registering your business name requires careful thought. Your business name is a key part of your brand and marketing strategy. It should reflect what your startup does and stand out in the markets you’re targeting. You also need to ensure that your chosen name doesn’t infringe on existing trademarks or business names, as this could lead to costly legal disputes down the road. Each state has its own laws and regulations regarding business name registration and trademark, so make sure you research the rules applicable in your specific state.

An employer identification number (EIN) is essentially a Social Security number for your business. It’s a unique nine-digit number assigned by the Internal Revenue Service (IRS) to businesses for tax filing and reporting purposes. Even if you don’t plan to have employees, most businesses are still required to obtain an EIN.

Who needs an EIN If your business is a corporation or a partnership, or has employees, you’ll need an EIN. Most banks also require an EIN to open a business bank account . An EIN is also necessary if you’re self-employed and want to create a tax-deferred retirement plan, or if you’re involved with trusts, estates, real estate mortgage investment conduits, nonprofit organizations, or farmers’ cooperatives.

How to apply The process to apply for an EIN is straightforward and free of charge. You can apply online through the IRS website . You’ll need to complete the application in one session as you cannot save and return to it later, so make sure you’ve gathered all necessary information beforehand.

Information needed To apply for an EIN, you’ll need to provide information about your business, such as its legal name, the county and state where it operates, and the nature of your business activities. You’ll also need to provide information about the “responsible party”—the individual or entity who controls, manages, or directs your business and its assets.

Securing an EIN early in the process of setting up your startup is beneficial because it allows you to keep your Social Security number private, reducing the risk of identity theft. Additionally, it enables you to complete other business setup activities that may require an EIN, such as opening a business bank account or applying for business licenses and permits.

Once you’ve established your business name and have your EIN, you’ll need to register with your state’s Department of Revenue or equivalent body. This registration allows your startup to pay state taxes, which can include sales tax, unemployment insurance tax, and income tax. The requirements can vary significantly from state to state, so it’s important to understand your specific obligations. Here are some of the taxes you might have obligations to pay:

Sales tax If you’re selling a physical product, you’ll likely need to register for a sales tax permit. Some states also require sales tax for certain services. After registration, you’ll collect sales tax from customers and remit it back to the state. The frequency of these payments varies by state and can also depend on the volume of your sales.

Employer taxes If you’re planning to hire employees, you will also need to pay unemployment insurance tax and employee withholding tax. The unemployment insurance tax goes into a state fund that pays benefits to workers laid off due to no fault of their own. The withholding tax is the income tax that employers withhold from employees’ wages and pay directly to the government.

Income tax Depending on your business structure, you may also need to pay state income tax. For example, while an LLC itself isn’t subject to income tax (with the tax “passing through” to individual members), some states levy a franchise or privilege tax on LLCs for the privilege of doing business in that state.

Notably, not all states have the same tax structure. Some states do not charge sales tax, others don’t have an individual income tax, and a handful don’t have either. Furthermore, some cities and counties also impose additional taxes, so you’ll need to consider local regulations as well.

Addressing these state and local tax obligations can be complex, and the stakes are high. If you fail to properly register and pay your business taxes, you could face penalties, fines, and interest on any amount overdue. You may want to consider using the services of a tax professional, who can ensure that you’re meeting all your obligations and taking advantage of any potential tax benefits.

To operate legally, your startup may need specific licenses and permits. These requirements vary widely depending on your business’s location and industry. Failing to obtain the necessary licenses and permits can result in penalties and, in extreme cases, force you to cease operations. Here are some examples of licenses and permits you might be required to get:

State licenses and permits Many states require specific businesses to hold licenses. For instance, if your startup is in the food service industry, you’ll likely need health permits and a food handler’s permit. Professional services, such as legal services, real estate, and medical care, often require professional licenses.

Local licenses and permits In addition to state licenses, your city or county might require you to have certain permits. Common examples include signage permits, home-based business permits, and a general business license. The process to obtain these can often be found on your local city or county government website.

Federal licenses and permits Federal licenses are typically only required for specific industries. For instance, if your business involves broadcasting, aviation, or selling alcohol, tobacco, or firearms, you’ll need a federal license or permit.

Specialty permits Depending on your operations, you may need additional permits. For example, if your business affects the environment, such as certain manufacturing operations, you may need an environmental permit.

Securing the appropriate licenses and permits is an important step in your startup’s journey. The process can be time-consuming and complex, so it’s wise to start early. Ensure that your business is fully compliant with all regulations to avoid any future penalties or interruptions to your operations. Keep in mind that requirements can vary depending on your specific industry, location, and business activities, so thorough research or consulting with a business expert is highly recommended.

When you start hiring employees for your startup, you’ll need to fulfill specific tax responsibilities related to employment, including:

Unemployment insurance tax In the US, businesses are required to pay state unemployment insurance taxes, also known as SUTA or SUI taxes, to fund unemployment benefits. The process of registration and payment varies by state. Usually, you’re required to register with the state’s labor department or unemployment insurance agency. The tax rate you’ll pay often depends on factors such as your industry and your company’s history of layoffs.

Employee withholding tax As an employer, you’re also required to withhold certain taxes from your employees’ wages and pay them to the government. This typically includes federal income tax and FICA taxes, which fund Social Security and Medicare. In most states, you’ll also need to withhold state income tax. The specifics of this process depend on your state’s rules and the details of your payroll.

Managing these tax obligations can be complex, especially as your startup grows and your workforce expands. Stay organized, keep accurate records, and make timely tax payments. Many businesses find it beneficial to use payroll services or employ an accountant to handle these tasks and stay up to date with federal, state, and local tax laws, as they can change from year to year.

The right insurance can protect your business from financial losses caused by a variety of risks, including property damage, theft, legal claims, and even business interruption. Here’s an overview of some types of insurance you might need to deal with:

General liability insurance This coverage protects your business if it’s sued for causing bodily injury or property damage. For example, if a customer slips and falls in your office or if you accidentally damage client property during a service call, general liability insurance can help cover legal costs and damages.

Property insurance If you own or lease a physical space for your business, property insurance can protect your buildings and contents in case of fires, theft, or other disasters. Even home-based businesses should consider this coverage, as homeowners’ insurance may not adequately cover business property.

Workers’ compensation insurance If you have employees, most states require you to carry workers’ compensation insurance. This coverage can help pay for medical expenses and lost wages if an employee is injured on the job.

Professional liability insurance If your business provides professional services, such as consulting or financial advice, consider professional liability insurance (also known as errors and omissions insurance). It can protect you if you’re sued for negligence, misrepresentation, or inaccurate advice.

Cyber liability insurance If your startup stores sensitive customer data (such as credit card information or personal details), cyber liability insurance can protect you in case of data breaches or cyber-attacks.

Choosing the right types and levels of insurance can be complex, and it depends on several factors including the nature of your business, its location, and its size. It’s a good idea to consult with an experienced insurance broker who understands your industry and can guide you to the appropriate coverages. Keep in mind that as your business changes over time, your insurance needs might change, too, so review your coverage periodically.

To formally establish your startup’s legal structure, you must file certain organizational documents with your state’s secretary of state or similar government agency. The exact documents and the filing process can vary by state and by your chosen legal structure. Here’s a brief overview of the requirements for different business structures:

Corporation If you’re forming a corporation, you’ll need to file articles of incorporation. This document includes key details about your business, such as its name, principal office address, purpose, the number of shares the corporation is authorized to issue, and information about the registered agent.

Limited liability company If you’re starting an LLC, you’ll file articles of organization. Much like the articles of incorporation, this document will include the name of your LLC, the principal office address, the purpose of the LLC, and information about the registered agent.

Partnership If you’re forming a partnership, the requirements can vary. Some states require partnerships to file a similar document called a “Statement of Partnership Authority.”

After filing these documents, your business is officially registered with the state. But the paperwork doesn’t stop there. If you’re operating as a corporation or an LLC, you’ll also need to create bylaws or an operating agreement. While these documents don’t need to be filed with the state, they are important, as they outline the governance and operating procedures for your business.

Your business will also likely need to file an annual report and pay an annual fee to keep your business in good standing with the state. The due date, filing fees, and processes for these reports can vary greatly by state and business structure, so be sure to note these requirements.

An operating agreement is a foundational legal document that outlines the operational procedures and ownership structure of your startup, particularly if you’re forming an LLC. Here’s what you need to know about this document:

What it includes Your operating agreement should cover key aspects of your business, such as the percentage of ownership for each member, distribution of profits and losses, member roles and responsibilities, procedures for adding or removing members, dissolution of the company, and how to handle disputes among members. It can also specify details such as meeting frequency and voting rights.

Why it’s important An operating agreement provides clarity and structure, prevents misunderstandings, and safeguards your limited liability status by separating your personal assets from those of the company. It provides a roadmap for decision-making processes and the resolution of potential disagreements among members.

Legal requirements While not all states require an LLC to have an operating agreement, it’s highly recommended to have one—even for single-member LLCs. Some states may have default rules that govern LLCs without operating agreements, but these rules may not be suitable for your business needs.

Creating an operating agreement requires thoughtfully considering how you want to run your business and how decisions will be made. It’s a good idea to consult with an attorney or a professional advisor during this process to ensure your operating agreement covers all necessary details and is in line with state laws and regulations. The operating agreement isn’t a one-and-done document. As your business grows and evolves, the agreement should be revisited and updated to reflect changes in your business structure or strategy.

Intellectual property (IP) refers to creations of the mind, such as inventions, literary and artistic works, designs, symbols, names, and images used in commerce, that are legally protected by patents, copyrights, trademarks, or trade secrets. IP protection is an important step for many startups. Your IP—including your business name, logo, products, or services—can be some of your most valuable assets, and protecting them can be necessary for your success.

Trademarks A trademark can protect a word, phrase, symbol, design, or a combination of these, that identifies and distinguishes your goods or services. It’s what makes your brand recognizable. Registering a trademark with the United States Patent and Trademark Office (USPTO) gives you exclusive rights to use the mark nationwide in connection with your goods or services. The process involves a comprehensive search to ensure your mark doesn’t infringe on existing trademarks, followed by an application that includes details about your mark and the goods or services it represents.

Patents If your startup has invented a new and useful process, machine, manufacture, or composition of matter, you may want to consider applying for a patent. A patent grants the inventor exclusive rights to the invention, preventing others from making, using, selling, or importing it without permission. Patents are granted by the USPTO and can take several years and substantial resources to obtain. There are different types of patents (utility, design, and plant patents) each protecting a different aspect of an invention.

Securing intellectual property rights can be a complex process requiring detailed technical and legal knowledge—and mistakes during the application process can result in lost rights or unnecessary expenses. For this reason, it’s often beneficial to engage an IP attorney or a professional service to handle these applications. Protecting your IP not only secures your rights but can also add value to your startup, attract investors, and provide a competitive advantage in the marketplace.

This is not an exhaustive list of legal requirements, and the journey to starting a business may require additional steps or involve different considerations based on a variety of factors. The nature of your startup, the industry you’re operating in, and the specific regulations of the state or states where you plan to operate can all influence which steps you’ll need to take to start your business.

For example, a tech startup with a unique software solution might need to focus heavily on patent applications, while a restaurant would have different concerns, such as health permits and food-handling certifications. A company operating in multiple states will have to comply with different state regulations, requiring a comprehensive understanding of the varying legal landscapes.

The preceding steps serve as a general roadmap, but every business’s journey is different. Conduct in-depth research, consult with professionals such as lawyers and accountants, and seek advice from business advisors familiar with your specific industry and region to ensure you’re meeting all legal requirements. This will create a foundation for launching and growth that is best suited for your specific business.

The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.

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7 Top Legal Considerations When Starting a Business

by Staff Writer | Jun 22, 2020 | Management and Operations

Nothing can be more exciting than the thought of opening your own business. But you have to go through numerous processes when starting your own company, so much so that your excitement can easily dissipate just thinking about them.

Top lawyers say that learning about and dealing with the legal issues that come with starting your venture first can help you go through these processes correctly and efficiently. You will also reduce the likelihood of making costly and time-consuming mistakes that can delay or negatively affect your plans of opening your business.

The Legal Aspects of Opening a Business

When starting your own business , there are a number of legal requirements that you have to satisfy or adhere to. The most important ones are:

1 – The legal structure of your business

One of the many important decisions you have to make when starting a business is to decide on the legal status or structure of your company. Your chosen legal structure will affect how you run your business. It will also have implications on how you pay your taxes and keep your accounts.

The most widely used business legal structures are:

● Limited partnership ● Sole proprietorship ● Limited Liability Company (LLC) ● Corporation ● S-corporation

To decide on which status is best for your new business, consider all liability issues that may be associated with your company. Think about which type of tax structure will be best for your business as well.

2 – Trademark

Before selecting your business’s official name, perform a meticulous search online first. Find out if there is another business operating under the name you’ve come up with for your new venture. Do this to avoid infringing upon another company’s trademark and getting caught up in a trademark opposition action .

Once you’ve selected your official company name, consider registering your trading name and logo (if you already have one) as a trademark. This will prevent others from registering their company under the same name.

3 – Licenses

You will need several types of licenses or permits before you open your business. The number of licenses your business will require will depend on the kind of establishment you want it to be. At the very least, you will need a business license, trading license, and sales tax permit.

If you plan to open a restaurant, pub, or catering company, you will have to register with the local governing body for food standards and health and safety oversight. If you plan to provide entertainment in your establishment, you will also need to get the relevant permits for music and entertainment.

It is best to do some additional research and contact relevant local government agencies to learn more about the specific licenses you will need to legally run your business.

4 – Zoning laws

If you are still looking for a good location for your shop, establishment or office, you have to make sure that the area you are eyeing is properly zoned for the type of business you plan to operate. Again, do some research or ask local government bodies to be certain that you can open your business in that area.

Do not make the costly mistake of assuming that your zoning is appropriate just because your business is similar to the ones already located there. There will be instances wherein zoning may have changed while the other businesses were already operating, and these companies may have been given exemptions that won’t be provided to new establishments such as yours.

5 – Relevant health and safety laws

As a business owner, you will have to assume several important health and safety responsibilities. These include ensuring that your employees work in a safe, healthy environment.

You also have the duty to look after the well-being of anyone including clients and visitors inside, outside, and near your business premises.

It is highly recommended that you carry out a risk assessment to help identify the risks posed to individuals by your business activities. You then have to mitigate these risks or hazards as much as possible. This may include changing some standard operating procedures and removing some fixtures to ensure that employees and members of the public are safe.

6 – Insurance

Most business zones require all businesses that employ a number of workers to get employer’s liability insurance. But aside from being a legal requirement, when you have sufficient coverage, you will avoid incurring fines every day that you are uninsured. You also avoid leaving yourself vulnerable to compensation claims from employees and visitors who may get injured or sick while they are in your premises.

Aside from an employer’s liability insurance, you may want to consider investing in public liability or professional indemnity as well. These types of coverage will help protect your business from compensation claims if something goes awry.

7 – Confidentiality and Non-Disclosure Agreements

Lastly, if you will be working with a bank or other partners for business financing or entering into contracts with suppliers, make sure you have the right confidentiality and non-disclosure agreements.

These parties will have access to business information that you may want to keep private and, as such, you should consider preparing these contracts. Make sure your partners and suppliers sign them as well.

Knowing which laws apply to your new business is something that is also important if you want to open a company overseas. If you want to expand globally, make it a priority to consult a trusted corporate law firm to guide you every legal step of the way.

Our guest author Al Tamimi is senior partner at law firm Al Tamimi & Company.

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Types of Business Structures Explained

13 min. read

Updated January 5, 2024

The choice you make about what type of business structure is appropriate for your company will affect how much you pay in taxes, the level of risk or liability to your personal assets (your house, your savings), and even your ability to raise money from angel investors or venture capitalists.

So, the structure you choose is significant.

This guide will explain the basics of common business structures, but we can’t tell you exactly which structure you should choose—if you need that kind of advice, you should consult a lawyer or an accountant.

• Sole proprietorship

The simplest business structure is the sole proprietorship. If you don’t create a separate legal entity, your business is a sole proprietorship. 

The main advantage of the sole proprietorship is that it’s relatively simple and inexpensive. The disadvantage is that it doesn’t create a legal separation between you and your personal assets and business assets. If you’re sued or your business folds—your personal assets are fair game for creditors and in terms of legal liability.

Who is a sole proprietorship for?

A sole proprietorship is ideal for self-employed individuals like personal trainers offering individual coaching or artists selling unique items on platforms like Etsy.

Key considerations

• Cost-effective setup: The primary expense is usually the DBA (“doing business as”) registration. Some states may require public notice, like a newspaper ad. Generally, the total cost is below $100.
• Simplified taxation: Sole proprietorships are “pass-through” tax entities. Profits and losses are reported directly on the owner’s taxes, necessitating only a few additional tax forms if you’re the sole worker.
• Hiring employees is possible: Being a “sole” proprietor doesn’t restrict hiring. If you employ others, tax processes become slightly more intricate.
• Limited ways to raise funding: You can’t sell company stock, limiting fundraising avenues.
• Potential loan difficulties: Banks might hesitate to grant loans to sole proprietorships due to perceived credibility issues.
• Full personal liability: If the business faces debt or legal issues, your personal assets, including your home, car, and savings, are vulnerable.

Dig deeper:

Should you register as a sole proprietorship?

Explore the pros and cons of incorporating as a sole proprietorship.

How sole proprietorships are taxed

Understand how registering as a sole proprietor impacts your taxes.

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• Partnerships

Still a relatively simple business structure, a partnership involves two or more individuals sharing ownership of their new business. They’ll contribute to the business in some way and share in profits and losses.

Partnerships are harder to describe because they change so much. State laws govern them, but the Uniform Partnership Act has become the law in most states. That act, however, mainly sets the specific partnership agreement as the real legal core of the partnership so that the legal details can vary widely.

Usually, the income or loss from partnerships passes through to the partners without any partnership tax. The agreements can define different levels of risk, which is why you’ll read about some partnerships with general and limited partners, with different levels of risk for each. Your partnership agreement should clearly define what happens if a partner withdraws, buy and sell arrangements for partners and liquidation arrangements if necessary.

What are the types of partnerships?

• General partnership: Assumes equal involvement of all parties in profits, liabilities, and duties. Any intentional imbalance should be specified in the partnership agreement.
• Limited partnership: Suited for partners in an investor role with limited involvement in daily operations. This structure is more complex and less common.
• Joint venture: Designed for a single project or a limited duration, operating similarly to a general partnership.

Who is a partnership for?

A partnership is similar to an extended sole proprietorship and is ideal for two or more individuals wanting to start a business jointly. 

To make the partnership more effective, you and your partners should have skillsets, connections, or other unique benefits that complement each other. 

For example, a personal trainer and nutritionist building an online fitness program. One entrepreneur has experience building an exercise regiment with clients. The other understands how to create balanced meal and supplement recommendations. 

They have unique but complementary knowledge that, when combined, creates a more valuable product/service.

• Partnership agreement: While not mandatory, it’s advisable to draft a partnership agreement, ideally reviewed by legal counsel, to clarify roles and responsibilities, ownership, and what will happen if a partner wants to leave the partnership.
• Tax implications: Partnerships are “pass-through” entities, meaning profits and losses are directly passed to the partners. Refer to the IRS for partnership tax details.
• Additional costs: Since it’s a good idea to have a lawyer look over your partnership agreement, don’t forget to factor in this added expense.
• Trust in partnership: Ensure your partner is trustworthy, as partners share responsibility for business decisions and debts. A well-drafted partnership agreement can prevent future conflicts.

How to create a business partnership agreement

Even if you’re not in an official partnership, you should consider drafting a partnership agreement. Doing so will clearly define rights and responsibilities and help you amicably resolve any disputes.

How partnerships are taxed

Understand how registering as a partnership impacts your taxes.

Plan for changes with a buy-sell agreement

What will you do if you or your partner quits, sells their portion of the business, or passes away?

How to find the right business partner

A partnership is more than a legal structure. It’s a relationship between entrepreneurs who share a passion for an idea and bring unique skill sets. So, how do you find the right person to make your partnership thrive?…

Traits to look for in a business partner

What makes a good business partner? If you’re considering someone with the following traits, you likely have a good fit.

How many partners should you have?

What’s the ideal number of business partners? The right mix of people and skillsets can lead to tremendous business growth. But too many may lead to disaster.

What to do when your business partner is your life partner

Should your significant other be your business partner? Learn your legal options and how to find the right ownership fit for your business and relationship.

• Limited liability company

Should your business fall on hard times, does the idea of being held personally responsible for all losses sound intimidating?

It’s understandable—plenty of would-be entrepreneurs shudder at the thought of the bank seizing their personal assets should the business go south.

A limited liability corporation (or LLC) is, in some ways, the best of both worlds. It allows for the flexibility of a partnership or sole proprietorship but, as the name suggests, limits the liability of those involved, similar to a corporation. An LLC is usually a lot like an S corporation. It offers a combination of some limitations on legal liability and some favorable tax treatment for profits and transfer of assets.

Who is a limited liability corporation for?

An LLC is ideal for those wary of personal liability in business. If you possess significant personal assets or operate in a lawsuit-prone industry—an LLC safeguards your personal finances. 

• Complexity: While offering more protection, an LLC is harder to establish than a sole proprietorship or partnership.
• Tax benefits: LLCs maintain “pass-through” tax status, meaning you’re taxed only on your profit share, which is reported on personal taxes. 
• Single-member LLCs: Most states allow single-person LLCs, making it a potential alternative to sole proprietorships.

How to form a limited liability company

Interested in forming an LLC? Here are the steps you’ll need to take.

How to create an LLC operating agreement

Set the rules for how your LLC will operate, including the management structure, individual responsibilities, ownership percentage, and other important information.

LLC costs and fees explained

Make sure you’re aware of all the costs and fees associated with forming an LLC.

How LLCs are taxed

Understand how registering as an LLC impacts your taxes.

• Corporations

Shareholders, a more complex legal structure, and more intricate tax requirements are all characteristics of a corporation.

Corporations are either the standard C corporation, the small business S corporation, or the benefit corporation or B corp. The C corporation is the classic legal entity of the vast majority of successful companies in the United States.

Corporations can switch from C to S and back again, but not often. The IRS has strict rules for when and how those switches are made. You’ll almost always want to have your CPA, and in some cases, your attorney, guide you through the legal requirements for switching.

Who is a corporation for?

Corporations are best suited for larger, established businesses with multiple employees, plans for rapid scaling, or intentions to trade or attract significant external investments publicly. A corporation might not be the right choice if you’re a small business owner or work with a small team.

What are the types of corporations?

C corporation.

What we typically think of when we refer to corporations, where all shareholders combine funds and are then given stock in the newly formed business. 

A C corp is a separate tax entity, meaning your business can deduct taxes. It also means that earnings can be taxed twice, as they are concerning your business and your personal taxes if you take income as dividends. However, good tax planning can often minimize the impact of double taxation.

Most lawyers would agree (but verify this with your lawyer who is familiar with your unique business) that the C corporation is the structure that provides the best shielding from personal liability for owners, and provides the best non-tax benefits to owners. Many companies with ambitions of raising major investment capital and eventually going public consider the C corporation.

S corporation

An S corp is similar to a traditional C corporation, with one major difference: Profits and losses can be “passed through” to your personal tax return without being taxed separately first.

In practical terms, the owners can take their profits home without first paying the corporation’s separate tax on profits. In most states, an S corporation is owned by a limited number of private owners (25 is a common maximum), and only individuals (not corporations) can hold stock in S corporations.

To become an S corp, you must first set your business up as a corporation within your state and then request S corp status. The IRS instructions for Form 2553 (which you’ll need to file to become an S corp) can help you determine if you qualify.

B corporation

Does your company have a dedicated social mission, a good cause built into its foundation that you’d like to continue furthering as your company grows? If so, you might consider becoming a B corporation, which stands for “benefit corporation.” 

However, the name is a bit misleading; a B corp isn’t an entirely different structure than a regular C corporation. It’s a C corp vetted and approved for B corp status. Some states give tax breaks to B corps, and it’s a great way to stand behind a cause.

So, why would you choose a B corp over a nonprofit? The biggest difference is in ownership—with a nonprofit, no owners or shareholders exist. A B corp, which is still a type of corporation, still has shareholders who own the company. So, a B corp has a social mission but is still a for-profit company (as opposed to a nonprofit) with an end goal of returning profits to the shareholders.

• Liability: Corporations offer the most protection for personal assets.
• Capital raising: The ability to sell stock enhances investment potential.
• Taxation: Corporate taxes are separate (except for S corps), but the structure can lead to double taxation, especially for C corporations.
• Complexity: Establishing a corporation is more intricate than other business structures, requiring more paperwork and formalities.

How to form a corporation

Follow these ten steps to incorporate as a C, S, or B corporation.

How are corporations taxed?

Understand how registering as a corporation impacts your taxes.

S corporation basics

Should you choose an S corp as the legal structure for your business? Learn the basics and what alternatives are available.

B corporation basics

Should you choose a B corp as the legal structure for your business? Check out this detailed overview of how this business entity functions and the pros and cons you’ll contend with.

A nonprofit is a “not-for-profit” business structure, meaning the business does not exist to generate revenue for shareholders, but rather funnel business revenue into a social mission, cause, or purpose.

Who is a nonprofit for?

Nonprofits cater to those with missions centered on charitable, educational, scientific, or religious purposes. Examples include homeless shelters, conservation groups, arts centers, and educational institutions.

What’s the difference between a nonprofit and a cooperative?

Like a nonprofit, a cooperative is a business with a social mission that doesn’t divide income between shareholders but toward a cause or purpose. However, while some states view nonprofits and cooperatives as the same, a cooperative differs because the members own it, referred to as “user-owners.”

If you plan on organizing your business to be democratically owned, looking into the cooperative business structure might be a good idea to look into the cooperative business structure .

• Complex setup: Establishing a nonprofit requires steps similar to forming a corporation, including filing articles of incorporation, creating bylaws, and organizing board meetings.
• Fundraising will be your main priority: Nonprofits generally rely on fundraising and grants to keep a flow of income into their business.

What is a nonprofit corporation and how to start one

Learn the basics of setting up a nonprofit corporation.

How to earn income as a nonprofit corporation

Learn how related and unrelated business activities can generate revenue for a nonprofit corporation.

• Making your business legally compliant

Choosing a business structure is the first legal step you’ll take. Your choice will impact your taxes, fundraising, and personal liability. 

Tim Berry, founder of Palo Alto Software (maker of Bplans) reminds small business and startup founders that choosing a business entity or structure is something to take seriously. He says:

“Make sure you know which legal steps you must take to be in business. I’m not an attorney, and I don’t give legal advice. I strongly recommend working with an attorney to review the details of your company’s legal establishment and licensing. The trade-offs involved in incorporation versus partnership versus other structures are significant. Small problems developed at the early stages of a new business can become horrendous problems later on. In this regard, the cost of simple legal advice is almost always worth it. Don’t skimp on legal costs.”

TLDR: Take time, carefully weigh your options, and consult a legal professional.

Once you’ve chosen, check off the remaining legal requirements to start a business. While you can complete most of these in any order, here are a few suggestions.

• Apply for a federal and state tax ID
• Obtain licenses and permits
• Register your business name

Kody Wirth is a content writer and SEO specialist for Palo Alto Software—the creator's of Bplans and LivePlan. He has 3+ years experience covering small business topics and runs a part-time content writing service in his spare time.

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Essential documents for starting a business.

Find all of the documents you need when starting a business.

• LLC Operating Agreement

An LLC Operating Agreement is used to outline the rights and responsibilities of each LLC member and to establish other operational details for a limi...

• Business Plan

A Business Plan is a comprehensive proposal that outlines a business's challenges and opportunities as well as its marketing, financial, and managemen...

• Partnership Agreement

A Partnership Agreement establishes the rights and responsibilities of general partners, and the rules in a for-profit partnership.

Last updated January 24, 2024

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Starting a business is no easy task, as no one-size-fits-all approach exists. However, you must start with thorough research and planning to get started on the right foot.

When researching, you must understand the various types of legal business structures. Your chosen structure will determine how your business functions, how it pays taxes, and the legal liability you may carry as the owner . Every business structure has its pros and cons, so it's important to consider your options before launching your business .

In this guide, we will cover using a Business Plan, common types of business structures, and the various documents you need to form your business.

Table of Contents

• Planning your business
• Types of business structures
• Sole proprietorship
• Partnership
• Corporation
• Limited liability company (LLC)
• Business formation documents

Articles of Incorporation

Corporate Bylaws

LLC Articles of Organization

• After you form your business

Before you legally form a business, it's imperative that you conduct thorough market research and create a comprehensive plan. Trying to get a business off the ground without any sort of strategy is difficult and impractical.

Prior to developing a plan for your business, research as much as you can about the industry in which your business would operate. For example, you should research:

• Target demographics
• Available business names
• Competitors
• Marketing opportunities
• Funding opportunities

Once you have done the necessary research to confirm that your business idea has potential and you want to move forward, the best place to compile your findings and strategies is a written Business Plan.

A Business Plan is a detailed, written document that outlines a business's goals and strategies . A business plan  is not legally required to start a business , but we still consider it fundamental for emerging businesses.

If you are looking for loans or investments when you are just starting out, a Business Plan can make or break you. Typically, potential lenders and investors want to see thorough research and detailed planning before fronting any money.

Business Plans are effective and beneficial to business owners because they:

• Provide entrepreneurs with guidance during a business's early stages
• Give entrepreneurs a reference document
• Show legitimacy to potential partners and employees
• Consolidate important business information for potential investors

It is a convenient way in which you can summarize the key elements of your business. A Business Plan should include a description of a business's products and services, an analysis of competition and opportunities, a strategy for marketing the business, and more.

If you are buying an existing business , you can still create a Business Plan to outline your vision for the company.

You can also create a One Page Business Plan to succinctly outline all your business' core information on one page.

Once you have created a Business Plan, you must complete the necessary documents to form your company. The documents you need will depend on the business structure you select.

Understanding the different types of businesses is extremely important because they all impact your personal liability and tax obligations in unique ways . There are four main types of business structures: sole proprietorships, partnerships, corporations, and limited liability companies.

A sole proprietorship is a business that a person runs and owns by themself . This person is known as a sole proprietor. When one person forms a business without registering another type of business entity, they become a sole proprietor by default.

Sole proprietorships do not have to be registered federally or with their state. However, they might be required to register with a local municipality or acquire a business license to practice, depending on the type of business.

When operating as a sole proprietor, you can be held personally liable for the mistakes of your business. This means your personal assets can be seized if your business is sued or has unpaid debt .

Sole proprietors are entitled to pass-through taxation , which means they include their business income with personal income instead of filing separate business taxes.

Unlike more formal businesses, sole proprietors can simply operate under their personal name, or they can also register a business name with their local and state governments. Depending on the type of work they provide clients, some independent contractors may function as sole proprietorships.

A partnership , also known as a general partnership, is an informal business entity owned by two or more partners who share all the financial and legal responsibilities, profits, and assets by jointly owning the company. They also share unlimited responsibility for any liabilities the business incurs, meaning their personal assets can be seized as compensation.

A partner can be an individual, corporation, LLC, trust, or another partnership. Like sole proprietorships, when two or more people form a business without forming another type of business entity, they become a partnership by default.

All types of partnerships are pass-through businesses, so profits pass through to the partners and are taxed at the individual income level . However, partnerships must report their earnings, losses, and deductions in an annual information return.

A general partnership is not required to file paperwork to form or register itself legally as a business. However, a general partnership may have to register its business name and apply for certain licenses, depending on the state and type of industry.

In addition, partners should always use a Partnership Agreement to define the responsibilities of each partner and outline the distribution of income and losses. All types of partnerships can use Partnership Agreements, including limited partnerships and limited liability partnerships (LLPs).

Limited partnership

A limited partnership consists of at least one party with general liability and one with limited liability .

In this type of partnership, general partners oversee the company's day-to-day activities. The limited partners are considered passive partners because they're less likely to have any involvement in managing the business.

When operating as a limited partnership, general partners have unlimited liability, and limited partners have limited liability based on the amount of money and assets they've invested in the company. For example, if a limited partner invests $100,000 in the business, they're only liable for paying off $100,000 in partnership debts.

To create a limited partnership, partners must register with the applicable state government . All limited partnerships in the U.S. are governed by the Uniform Limited Partnership Act .

Limited liability partnership (LLP)

Limited liability partnerships provide all partners with limited liability . This means all the partners' liability is based on the amount they've invested in the company. Take note that not every state allows the formation of an LLP.

In the states where you can form an LLP, the laws regarding liability protection differ. Some states provide protection similar to an LLC. In other states, partners can remain personally liable for some of the company's debts or obligations. Additionally, some states only allow certain professionals to form an LLP.

A corporation , also known as a “ C corporation ,” is a business entity with its own rights and liabilities that are distinct from its owners . Corporations can own assets, enter legal agreements, lend and borrow money, and more. A distinguishing feature of corporations is that shareholders are protected from personal liability, meaning they cannot be held personally liable for business mistakes.

Corporations are subject to corporate taxation . Under corporate taxation, the corporation pays taxes based on its profits, and shareholders also pay taxes on any income they earn from the business.

For your business to be a corporation, you must file Articles of Incorporation with your state government. Please note that there are other types of corporations , such as S corporations.

S corporation

S corporations are the same as C corporations except they are entitled to pass-through taxation , so business profits are not subject to corporate tax rates. S corporations must meet certain requirements and be registered with the IRS to receive S corp status.

A limited liability company (LLC) is a legal structure that offers limited liability protection to its members (owners), as well as the option to be taxed as a corporation or a partnership .

Like a corporation, an LLC operates as a separate legal entity and can own assets, enter legal agreements, and be involved in lending arrangements. LLC members are generally not liable for the company's debts, obligations, or wrongdoings, and can only be liable up to the amount of their investment in the company.

To form an LLC, you must file Articles of Organization with your state government. Generally, this document includes your business name. Also, it will often include each member's name, but this depends on the state where you're filing.

Once you know which type of business you want to form, you can create the documents necessary for your success.

Keep in mind, depending on the industry of your business and which state and local area you're operating in, you may also have to obtain a business license or permit to legally operate your business. For example, certain permits are required when preparing and serving food.

Also, if you want to hire employees, you need to obtain an Employer Identification Number (EIN) .

A Partnership Agreement outlines the responsibilities of each partner and the distribution of income and losses . The agreement also lists capital contributions and outlines the general partnership rules, such as rules for withdrawals. Partnership Agreements are suitable for general, limited, and limited liability partnerships .

States do not require partners to create a Partnership Agreement, but they are still vital documents. Without an agreement in place, a business is governed by its state's standard statutes on partnerships.

In the United States, most states use the Revised Uniform Partnership Act to govern general partnerships and limited liability partnerships (LLPs). Limited partnerships are subject to the Uniform Limited Partnership Act . If you live in one of these states and do not create a valid agreement while operating as a partnership, your business may be subject to laws that aren't suitable for your business . Instead, create your own agreement so you can control how your partnership operates.

Agreements can prevent legal disputes between partners. By having a written record of the terms of the business arrangement, partners can reference the agreement for guidance when they are having a business disagreement.

Articles of Incorporation are the state-required legal papers that you file with your state government to register your business as a corporation.

All states require these articles to form a corporation . However, the specific laws and regulations applicable to incorporating a business vary from state to state. The articles must include the following information:

• The name of the corporation
• The number of shares the corporation is authorized to issue
• The address of the initial registered office
• The address of the registered agent
• The name and address of each incorporator

Depending on your state, Articles of Incorporation may also contain the names of any initial directors, the primary activities or purpose of the corporation, and any starting provisions that will govern the corporation.

Corporate Bylaws are the internal policies that govern a corporation . After a business incorporates , its owners create Corporate Bylaws to ensure fair and consistent operating practices. Corporate Bylaws define your business' structure, roles, and operations.

Corporate Bylaws are not a legal requirement in every state. They are not required in Alaska, California, Colorado, Kansas, Louisiana, Michigan, Minnesota, Missouri, Nevada, North Dakota, Ohio, Pennsylvania, Rhode Island, Utah, and Wisconsin. However, most corporations still create bylaws because they protect the business's and its shareholders' interests .

Corporate Bylaws are essential because they outline how a company will operate. Bylaws include rules and procedures, such as:

• If the company will have a simple or complex management structure
• How much notice is required for special meetings
• Whether remote meetings are allowed
• What percentage of votes constitute a quorum
• If shareholders can form voting trusts
• If cumulative voting is allowed
• The number of directors
• Who can appoint officers
• Whether the corporation can lend money to its officers, directors, or employees

LLC Articles of Organization are the state-required paperwork you use to establish your business as a limited liability company (LLC). All states require LLC Articles of Organization , but some may call them the certificate of organization or certificate of formation .

LLC Articles of Organization should include the basic information that your state needs to register your company, including its name, purpose, registered agent , office address, and management strategy. Some states require each member's name and address.

In order to be legally recognized as an LLC, you must file LLC Articles of Organization with the appropriate state office . States, counties, and cities can have varying rules for filing LLC Articles of Organization, so check the state-specific and municipal filing requirements where you plan to file.

Currently, we only offer LLC Articles of Organization in certain states. We don't offer Articles to the states in the table below, so we have provided the following links to government websites where you will find a free LLC Articles of Organization PDF form or way to register online:

In addition to LLC Articles of Organization, some documents are not required by law but can be immensely helpful to LLC owners, such as an LLC Operating Agreement.

An LLC Operating Agreement is a legal contract that owners of a limited liability company use to establish their rights and obligations and describe the company's internal structure.

Only five states legally require LLCs to have an operating agreement: Delaware, Maine, California, Missouri, and New York. In some of these states, the agreement can be written or oral. However, all LLC owners should still create an operating agreement when starting their company.

LLC Operating Agreements are beneficial for many reasons. They are an important reference tool that can guide business decisions and help business owners navigate different situations, such as admitting new members. Operating agreements also allow companies to establish their own unique rules and make members bound to them.

Operating agreements vary in length, depending on the number of members and the complexity of management practices. Generally, LLC Operating Agreements should include the following information:

• The company's name, description of services, and office address
• Each member's name and address, membership class, capital contribution, ownership percentage, and share of profits and losses
• How company decisions are made, when and where meetings are held, how new members are admitted, and how the company is managed
• The company's accounting methods, fiscal year, annual report details, and how it will be classified for tax purposes

Once you have chosen a structure, formed your business with the necessary documents, and obtained all the proper licenses and permits, you can focus on growing and managing your business. Managing your business may involve hiring employees .

Most businesses start very small and may start as a sole proprietorship or partnership. Once you begin growing your business, creating your business' website (which can be professionally done with Wix) , starting marketing promotions, obtaining clients and customers, or receiving investment funding, you may find that your needs change over time.

It is important to review what's working for your business and what you could improve.

You may evolve into a larger entity and need to register under a different structure that better suits your business' needs. If you eventually incorporate your business , you will need to adapt how you manage your corporation .

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Stay legally compliant

Internal requirements.

To stay legally compliant, you’ll need to meet external and internal business compliance requirements. Most external requirements involve filing paperwork or paying taxes with state or federal governments.

Internal business requirements are for your own record keeping. You should document your compliance with internal requirements closely with company records. You might need them when you decide to  sell your business  or if a legal action is taken against your business.

Requirements by business structure

Corporations have the strictest internal requirements. Corporations should hold initial and annual director and shareholder meetings, record their meeting minutes, adopt and maintain bylaws, issue stock to shareholders, and record all stock transfers.

LLCs have less strict internal requirements. However, they are generally advised to maintain an updated operating agreement, issue membership shares, record all membership interest transfers, and hold annual meetings.

Other business structures have few, if any internal requirements. However, it’s rarely a bad idea to document important decisions with your business.

Ongoing state filing requirements

Your  annual filing requirements are based on your  business structure  and the state. Still, there are a few common requirements to look out for:

• Annual report or biennial statement.  Most states require one or the other. Some states set the due date on the anniversary of the business formation date, and other states pick a specific day for all businesses.
• Statement filing fees.  Fees normally accompany the annual report or biennial statement, which can exceed $300.00.
• Franchise tax.  Some states charge franchise taxes for corporations or LLCs that operate with their border. Formulas vary by state.
• Initial reports.  Some states require initial reports and fees shortly after incorporation.
• Articles of Amendment.  If you’ve made important changes to your company — like address, name, new shares, or membership — report it with articles of amendment.

Ongoing federal filing requirements

Most businesses won’t have federal requirements beyond paying federal taxes and complying with the Affordable Care Act. Make sure that you meet all federal tax obligations, including income and employer taxes.

The Affordable Care Act requires businesses with 50 or more employees to  report to the IRS  that they provide health coverage.

If your business has any federal  licenses, permits, or certificates , you’ll need to keep those up to date.

Other federal requirements

Some business activities are regulated but don’t require filing. Make sure to stay in compliance with any applicable  marketing and advertising laws ,  copyright laws ,  workplace poster laws ,  workplace health and safety laws , and the  Americans with Disabilities Act (ADA) .

Licenses, permits, and recertification

The documents for staying legally compliant vary based on your industry and location.

Maintain any licenses, permits, or certificates your business received from your state, city, or county. Renewal requirements vary, so it’s best to check with local business licensing offices.

For example, most restaurants need to regularly renew health and safety certificates. Businesses that sell regulated items like tobacco, alcohol, or tires might need to regularly renew their sales permits. For professional services like plumbing or nursing, the state might require certification with a third-party board to keep your license.

For federal licenses, permits, and certificates, check with the issuing institution to confirm renewal requirements for your business. Here’s a list of some common federal agencies and departments that small businesses register with:

• U.S. Department of Agriculture (USDA)
• Alcohol and Tobacco Tax and Trade Bureau (TTB)
• Federal Aviation Administration
• Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF)
• U.S. Fish and Wildlife Service
• National Oceanic and Atmospheric Administration
• The Federal Communications Commission

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Essential Legal Aspects of Business Examples to Consider

When starting or running a business, it's crucial to consider essential legal aspects such as choosing the right business structure, ensuring compliance with local regulations, protecting intellectual property, drafting clear contracts, and understanding tax obligations.

Legal Aspects of Business Examples

Understanding these aspects helps businesses navigate legal challenges effectively, legal aspects of business examples include:

1. Business Structure:

Choosing the proper commerce structure (e.g., sole proprietorship, association, enterprise, or LLC) may be a foundational legal choice.

2. Employment Law:

This envelops directions on contracting, working conditions, representative rights, and end.

3. Intellectual Property:

Ensuring mental property (IP) such as trademarks, licenses, and copyrights is imperative. IP laws protect a company's developments, brand personality, and inventive works, anticipating unauthorized use by competitors.

4. Contract Law:

Businesses routinely enter into contracts with providers, clients, and accomplices. Understanding contract law makes a difference guarantee ascension are legally official and enforceable, sketching out rights and commitments clearly.

5. Regulatory Compliance:

Following industry-specific controls, such as natural laws, wellbeing and security benchmarks, and budgetary controls, is basic. Non-compliance can lead to fines, sanctions, or operational shutdowns.

6. Consumer Protection:

Laws pointed at ensuring customers from out of line homes, guaranteeing item security, and ensuring honest promotion are significant. These laws offer assistance to keep up belief and maintain a strategic distance from legal issues.

7. Taxation:

Understanding charge commitments, counting corporate charges, VAT, and finance charges, is fundamental for compliance. legal access, arranging and recording can anticipate legal issues and monetary punishments.

Legal Aspects of Business Notes

Understanding these legal aspects is crucial for sustainable business operations, legal aspects of business notes cover essential topics like:

1. Importance of Legal Advice:

Looking for legal advice can offer assistance exploring complex legal scenes, guarantee compliance, and give vital exhortation custom fitted to your trade needs.

2. Documentation:

Keeping fastidious records of all legal reports, counting contracts, licenses, and compliance reports, is crucial. This documentation can serve as proof in legal debate and reviews.

3. Risk Management:

Recognizing potential legal dangers and executing measures to relieve them is fundamental. This incorporates having protection approaches, conducting customary legal reviews, and preparing representatives on compliance.

4. Staying Updated:

Laws and directions habitually alter. Remaining educated approximately legal upgrades pertinent to your industry can offer assistance guarantee progressing compliance and adjust commerce hones appropriately.

Legal Aspects in Business Plan

Legal aspects in business plan encompass the necessary legal considerations a company must address to operate legally and protect its interests. Joining legal aspects into your commerce arrangement not as it were fortifies your key approach but moreover consoles speculators and partners of your commitment to compliance and hazard administration. Here’s how to coordinated legal contemplations into your trade arrange:

Clearly state the chosen trade structure and diagram the legal suggestions, such as obligation and charge commitments. Clarify why this structure is best suited for your trade.

2. Compliance Strategy:

Detail your approach to complying with industry directions and measures. Incorporate information on required licenses, grants, and how you'll guarantee adherence to laws.

3. Employment Policies:

Layout your work arrangements, counting contracting homes, worker benefits, and compliance with labor laws. Highlight any preparing programs for legal compliance.

4. Intellectual Property:

Portray how you may ensure your mental property. Incorporate plans for enrolling trademarks, licenses, and copyrights, as well as measures to prevent encroachment.

5. Contracts:

Clarify your methodology for managing contracts, including standard terms, transaction homes, and contract administration frameworks. Emphasize the significance of legally official ascension.

6. Risk Management:

Distinguish potential legal dangers and your procedures for relieving them. This might incorporate protections scope, legal reviews, and compliance preparing for employees.

7. Consumer Protection:

Detail how you'll follow shopper security laws, counting item security guidelines, reasonable publicizing homes, and client complaint determination strategies.

8. Tax Strategy:

Give an outline of your charge commitments and methodologies for compliance. Incorporate plans for charge recording, finance administration, and any tax-saving activities.

Understanding and tending to the legal aspects of business is principal for guaranteeing long-term victory and steadiness. By consolidating these contemplations into your trade arrangement and keeping up persevering compliance homes, you'll protect your trade against legal dangers and construct a strong establishment for development and validity within the advertisement.

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Legal requirements for starting a small business

10 legal requirements for starting a small business.

Getting ready to launch your own small business is an exciting step that merges both your personal and professional goals. Not only do you get the chance to become your own boss, but you also have the opportunity to bring your creative visions to life and dictate how you want your business to operate. But there’s more to building a new business than setting up the lemonade stand that inspired your entrepreneurial dreams once upon a time.

Beyond scouting a location and developing a business plan, there are several legal requirements for starting a small business. In this post, we’ll take a look at ten steps to take before opening up shop.

Read on for a step-by-step perspective or use the links below to skip throughout our list of legal requirements for small businesses.

• Choose your business structure
• Brainstorm and register your business name
• Get your federal tax ID number
• Obtain a state tax ID number
• Review small business insurance options
• Apply for business licenses and permits
• Open a business bank account
• Protect yourself with legal support
• Make a compliance plan
• Set up your accounting system

1. Choose your business structure

After coming up with your initial vision and business plan, one of the first steps you’ll take is choosing your business’s structure. Your business structure sets legal and tax-related precedents for your organization, so it’s important to take this step seriously.

There are several types of business structures to choose from, each with its own legal structures and tax implications. Let’s take a deeper look at how four of the most common classifications work so you can find the best solution for your small business.

Sole proprietorship

• According to the  Small Business Administration , sole proprietorship is the  most straightforward  and  most common  type of business structure. Sole proprietorships are basically a convergence of the individual business owner and their business. Sole proprietorships only have one business owner.
• Because there’s no separation between the small business owner and business entity, the  individual owner is entitled to all profits and is liable for all debts, losses, and liabilities .
• Sole proprietors will  report business earnings and remit taxes on their personal tax return  using Form 1040 and Schedule C. As the proprietor of their own business, sole proprietors are also subject to self-employment taxes.

General partnership

• A  general partnership  is a legal agreement between  two or more  business partners to  share  their business’s  profits, losses, liabilities, and assets .
• Partners are individually responsible for their own tax liabilities and must  report their partnership earnings on their individual tax returns .

Limited liability corporation (LLC)

• Both  businesses and individuals  can form a  limited liability corporation  (LLC). LLC  regulations vary by state.  In most states, banks and insurance companies are not allowed to form LLCs but some states permit it.
• Limited liability companies are considered corporate structures in the United States, which means that the  business owners are not personally liable  for the company’s debts or other liabilities. Instead, the company’s assets would likely be seized if it can’t settle its debts.
• LLC entities do not pay taxes themselves; the t ax liability is passed onto the owners  to be  claimed on their individual tax returns .

S Corporation

• S Corporations , also known as S Subchapters, are a type of corporation.  S Corporations have shareholders that own a percentage of the company , sort of like a partnership. These shareholders must be individuals, certain trusts and estates, or specific tax-exempt organizations.
• The formation of an S-Corp allows businesses to incorporate while still being taxed as a partnership.  Business income, losses, and liabilities, including taxes, can be passed on to shareholders . Individual shareholders will report this information on their tax return.

Note:  Other types of business formations that are typically more nuanced include nonprofits and C corporations.

Because your business structure can have such a strong impact on your operations and finances, it may benefit you to seek legal advice as you approach this step. A legal professional can better contextualize how each structure would impact your business, for better or worse. Bottom line, selecting a business structure is one of the more important decisions you’ll make at the start, so be sure to do your research before diving in.

2. Brainstorm and register your business name

Coming up with your business’s name is one of the more creative steps in the legal proceedings required to start a small business. However, there are some legal guidelines to keep in mind as you start brainstorming.

There are four different  ways to legally register your business name :

• Entity names:  An entity name is how the state identifies your business, this protects you at the state level. Usually, securing an entity name with your state prohibits other entities from operating under similar names. This process is handled at the state level.
• Trademark:  A trademark protects your business’s name, products, and services at a federal level. When you register a trademark, other businesses will not be allowed to use any of your trademarked names.
• Doing Business As (DBA):  Some state and local jurisdictions require DBAs, also known as trade or fictitious business names. These names don’t offer legal protection but might be legally required depending on local regulations and your business structure.
• Domain name:  A domain name represents and protects your business’s online presence. A website address or URL is an example of a registered domain name. Once you’ve registered and paid for one, no one else can operate under the same online domain.

3. Get your federal tax ID number

Part of owning and operating a small business is fulfilling your federal obligations to Uncle Sam, aka paying taxes. Depending on your business structure, you, as the business owner, may be responsible for reporting income on your tax return, or you may have another process for paying your income taxes. In addition to paying income taxes, you’ll also be liable for employment taxes if you hire employees.

In order to fulfill your employment tax responsibilities, you’ll need to obtain a federal tax ID number, also called an employer identification number (EIN). You can apply for an EIN by going to the  IRS website .

You  must apply for an EIN if  your business:

• Pays employees
• Operates as a corporation of partnership
• Files tax returns for employment, excise, or alcohol, tobacco, and firearms
• Withholds taxes on income, other than wages paid to a nonresident alien
• Uses a Keogh Plan (a tax-deferred pension plan)
• Works with certain types of organizations

4. Obtain a state tax ID number

Depending on what state you live in, your business entity may have to pay state or local taxes. This may include income taxes, sales taxes, or both. Once you have a better idea of your state’s small business tax requirements, you’ll need to integrate those requirements into your accounting system.

Each state has its own tax bureau that handles state tax ID numbers for small businesses. Check with your state government’s website to learn more about applying for a state tax ID number.

5. Review small business insurance options

No matter how big or small, your business is your baby, so you want to protect it at all costs. The way both individuals and businesses do this in the United States is with insurance coverage. There are several different types of insurance policies that can work to protect your personal assets and legal and financial affairs.

Some common types of insurance small businesses may leverage include:

• General liability insurance
• Errors and omissions insurance
• Worker’s compensation insurance
• Home-based business insurance

When it comes to selecting the right insurance plan for your small business, you’ll want to make a decision based on your business’s structure, number of employees, assets, and other special considerations.

6. Apply for business licenses and permits

In order to operate locally—and legally—you’ll need to obtain a business license and any other relevant permits that your municipality may require. If you’re opening a restaurant and plan to serve alcohol, for example, your local jurisdiction will likely require you to get a business permit and liquor license before you start serving customers.

If you’re supplying goods or services that are regulated by a federal agency, you will need to get a federal license to operate. Business license requirements vary on the state and local level, so be sure to check with your local government’s website to make sure you’re getting the required licensure.

7. Open a business bank account

In order to exchange money securely, your business needs a  business bank account . Having a separate bank account just for business can help you better organize your finances, and in some cases, it may be a requirement.

According to  SBA.gov , some of the benefits of business bank accounts include:

• Protection:  Keeping your business and personal funds separate establishes personal liability protection.
• Professionalism:  Gives customers the opportunity to pay your business via credit or debit card or with a check made out to your business, not your personal account.
• Preparedness:  In most cases, having a business bank account also comes with the opportunity to open a line of credit. Having available credit can help cover emergency and other substantial costs.
• Purchasing power:  Credit can also help your business fund initial startup costs until profits start rolling in. Of course, you’ll want to create a plan for paying all of your borrowed funds back.

8. Protect yourself with legal support

As you know by now, there are a lot of legal steps to take as you begin the initial process of launching your small business. For many business owners, enlisting the help of a legal professional is well worth it in the beginning stages and throughout your small business’s lifetime.

A legal professional can help you set up protections to safeguard your intellectual property, assets, privacy policies, tax compliance, and general liability.

9. Make a compliance plan

Businesses in the United States are subject to a number of regulations, in addition to the legal requirements we’ve mentioned in this post. These legal guidelines may impact your marketing and advertising efforts, employment policies, financial recordkeeping, etc.

Meet with an industry or legal professional to get a better understanding of the regulations that may apply to your business and to create a plan that will help you maintain compliance. As you continue to bring your entrepreneurial vision to life, refer back to your compliance plan to make sure you’re operating in alignment with these rules.

10. Set up your accounting system

Your accounting system is a cornerstone of your small business. From assessing budgets and ensuring tax and payroll compliance to measuring your milestones, having a streamlined accounting setup is essential.

With  QuickBooks accounting software  for small businesses, you can monitor your income and expenses, invoice customers, conduct payroll, and more. QuickBooks accounting features are intuitive and automated, giving you more time to focus on building and growing your business.

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Legal Form of Organization in Business Plan

The legal form of organization in business plan is used to decide how the company will function, how roles will be assigned and how relationships will work. 3 min read updated on September 19, 2022

The legal form of organization in business plan is used to decide how the organization will function, how roles will be arranged and assigned, and how relationships will work. These organizational steps should take place at the beginning of the business formation.

Starting a Business

The first step when beginning a business is to name the business. The name must be unique and not in use by another existing entity. The next step is to decide on the organization type your business will use. Each business entity has specific requirements on how they are run including how income is reported. The business types include:

• Sole proprietorship.
• Partnership.
• Limited Liability Company.
• Limited Liability Partnership.
• Corporation.
• S Corporation.
• Tax-exempt organization.

Each type has advantages and disadvantages that should be reviewed before making a final decision. However, the business type you choose isn't permanent. As the needs of your business change, the business entity type can be changed. Examples include:

• Changing a sole proprietorship to a partnership due to growth.
• Switching to a corporation to establish protection that comes with limited liability.

Limited Liability is attractive to business owners because it protects personal assets from any debts or obligations incurred by the corporation.

Business Type Requirements

A major component of selecting a business type is what is required to be legal and the tax implications.

• Applications to the state government are not required.
• Dependent on the state, registering the business may be required with the state and/or country.
• A business license may be required based on the type of business and state requirements.
• The IRS views all business activity as personal. When filing, personal and business income are seen as the same thing.
• A sole proprietorship is personally responsible for all aspects of the business. If the business is sold, it can impact any personal assets if you are found liable.
• In a general partnership, two or more sole proprietors are seen by the IRS as having equal responsibility.
• Any profit and loss distribution is determined by the partnership agreement and is then passed to the individual partners.
• Profit and loss distribution does not have to match the percentage of ownership.
• The partnership is not subject to income or franchise tax.
• The structure and tax implications are similar to a general partnership, but a limited partnership ( silent partner ) allows for ownership without the requirement of being actively involved in how the business is managed.
• Business liabilities are limited to the amount invested by the partner.
• Outside investors can be partners without taking on any liabilities.
• Personal liability protection is provided without having to meet the administrative and governance procedures.
• The Articles of Organization determine the ownership percentages, distribution of profit and losses, and voting rights. In corporations, this is determined by stock ownership.
• Most LLCs use the pass-through method of taxation. This means that taxes aren't paid by the LLC, but by at the personal tax level of the owners. The personal rate is lower than the corporate tax rate. When the LLC files taxes, no money is sent and an owners report is included to show the owners will pay the tax instead.
• Based on the state, the LLC is subject to a franchise tax .
• A corporation can be formed as for-profit or nonprofit.
• Corporations provide a shield from liabilities. This protection is only removed if the owners or board members have been found to be illegally running a corporation and have been breaking federal and/or state laws.
• Corporations can sell stock in the business.
• A Board of Directors is used to manage corporate policies and strategies. This is for both for-profit and nonprofit.
• Corporations continue to exist even in the event of the owner's death, or if owners leave.

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• Types of Business Structures
• Best Type of Corporation for Small Business
• Partnership Business Entity: Everything You Need To Know
• Types of Companies LLC
• LLC Partnership
• Individual Ownership of Business
• Partnership Advantages and Disadvantages
• What Is Classification of Business According to Ownership?
• Types of Business Entities
• Benefits of a Close Corporation as Opposed to a Partnership

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12  Legal Requirements When You Start A Business

This post may contain affiliate links and I may receive a small commission if you make a purchase using these links – at no extra cost for you. Please read my disclaimer here .

Starting a business is an incredibly exciting time, but it can also be a bit daunting.

There are so many things to think about , from the business entity to the business plan. And don't forget about all of the little details, like getting your business name registered or setting up your taxes correctly. 

In this blog post, we will go over some of the most important legal requirements for starting a business. 

Keep in mind that this is not an exhaustive list - please consult with a lawyer to make sure you are covering all of the bases! Now, let's get started.

Business entity

The first step in starting a business is to choose the right business entity . This will determine things like how much liability you have, how easy it is to raise money, and what your tax obligations are. 

The most common business entities are sole proprietorships, partnerships, limited liability companies (LLCs), and corporations. Each has its own advantages and disadvantages, for example:

Sole proprietorships are the simplest and most common type of business entity . They are easy to set up and usually have very few legal requirements. 

However, sole proprietorships also have unlimited liability, meaning that the owner is personally responsible for all debts and liabilities of the business.

Partnerships are similar to sole proprietorships, but there are two or more owners .

Partnerships have the same advantages and disadvantages as sole proprietorships, but with one key exception: each partner is only liable for their own actions, not the actions of the other partners.

Limited liability companies (LLCs) are a type of business entity that offers limited liability to its owners . This means that the owners are not personally responsible for the debts and liabilities of the business.

LLCs are a bit more complex than sole proprietorships and partnerships, and they have different tax consequences. If you would like more information regarding limited liability companies, you can learn more with LegalVision .

Business plan

After you have chosen your business entity, you need to start working on your business plan. This is a document that outlines your business goals, strategies, and how you plan on achieving them . 

Your business plan should also include a financial projection, which is an estimate of your revenue and expenses for the next few years.

In addition, your business plan should include a marketing plan , which will outline how you plan on promoting your business and attracting customers. It's important that your business plan is clear, concise, and realistic.

In order to write good business plans , you should do some research on your industry and competitors.

Business name

In addition to the business plan, you also need to choose a business name . This is the name that you will use for your business , and it should be something that is easy to remember and pronounce. 

It's important to choose a business name that is not already being used by another company, as this could create legal problems down the line. You can search for available business names online or at your local courthouse. 

Once you've chosen a business name, you need to register it with the government . To do this, you will need to fill out a form and pay a fee.

One of the most important legal requirements for starting a business is to pay your taxes . When you register your business, you will be assigned a tax identification number (TIN). This number is used to identify your business for tax purposes.

You will need to use this number when you file your taxes. In addition, you will need to pay federal, state, and local taxes. Depending on the type of business you have, you may also be required to pay payroll taxes.

In order to find out what taxes you need to pay, you should speak with an accountant or tax attorney. They will be able to help you determine which taxes you need to pay and how much you need to pay. 

With these considerations in mind, taking the next step to form a company becomes a pivotal move in turning your business aspirations into a tangible reality. Consulting with legal and financial experts can streamline the process and ensure that your business is structured and set up in accordance with regulatory requirements.

Opinion letter

Another important legal requirement when starting a business is to get an opinion letter from a lawyer.   This letter will state that the lawyer believes that your business is legal and in compliance with all applicable laws . 

In order to get a legal opinion on the matter , you will need to provide the lawyer with information about your business, including your business plan and business name. 

The lawyer will then research the laws that apply to your business and give you their opinion on the matter.

This letter is important because it will protect you from liability if your business is ever sued. In addition, it can be used as evidence in court if your business is ever accused of breaking the law.

Permits and licenses

Depending on the type of business you have, you may need to get a permit or license from the government. For example, if you are starting a restaurant, you will need to get a food service license.

If you are starting a daycare, you will need to get a childcare license. There are many different types of businesses that require permits and licenses, so you will need to do some research to find out if your business needs one. 

You can typically apply for a permit or license online or at your local courthouse. Your chosen lawyer can also help you determine if you need a permit or license. He/she can also help you with the application process.

Bookkeeping

Another important legal requirement for starting a business is to keep accurate records of your financial transactions . This includes all income and expenses . 

For example, if you sell products or services, you will need to keep track of the sales price, date of sale, and quantity sold. You will also need to keep track of your expenses, such as office supplies, advertising, and travel. 

In addition, you will need to keep track of your employees' salaries and wages. It's important to keep accurate records because you will need them for tax purposes.  

In addition, accurate records will help you make better financial decisions for your business. Keep in mind that if you do not keep accurate records, you may be fined by the government.

Bank account

Another legal requirement when starting a business is to   open a bank account for your business. This account will be used to deposit your revenue and pay your expenses. 

When you open a bank account, you will need to provide the bank with your business name, address, and tax identification number. 

In addition, you will need to provide the bank with your business plan. The bank will then review your information and decide whether or not to approve your account.

It can help to have a lawyer or accountant review your bank account before you open it. 

This way, they can make sure that everything is in order and that you are not violating any laws.

One of the most important legal requirements when starting a business is to have insurance. This will protect your business from liability in the event that someone is injured on your property or if you are sued . 

There are many different types of insurance, such as property insurance, liability insurance, and workers' compensation insurance. Property insurance will protect your property from damage or theft.

Liability insurance will protect your business from lawsuits. Workers' compensation insurance will protect your employees in the event that they are injured on the job.  

It's important to speak with an insurance agent to determine which type of insurance you need.

Intellectual property

Intellectual property refers to any ideas, inventions, or creations that you own . This includes trademarks, copyrights, and patents. If you have intellectual property , it's important to protect it. 

Otherwise, someone else could steal your ideas and make money from them. One way to protect your intellectual property is to file for a trademark or copyright. This will give you legal ownership of your ideas.

Another way to protect your intellectual property is to keep it confidential. 

This means that you don't share your ideas with anyone else. If you do share your ideas, make sure that you have a nondisclosure agreement in place. This will prevent the other person from sharing your ideas with anyone else.

Privacy policy

If you collect personal information from customers, such as names and addresses, you need to have a privacy policy.  

This policy should state how you will use the information and how you will protect it. In addition, the privacy policy should explain what rights the customer has.

For example, the customer should be able to opt-out of having their personal information shared with third parties.  

When creating a privacy policy, it's important to have a lawyer review it. This way, you can be sure that it meets all legal requirements.

Have a lawyer

One of the most important things you can do when starting a business is to hire a lawyer. A lawyer can help you with many aspects of your business , such as choosing the right business entity, drafting contracts, and protecting your intellectual property.

In addition, a lawyer can help you comply with all legal requirements when starting a business.

This includes filing the necessary paperwork and obtaining the necessary licenses and permits . When choosing a lawyer, it's important to choose someone who is experienced in business law. 

This way, you can be sure that they will be able to help you with all of your legal needs.

Final words: 12 legal requirements when you start a business

Starting a business can be a daunting task, but it's important to make sure that you comply with all legal requirements. 

Hopefully, this article has given you a better understanding of some of the things you need to do in order to start your business off on the right foot.

Remember, it's always a good idea to have a lawyer review your plans before you get started . This way, you can be sure that everything is in order and that you are not violating any laws.

About the author 

Peter Keszegh

Most people write this part in the third person but I won't. You're at the right place if you want to start or grow your online business. When I'm not busy scaling up my own or other people' businesses, you'll find me trying out new things and discovering new places. Connect with me on Facebook, just let me know how I can help.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Attorney Advertising.

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