Start Your Small Business Legally: 8 Key Legal Requirements

Learn about possible legal issues you may face as a new business owner

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Start Your Small Business Legally

Starting a business is both thrilling and terrifying. I know – having started, sold, and consulted with many startup companies. As a new entrepreneur, you need to know what is legally required of you to start your business. 

I have written this in-depth guide to inform you about how you can legally start your business and the possible legal issues you will face as a new business owner.  I wish I had such a legal guide when I got started! 

Plus I have attempted to make it as simple as possible by creating multiple sections (with a clickable table of contents too!) covering different legal aspects written in everyday language with lots of links to helpful resources – many of which are free!  

Come along my entrepreneurial friend, let’s get busy starting your business legally. 

#1 Business Registration – State & Federal Government

Your first order of business when you start your business (liked that pun!) is to register your business with your state and federal government. Here’s how. 

EIN Number – Employer Identification Number

All businesses, even those without employees, should get an EIN number. Here’s how to obtain an EIN number quickly and easily. 

Lots of entrepreneurs have questions about the EIN number and what it means for their taxes, employees and business registration. So I wrote this guide to EIN numbers filled with FAQ

DBA Doing Business As

In most states, your first step is to file a DBA or “doing business as” certificate. Go to your state’s business registration department which can often be the Secretary of State. Find your state’s office and get information about costs on my list of all 50 US State’s business license offices here

This filing fulfills consumer protection laws that require you to make an official record of who you are so that consumers have full disclosure of who they’re doing business with. 

Once you register you will receive your business certificate that certifies that You, Ms. Sally Jones now have the right to do business under your business name Sally’s Sweets. You will need this document to open a business checking account in most US banks. 

The process of registering with your state is pretty straightforward and inexpensive.  Go to your state’s site and follow the instructions. 

Web Domain Name Registration 

In today’s digitally fueled marketplace registering your business name is not enough. You will also want to register your company name as a web domain name for the rights to use that name on your website and email address. 

Some new entrepreneurs wrongly assume that because they have registered their business name with their state that they automatically have the associated web address rights. That is not so.

I highly recommend that you concurrently register your domain name and business name – at the same time. 

My client often asks if their business name website domain needs to match.

The answer is no, there are two separate regulating parties: your state government and the internet name association ICANN so you can have slightly (or very) different names depending upon the availability and desirability of domain names. To learn more about how to get a great domain name for your company read my in-depth guide here

An example would be Big Bob’s Plumbing would be registered (and protected) in his home state of Texas as a DBA and if his domain name is not available he could register BigBobPlumbingTX.com.

Adding a geographic indicator is a smart strategy to find available domain names especially if your company name is fairly generic. Also including your geographic market area helps in both search engine rankings and in customers’ understanding of your service market. 

Learn more about how to get the right domain name for your business in my in-depth entrepreneurs guide here

It’s important that you register your business because you need your business certificate of registration, which may be called different names in different states, for you to open a business bank account, get a credit card processing system, enter into a store lease and buy products wholesale. 

PS here I share my best sources to find wholesale products to resell

You may also need additional business licenses, permits, and certifications which I cover in detail further on – you can jump ahead here.   

There is a difference between a business registration and the legal formation of your company. I know it sounds confusing but I’m gonna make it simple. Keep reading

1- Registering your business with your state as a DBA (doing business as) is by default a legal formation called a sole proprietorship.  

Some business owners do not proceed to create a more structured legal formation and elect to run their business as a sole proprietorship. 

This means that all business profits and losses will be listed and paid on the business owners’ personal tax return. Also, there is no legal protection from business debt collectors or lawsuits for the business owner’s personal assets – including their family home and some retirement accounts. 

So I don’t recommend a DBA or sole proprietorship as an adequate legal formation for any business that is beyond a cash-only side hustle weekend type gig. I highly recommend that most small businesses from an LLC – protect their family, assets and themselves. 

Now that you’ve registered your business, you need to decide what legal business structure you want for your business

Here are the highlights of the different options of legal structures available to most small businesses, excepting professional companies such as doctors and lawyers who can use a PLLC, and large corporations who will use C-type corporations to issue stock shares to investors and shareholders. 

Business Partnerships 

One of the most traditional business structures is a partnership general or limited. 

Read my article about the different types of partnerships and find out which is right for your situation.  

Find out how to best split profits in a partnership fairly and equitably in my guide here.

Business partnerships can be between two or more individuals that enter into an agreement to form a partnership company.

PLEASE Do not go into a partnership business without a legally binding signed agreement.

Having a clear-cut agreement is even more important if you love your business partner! 

Married couples, life partners, and best friends can be good business partner choices (here are my best business ideas for couples).

If you are looking for a business partner, check out my best advice on how to find a good business partner here.

LLC Limited Liability Company

LLC stands for limited liability company. It is a legal instrument to create a business that gives liability protection for the business owner’s assets including his home, vehicles, and savings accounts from the business’s debts and lawsuits.  

LLC Advantages

There are multiple advantages to starting your firm legally as an LLC including: 

  1. Inexpensive and quick to set up 
  2. Easy to maintain – there is not a lot of complex paperwork nor required government reporting.  
  3. Flexible – because you can add officers and change business locations and functions simply.

NOTE: If you are unsure of whether you should remain a sole proprietorship DBA or create an LLC read my informative article here

Incorporation

A corporation is a more structured type of legal business entity. Companies use corporations to protect the owner’s assets, reduce taxation and share equity with investors. 

Most small businesses use the subchapter S corporation type of corporation. 

This offers the advantages of C Corporations, which are used by large firms, without the disadvantages of complex paperwork, expensive annual fees,  strict reporting rules, and inflexible operating terms. 

Incorporation Advantages

The advantages of incorporation versus DBA or LLC are:

Learn more about what Inc. means for a business on my article here.

NOTE: PLEASE… do not try and set up your own corporation. There are far too many things that can go wrong when an inexperienced legal professional person – such as yourself – files these complex documents. I know! I did it and screwed up!

Early in my entrepreneurial life, I attempted to set up my own S corporation – to save some money. Wrong move. 

I thought I did the paperwork fine – I even got the incorporation certificate. BUT later on in the firm’s existence certain mistakes I made in the setup paperwork came to light and caused lots of problems.

Incorporation can be a smart choice for those types of firms that may have greater liability risks such as consumer products. My cosmetic manufacturer was set up as a corporation with good success.  Learn which is better for your business from attorney Jane Haskins LLC vs INC

#3 Intellectual Property 

Know that when you start a business a good portion of that business’s assets are the intellectual property and business ideas and that you create. As such, you may elect to use the law to protect those vital business assets from your competitors stealing or copying them. 

Earlier we spoke about using a trademark to protect your business name which I highly recommend if your company is any larger than one person, one location, and on a part-time basis. You can read more information about my recommendations for trademark registration here

When you file your DBA your business becomes a sole proprietorship which is a form of legal formation. This means that you are the sole owner i.e. proprietor and that you alone are responsible for the business operations, taxes, and compliance with government regulations.

Yes registering your business name as a DBA gives you some limited protection from intellectual property theft; HOWEVER it is ONLY within your State and Industry not nationally or internationally. 

So if you get a DBA (check out the cheapest and easiest way to register your DBA here) for Hot BBQ in Austin, Texas that DOES NOT protect your name from another pitmaster opening a Hot BBQ in Dallas, or Chicago or New York. 

To get national protection across America for your intended business name you will need to register your trademark. Don’t worry,

It is actually quite easy and relatively inexpensive to register your trademark.

This is an area I specifically do not recommend doing it yourself, Trademark registration is way too important a process for you to try to save a few bucks by doing it yourself. If you are going to be investing thousands of dollars in a new business it is foolish to try and save a few bucks by doing your own trademark registration. 

You could end up years down the road with a nasty (and expensive) trademark lawsuit when you find out that a  competitor who legally owns your business name. Think of the hassle of changing your name and all the costs of changing your website, signs and merchandise!  

It is actually quite easy and relatively inexpensive to register your trademark.

Who should register their trademark. 

YES Register Trademark 

NO Trademark Registration Needed

Know that a DBA has different names in different states. Some states call DBA fictitious business names, assumed business names or trade names. These are all the same thing – they are the name that your company is using on its products and services to the public and or business clients. 

Learn more about the different types of names every company needs and how to create a catchy name for your business in my complete guide here

Service Marks

Perhaps you are selling a service, and not a product, if so, here is information on protection for your service brand called service marks in my article

Copyright

Other forms of intellectual property protection include copyright for works of art such as brochure copy slogans and books and patents for products and inventions. Get more information in my copyright article here

Patents

Most of my entrepreneurial clients worry about their business ideas getting stolen and thus think they need a patent before they begin before they launch the company or meet with investors or the bank. 

Happily, that’s usually not the case. While you certainly can go for the full patent process it can be very expensive and time-consuming. Instead, I give my clients my list of the best ways to protect your business idea without a patent so they can get started right away

Read more about my review of surprising affordable trademark services here and provisional patent services

My best advice to you is to please get started in business – don’t sit at home with your brilliant idea worrying it’s gonna get stolen. Because if you never bring it to market it won’t matter it will die in your desk drawer along with millions of other useful products and inventions that never saw the light of day.  

You see, my friend Richie has a brilliant idea for a board game but won’t show it to possible partner companies (learn how to sell your business ideas to companies in my article here) because he is scared it will be stolen and does not have the money to pursue a patent or trademark. I shared with him my list of the best ways to protect his intellectual property without a patent. (many are free! )

#4 Taxes

What’s the old joke there only two things you can be certain of – death and taxes! Well, as a business owner there are plenty of taxes you must legally pay or collect that you need to know about. Keep reading to learn more about the world of taxes including sales tax, income tax, payroll tax and special use excise taxes.

Sales tax 

Depending upon your state and type of business product or service,  most likely you will be required to collect a certain percentage of sales as sales tax. 

The fastest way to calculate the amount of tax you need to add all of your products and services is to go to your states tax collection website for the forms and current regulations requiring the amount of sales tax depending upon your county, type of product or service and other factors. 

You can find your state’s office on my list here on my list.

Income Tax 

You must pay tax on the profits from your business operations. The manner in which you pay those taxes will depend directly on how you as the business owner have decided to set up your business legally. 

If you have a legal business formation of a DBA or one-member LLC your business profits will be a part of your personal income tax statement on Schedule C and submitted with your personal 1040 tax return. 

If you are a legal business formation of a corporation it is different depending upon the type of corporation you used. Type S corporations pass-thru income to the owner’s tax returns while type C requires their own corporate tax return to be filed.

Payroll Tax 

If you hire employees, or even if you claim yourself the business owner as an employee as the business manager you are legally required to pay various payroll taxes such as Social Security taxes, unemployment taxes and disability payments. 

Property Taxes 

If you use your property for business purposes such as a store, warehouse or factory or farm, you will need to pay property taxes to local authorities for school tax, and roads and other public services. 

Special Use and Excise Taxes 

Excise taxes are sometimes required on environmental products such as petroleum oil spill treatments and ozone-depleting chemicals. Other special use taxes include communications and air transportation taxes. 

Learn more on the IRS site here.  https://www.irs.gov/businesses/small-businesses-self-employed/business-taxes#excise

#5 Licenses and Permits – Government

Depending upon the type of business you plan to start and operate you may require additional licenses permit certifications and professional licenses. 

You can research the type of licenses required in your state by referring to my list of business license offices by state here.

These industries and businesses require additional licensing to be in legal compliance:

Building Permits 

If your intended business location is requiring interior or exterior building improvements you will likely need building permits for the work being done. Check with your local building department for more information.  

Certificate of Occupancy 

In our state a specific Certificate of Occupancy must be issued by the local authorities to allow for a building to be used for a specific purpose. The building must be inspected and be in good repair, pass fire safety guidelines and be in the appropriate zoned area i.e. business, industrial or agricultural. 

Zoning requirements are specific for business operations such as restaurants, factories, retail stores and even home businesses! 

In my town, home businesses are permitted as long as they do not increase the number of parked cars on the property on a regular basis. 

Also, my town, which is a small rural town, allows homeowners to grow produce in your gardens and sell it on a farm stand or cart by the roadside. This is a good part-time business idea for small towns – here are more of my best rural business ideas.

#6 Employment Law 

These days hiring employees can be more complex than ever and this includes sub contractors, employees, freelancers and even online gig workers. 

It is wise for all entrepreneurs to have a working knowledge of the employment law in their area and nationally. 

Employment law covers various aspects of the hiring process such as interviewing, candidate selection, training and continuing employment. 

POWER TIP: I always recommend that entrepreneurs use the legal document work for hire agreements when they hire freelancers to help them develop their business ideas. This prevents hired workers from claiming your inventions as their own. 

Work for Hire agreements clearly state that the person you are hiring is paid for doing a task and is in no way a co-inventor of your product you will co-owner in your business. 

Listen to me I learned this lesson the hard way! Once I hired a website developer for one of my companies and somehow he got in their head that we were suddenly business partners. It got to be messy and cost me a lot of time and money to resolve which could have been avoided with the use of work for hire agreements. 

Read all of my best tips on how to protect your business ideas without a patent in my article here.

#7 Banking and Accounting 

Legal Requirements to Open Business Bank Account

In most states to legally open a business bank account, you will be required to present your DBA business certificate or business registration form. We discussed above how to get your DBA – check out this surprisingly affordable option.  

Your business certificate issued by your State informs the SEC Security Exchange Commission, Consumer Affairs and banking authorities that you have legally registered with the federal and state government and thus are entitled to open up a bank account in a business name. 

In many states it’s also legally required that a business have a separate bank account from the business owner’s personal account to prevent commingling of funds. Even if it is not specifically or legally required in your state it is my recommendation that you DO have separate accounts for personal and business for ease of bookkeeping and tax record preparation. 

Plus your credit card merchant processing accounts must clearly note your business name as it is on your business registration certificate. This is important to prevent credit card fraud which is sadly rampant these days. 

Check the settings in your credit card processing software and/or device so that it clearly tells your customers which company is charging your credit card. Too many times I get weird sounding names on my credit card statement from new businesses who forgot this crucial step. 

Also be sure to check your electronic payment accounts such as PayPal to be sure that they are set up properly and that your customers see your transactions properly labeled to understand their origins. Otherwise you could get chargebacks and lose money, customers and your credit card processing account. 

Double-check your transaction settings is especially important if you opened up your PayPal as a personal account and never switched to a business account.

If you are using Paypal for the business you should upgrade to a business account. Here’s how to upgrade your PayPal to a business account. There is no fee and it gives you greater protection and spending limits.

Accounting and Bookkeeping Legalities

You are required by law to keep business records for accounting purposes to support your tax return statements which include your gross sales, business expenses and tax payments. 

There are high-quality accounting software options online such as my favorites – Quickbooks and Freshbooks for ease of use, quick setup, flexibility, and affordable rates.

Here’s my recommendation on which accounting software to select based on your business needs. 

Use Freshbooks Accounting Software

IF you are just starting out in business and plan to do electronic invoicing I highly recommend Freshbooks for its ease of use and robust integrations.

Use Quickbooks Accounting Software

IF you are a retail establishment, consulting firm, or construction firm you will find that QuickBooks offers you more options for industry-specific reports,  estimates and expense categories learn more here.

NOTE: Legally you must clearly state your LEGAL business name on all invoices, contracts, credit application forms and leases. It must be the exact same name as on your DBA certificate (the letters DBA are not necessary) or if you are a legal LLC you must include “LLC” on these legally binding documents.  You do not need to add these legal indicators on your store signs or product bottles (except in certain cases – check with your attorneys).

I recommend getting a good business legal plan so you have access to professional attorneys to ask specific questions about your business at any time for a low price.

#8 Insurance 

There are many types of insurances that businesses both large and small need to know about and consider purchasing. Here are the ones that I recommend:

NOTE: Insurance gives a different kind of protection then a legal business entity structure such as an LLC or INC does. Your legal entity protects the business owner from being personally sued over a business debt, whereas business insurance covers the business and the business owner in the case of a customer falling in your store or your product unintentionally hurting someone. 

Do you want to start a small business in Canada?

We’re here to help! In this article, we cover all of the costs associated with starting your own company in Canada so that you don’t get caught off guard or spend too much money on unnecessary items or services.

Click here now and read our full blog post about How Much It Costs To Start A Small Business In Canada!

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