There are various legal requirements that you need to comply with before starting your business. They include financial, employment, and tax regulations. Complying with these laws allows you to focus on growing and expanding your organization. For every new business idea, research on the legal essentials of setting it up, in addition to the financial aspects.
What Are The Popular Legal Obligations For Startups?
This straightforward guide shows you how to start your business legally:
Table of Contents
1. Form a Corporation or LLC
Choosing a proper organizational structure is the first step of starting a small business. Advantages and disadvantages depend on whether you form an LLC or a corporation. It’s therefore advisable to conduct thorough research before registering your preferred business entity. Some of the distinctions are:
- Limited Liability Company (LLC)
This setup shields you from personal responsibility for most business events such as bankruptcy. Under most circumstances, your personal property won’t be eligible for seizure in case of a lawsuit against the company. LLCs also enable the filing of business earnings as a portion of individual income taxes, provided you pay self-employment tax. Finally, you’ll need to have an LLC operating agreement that outlines everyone’s duties.
- Corporation
Also known as a C corp, this entity is legally separate from the founders or owners. Of all business structures, corporations provide the highest level of protection from business liability. They also file distinct income taxes on profits. However, they’re not as easy and affordable to form as LLCs.
If you’re interested in becoming an entrepreneur, the Small Business Administration (SBA) has a comprehensive guide on various business structures.
Read:- How Can I Take Payments While Self-Employed?
2. Register a Business Name
After choosing a business structure, the next step is to register a business name. Pick a unique one that comprehensively represents your brand. Depending on the purpose, there are up to four methods of registration.
- The first is an entity name, which lawfully guards your organization at the state level.
- The second is a trademark to protect the entity at a federal level. The other two are:
- Doing Business As (DBA): Your business holds this status if it operates under a different name from the official one. In some instances, the local authority may require you to register the fictitious entity.
- A domain name to claim your organization’s web address.
3. Claim an Employer Identification Number (EIN)
The EIN is also known as a federal tax ID number. It enables your business to hire employees, request relevant licenses, pay federal taxes, and operate business bank accounts. The IRS website facilitates EIN applications.
You’ll need it if your business intends to recruit and remunerate employees and file employment tax returns. It’s also suitable for organizations that register as corporations and use tax-deferred pension plans.
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4. Establish Whether a State Tax ID is Necessary
You only require this number if the state deducts business taxes for your particular entity. It’s advisable to seek more information from the local authority’s website or offices. Be conversant with the tax code since it varies from state to state. Hiring an employment lawyer helps you understand that jurisdiction’s employment tax requirements.
5. Acquire Business Licenses and Permits
Although you need federal and state licenses and permits, your industry and business location also dictate additional certification. The SBA provides a list of expected documentation based on industry, which helps narrow your research. Other than location, your core business activities determine state fees, licenses, and permits.
6. Insure Your Business
Business insurance is crucial in instances where your business structure isn’t enough protection against personal liability. This shield can give you peace of mind by covering both individual and company assets. Some forms of insurance are mandatory by law, such as disability and unemployment.
It’s also advisable to invest in business insurance to safeguard your startup against unforeseen events. Your options include:
- General liability insurance: It shields against various types of financial loss, including property damage, lawsuit settlements, injuries, and medical issues.
- Product liability insurance: This type of coverage protects you in the unlikely event that some defective products injure your customers.
- Commercial property insurance protects you against losses from natural disasters, vandalism, accidents, and general damage.
7. Separate Business and Personal Bank Accounts
From a legal viewpoint, it’s crucial to make this distinction before accepting payments from customers. Pick a financial institution that has startup-friendly policies, such as affordable banking fees.
To open a business account, the bank will require some details. They include your EIN (or SSN if it’s a sole proprietorship), business formation documents, a valid license, and ownership agreement.
Read:- A Quick Guide to Filing Your Taxes for Small Business Owners
8. Seek Professional Advice
Attorneys play a vital role in business startups because they ensure your agreements are legally binding. They also give you essential information that you wouldn’t necessarily uncover on your own. Additionally, contact financial experts to ensure you cover all your bases. Other than accountants, you can consult a financial planner, insurance agent, and investment advisor.
Conclusion
Your small business will have a higher likelihood of success by following these tips. Business registration is the first vital step of this journey. A business name registration gives you certain benefits over individual entrepreneurs. Ensure you pick a unique name to facilitate long-term professional relationships with regulators, customers, suppliers, and other industry stakeholders.