What Are the Legal Requirements to Start a Business?

FT Contributor
Two binders labeled "compliance" and "regulations" sit on top of each other on a desk alongside a notebook, pen, and calculator.

The legal requirements to start a small business can be challenging to understand. The legal obligations for companies may vary depending on their size, industry, and operations.

Laws governing businesses may also vary depending on the location. For example, zoning ordinances, licensing requirements, and insurance coverage rules differ from state to state and city to city.

Every business wants to abide by these rules to avoid fines or other penalties. However, there is a lot to think about when you start a business, so you may worry that you’ve overlooked a vital regulation or neglected to file an essential legal document.

Legal requirements can also affect your business goals and plans and factor into your long-term strategy.

Though legal obligations vary from state to state, all new businesses need to consider the following requirements.

1. Choose Your Business Structure

Some of the requirements to set up a business depend on the structure of your company. Therefore, the first step for almost all businesses is to choose the type of company to establish.  

Your business structure will affect how you file taxes and organize assets, assign ownership status, and divvy up income. Furthermore, there may be different legal requirements depending on the structure you choose.

Here are the organizational structure options for businesses:

  • Sole proprietorship: A sole proprietorship is for a business that you operate yourself. As a sole proprietor, you are personally responsible for all the debts and assets of the company. There are no special legal protections, but it is easy to set up a business using this structure. A sole proprietor uses Schedule C to claim expenses, profits, and losses when filing taxes.
  • Limited liability company (LLC): An LLC offers more legal protections than a sole proprietorship. With an LLC, owners can keep their personal assets separate from the company. LLC owners won’t be personally liable for business debts or the company’s legal issues. LLCs can have more than one owner, and the structure makes it easy to share profits. The owners do not have to pay corporate taxes, but they are liable for their share of the profits, which they pay on their personal income taxes.
  • S Corp: An S corporation offers liability protections similar to an LLC. However, it is a separate tax entity. Instead of paying corporate taxes, the tax burden usually gets passed through to the owners, who pay taxes on their income. However, you do have to file separate tax returns for the company. Since an S corp is a corporation, you can issue shares that signify ownership.
  • C Corp: A C corporation makes owners shareholders. A C corp, like an S corp, is a separate legal and tax entity. With a C corp, you can issue different classes of stock, and there are few restrictions on who can be a shareholder. C corps are complex and take the most time to set up, but they are a viable option for companies that expect to grow and evolve.  

2. Register Your Business

You need to register your business name and ensure that it is available and not already trademarked.

Here are the options to consider when choosing a name for your business.

  • Register the name with your state: You can register your company as a business entity at the state level. You typically register as an entity with the Secretary of State’s office. The process usually involves filing a form and paying a fee. After you file as an entity, your name has protection at the state level.
  • Get a trademark: If you wish to register your name at the federal level, you can petition for a trademark. You register your business name with the U.S. Patent and Trademark Office (USPTO) by filling out the necessary forms and paying the required fees.
  • Choose a doing-business-as name: The simplest way to get a business name is to file for a “doing business as” (DBA) designation. This option does not protect your name, which means that someone else can use it. However, a state may require you to register a DBA name, and you may need to get a DBA for banking or licensing purposes.
  • Reserve a domain name: One final consideration is a website domain name. Choosing a domain name does not have legal ramifications, but it is worth considering. You want to ensure that your chosen business name has an available domain name and that people will not confuse it with an existing domain name.

Note that a sole proprietor can, if they so choose, do business under their own name.

3. Apply for Your Tax ID Number

If you have employees, you need to obtain an Employer Identification Number (EIN). This step is not always necessary. For example, if you are a sole proprietor, you do not technically need an EIN.

However, any LLC or corporation that hires employees needs an EIN. You use this number to file taxes, hire workers, and obtain loans. Like a Social Security number does for citizens, an EIN can also serve as your company’s identification when you apply for licenses or open a bank account.

You can apply for an EIN on the IRS website.

4. Apply for Permits and Licenses

Depending on the nature of your business, you could need federal, state, and local licenses. License requirements vary depending on location and business type. The Small Business Administration (SBA) maintains a list of licenses or permits you need at the federal level.

The SBA also has a search function on its website that you can use to find a local office. This office provides resources for local zoning laws and other local, regional, and state requirements. Since these regulations vary by location and business, the best strategy is to perform research for your specific area.

5. Choose Business Insurance Coverage

Depending on their industry and operations, businesses may need liability insurance. This insurance comes in different forms, and you need to select the right policy for your specific needs.

General liability insurance may be enough for most businesses. Some, however, need more specialized coverage, such as product liability insurance.

  • General liability insurance offers blanket policies that pay out if a business loses a lawsuit, experiences property damage, or if an employee or customer gets injured on company property.
  • Product liability insurance provides coverage for companies that sell products. If the product causes injury to someone or damage to someone’s property, this policy will cover settlement or payment to victims.
  • Property liability insurance covers damage to business property or injuries that occur on business premises.

6. Open a Business Bank Account

Whether the small business you create is a sole proprietorship or a C corporation, you need a business bank account to separate your personal and business finances.

With a business account, you can create a company budget and track cash flow, losses, and expenses for tax purposes. You may also connect your accounting software to your business bank account to automate your bookkeeping tasks. Programs like Quickbooks can collect account data to create reports and balance sheets.

Some banks have business accounts that offer specific services and features, such as payment processing. When you open a business account, you need to have the business name and EIN already set up.

Do You Have to Register a Small Business?

Technically, you do not have to register your small business. However, if you do not register it, you can only operate under your own legal name.

Working without registration may be acceptable for some subcontractors, freelancers, or small businesses that provide limited services.

However, most small businesses will benefit from registering with their state and getting a trademark. They will then be able to protect their company’s name legally. In most states, you are legally required to register a business name if you wish to conduct operations using that name.

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