Stay Compliant: Legal Requirements for Small Businesses

The idea of starting your own small business is very exciting, probably not as exciting as figuring out the legal requirements for handling your business. Of course, you want to focus more on who you’re going to hire, what your business plan needs to say, and who you want to receive funding for.

While you’re doing that, you will want to think about the legal requirements necessary to start and keep your business afloat. If you are in the process of starting your own business and you want to familiarize yourself with the legal requirements, you came to the right place. In this brief small business guide, we will cover all you need to know about starting your business and who you can reach out to for more guidance.

Legal Requirements for a Small Business

The first legal requirement for all small businesses is to create a proper business structure. Operating your business as a sole proprietor without a formal legal structure can put you and your assets in danger. For example, if someone sues your business and you don’t have a formal legal structure, they can come after your assets.

When creating your business structure, there are a few questions you should ask yourself:

What are my business goals?
Do I provide services or products
Am I a solopreneur, or do I need to hire more employees?

Every business has its own personal and legal requirements, so it is imperative to figure out what type of business structure you should have. Let’s look over the different types of business structures.

Sole Proprietor

A sole proprietor is a “solopreneur” who is the exclusive owner of their business. There is no legal distinction between the business owner and the business in this case.

As mentioned earlier, if you operate as a sole proprietor, you risk putting your personal assets on the line. You also have to pay a self-employment tax.

Limited Liability Corporation (LLC)

A limited liability corporation, also known as an LLC, helps you secure your assets. LLCs create a separate legal entity that protects you from any personal liability. With an LLC, you also have the opportunity to enjoy pass-through taxation.

S Corporation

S Corporations, also known as S Corps, are pass-through tax business entities where your business can give up paying business taxes by reporting revenue and losses. Any profits made with your S Corp are reported under a separate tax filing form.

C Corporations

With a C corporation, the business and the business owner pay separate taxes. With this type of structure, owners become shareholders with additional tax advantages. Under a C corporation, your business gets limited liability and unrestricted growth potential.

Partnerships

Partnerships, or Limited Partnerships, are arrangements between two or more people who operate and manage a business. In this partnership, liabilities and profits are split equally amongst the members.

This means that each member involved in the company is held liable for all of the business’s obligations and debts. There is no requirement to pay business taxes under Form 1065, but you must file the form for taxes.

Register Your Business Name

Regardless of where you do business, all small businesses require a name that your state and local government can use to track your actions. If you are a sole proprietor, you will need to register your Doing Business As (DBA) or a Fictitious Business Name (FBN). If you don’t register your business name as a DBA or an FBN, the state will consider your legal name as the name of your business.

Check for Availability

Before registering your business name, you will need first to check to see if your business name is even available. To do this, you can check the database of your county clerk or your state secretary’s website.

File the Name

You will need to fill out a form at your county clerk’s office to file your business name.

Information needed on the application:

Your full legal name
Business address
Personal address
The name of your business
Names of registered owners
Type of business

You will most likely need it notarized before you can officially file the paperwork. Depending on your county, you will need to pay a filing fee. The amount you pay will vary.

Obtain an EIN

Once you register your business name, you will need to get an Employer Identification Number (EIN). This will act as the tax identifier for your small business.

This number is basically the Social Security Number for your business. You can use this EIN to open a business bank account, file tax returns, and apply for business licenses. You can apply for an EIN through the Internal Revenue Service website.

Obtain Business Licenses and Permits

Independent contractors must obtain proper licenses and permits, and depending on your business location and industry; you will need state and federal licenses. If you are in a business that involves activities supervised by a federal agency, you will need federal permits. Business permits and state licenses depend on your business location.

Figure Out Your Federal Taxes

Every small business owner must pay taxes each year. The type of taxes and the amount you must pay will depend on your business structure. In general, small business owners must pay income tax and sales tax.

Other standard federal taxes:

Self-employment tax
Employer tax
Excise tax
Estimated tax

If you are unsure of what taxes you owe or want to simplify the tax process, it would be best to reach out to a business lawyer. They will ensure that your business stays compliant and they can keep your books in order.

Tax Withholding Records

If you plan on hiring employees, you will need to set up tax withholding records. The types of taxes you will have to pay depend on your employees’ types. For example, are they full-time, part-time, or independent contractors?

Any new employee you bring on board will need to fill out a W-4 employee withholding form. They also will need to fill out a W-2 form, the federal wage and tax statement document. In addition to these forms, you, as the business owner, will need to pay local and state taxes, depending on where you do business.

Local and state taxes include:

Sales
Income
Property tax
Unemployment
Self-employment
Payroll

In general, the types of taxes you have to pay to depend on your business structure. Your federal taxes also depend on the state that you operate in. Not all states require state taxes.

Create a Compliance Plan

No matter how small or large, every business entity has to follow specific rules and regulations. For example, your business needs to comply with particular finance, advertising, marketing, and privacy laws. The last thing you want is for your business to suffer from contractor misclassification concerns.

Small Business Rules and Regulation

Before you start your business, you will want to know employment laws and regulations. If you are unsure if your business meets this requirement, a knowledgeable business law attorney can help you out.

Fair Labor Standards

The United States Department of Labor, Wage and Hour division created the Fair Labor Standards in 1938. This includes the minimum payment amounts, work schedules, working hours, overtime limits, and criteria for non-exempt and exempt employees under the act. Some states have specific laws and rules that differ from federal legislation.

OSHA Laws

The Occupational Safety and Health Administration, also known as OSHA, mandates safety regulations that you must follow as a business owner. If you want to build a good safety program, you can reach out to your local OSHA office. They will provide you with the information you need to stay compliant.

Confirm Your Employees’ Eligibility

It is very important to keep papers that confirm your employees are eligible to work in the United States. If you aren’t able to prove that your employee is eligible, you can face severe penalties and fines from the United States Citizenship and Immigration Services.

Equal Employment Opportunity Commission

If your company has more than fifteen employees, you will need to enforce equal employment opportunities in your workplace. The Equal Employment Opportunity Commission (EEOC) enforces federal laws that make it illegal to discriminate against your employee or a job applicant due to their sexual orientation, race, color, religion, or disability.

If the EEOC finds that you discriminated against your employee or job applicant, they will try to settle the charge. If they are not successful, the EEOC has the authority to file a lawsuit to protect the rights of your employee or applicant.

Protect Your Business

The best way to protect your business is to get business insurance. There are several different insurance options available for you to choose from. However, the right insurance for your business will depend heavily on the type of business you own, the types of clients you have, and the size of your business.

Errors and Omissions Insurance

Errors and Omissions insurance, also known as E&O insurance or professional liability insurance, provides your business protection from liabilities related to improper services. Most accountants, writers, aestheticians, dentists, agents, and money managers get this type of insurance.

If your profession is not listed, that does not mean you shouldn’t look into E&O insurance. If you are unsure if you need it, you can reach out to your business lawyer, and they can point you in the right direction.

General liability Insurance

General liability insurance provides coverage for accidental damage done to property, the cost of defending lawsuits, and more. This insurance coverage usually includes bodily injury liability coverage and property damage liability coverage. Depending on the state you operate your business, this type of insurance coverage may be a requirement.

Property Insurance

If you plan to rent or purchase office space or retail space to run your business, you should buy property insurance. This insurance coverage protects your inventory, equipment, and your property from disasters such as theft, fires, vandalism.

Tornados, earthquakes, and flood damages are typically not offered and covered under property insurance policies. You may need to buy a separate policy, or you will need to add an endorsement to your policy.

Workers’ Compensation

If you have employees, you will need to purchase a workers’ compensation policy. Workers’ comp provides protection to your employees. In the event that they get hurt while on the job, workers’ comp can kick in to pay for their wages and medical needs.

This coverage also protects you and your business from any injury lawsuits. If you fail to get a workers’ compensation policy, you can face severe penalties, fees, and fines.

Hire a Lawyer

Every company needs a qualified business attorney to turn to when things go awry. On average, between 36% to 53% of small businesses have to deal with lawsuits.

When choosing your attorney, be sure to check their experience. The right attorney for you should have expertise in securities law, employment law, intellectual property law, and contract law.

Get Off on the Right Foot

Knowing the legal requirements needed to start and keep your business afloat is imperative. The last thing you want is for you and your company to come crashing down after facing penalties, fines, fees, and a lawsuit.

If you are unsure if your business meets the formal legal requirements, contact us now. We at Venerable Law have the expertise your small business needs to stay in business as long as you desire. Our team is fully prepared to answer any questions or concerns you have about your small business.