Moving forward to start a small business can be a real challenge. There are tons of things that need to be done, and your decisions will carry legal implications.
As someone who owns a small business, it’s essential to ensure all your legal bases are covered to avoid penalties like lawsuits, fines, or even time in jail.
The good news is that there are legal resources available for small businesses, both through hired counsel and online websites. This article will dig into some of the most important tasks involved in making sure your small business is legal. Follow along to ensure you don’t make any missteps.
By taking care of your legal needs early, you’ll have more time in the future to focus on other parts of your business, such as getting your product or service out under the eyes of potential customers or marketing to an audience that needs what you are selling.
#1: Select the right business structure
Before you do anything else, it’s essential to choose the right structure for your small business. This is crucial since it affects your fundraising options, how you pay taxes, and your personal liability. There are several structures to choose from, such as limited liability company (LLC), S corporation, C corporation, partnership, or sole proprietorship. After you choose the structure, you need to fill in the secretary of state.
Sole proprietorships and partnerships are often used for small businesses due to the shorter set-up time and limited paperwork requirements. However, these will not offer the best liability protection for you as an owner. LLCs and corporations tend to work better as businesses grow, letting you raise venture capital and secure loans.
#2: Look into registrations, permits, and licenses
Your location and what the business is for will determine whether you need certain business permits and licenses from the city, country, state, or country. This can be challenging since registrations, permits, and licenses come in many forms. For example, there are liquor licenses, industry permits, fire permits, health and safety permits, building permits, and local business licenses.
Since there are so many possibilities, this will often require a bit of research. If you have an attorney, they can help you determine what you need to do to be compliant with the law. Visiting the local business licensing agency can also get you started.
#3: Understand business taxes
As a business owner, you are required to pay taxes. This includes self-employment taxes, income taxes, and in some cases, sales taxes. A tax advisor is a great partner to have to be sure you don’t make any mistakes with your taxes. Investing in accounting software is also a good idea to educate yourself on what forms you need and when you should file.
Unlike individuals, most businesses can’t wait until spring to pay taxes. There is a pay-as-you-go schedule where you pay a certain amount of taxes every quarter. Look into the IRS requirements for the appropriate business structure to avoid back taxes or fines.
#4: Keep up with bookkeeping
Most locations require you to keep a record of all business transactions using a certain accounting method. Make sure you know the requirements for record-keeping based on your location and industry, then keep up with bookkeeping and filing for your transactions and documents. This will help with taxes and be useful if any legal problems pop up.
#5: Acquire an employer identification number (EIN)
To properly file your business tax returns and open a company bank account, it’s useful to have an employer identification number. This is something that can be requested from the IRS for no fee. You can call in to request one or fill out a form on the IRS website. Single-member LLCs and sole proprietorships are the only businesses that do not have to have an EIN.
The process to sign up for an EIN requires the social security number of the person filing the form. You’ll also need information about the date of incorporation and business structure. After completing the process, keep a signed copy of the document in your files.
#6: Create a compliance plan
Even the smallest business has to adhere to the same regulations and laws as huge corporations. This includes privacy, intellectual property, finance, marketing, and advertising laws. For companies with employees, there are additional federal and state requirements that need to be met. Make certain you’re aware of which laws apply to the business.
In addition, you want to be sure your small business never falls into contractor misclassification issues. This can be a threat to the business as a whole, as well as your clients and customers. A compliance plan ensures you have these things handled and risks are mitigated as best as possible.
#7: Purchase business insurance
As someone starting a small business, you are responsible for the financial and legal well-being of the company. The company is a part of you, so if issues arise within it, that will directly impact you. It’s crucial to ensure your business is protected against liability losses both because customers and clients expect it and because it protects the business and its future.
The type of business you have will determine what kind of insurance is needed. Everything from the types of clients you work with to the size of the business and its industry is important to note when choosing the right forms of insurance. Some of the most common forms include general liability insurance and errors and omissions insurance.
#8: Open a bank account
It’s not always required to have a separate bank account for the business, but it’s a good idea in any circumstances. A business account makes it easier to track and report your expenses and income. It’s best to have your business bank account ready before you ever receive payments. This is something you can do in the early stages of setting up the business.
Several pieces of information may be required when you open a business bank account, including the following:
- A business license
- Your employer identification number
- Ownership agreement documents
- Formation documents for the company
Having all of these documents ready before you head into a bank will make the process quicker and easier.
#9: Consider hiring an attorney
As you may have noticed, a competent attorney is useful for any legal issues that come up for your small business. While it might seem like an unnecessary expense, it could end up saving you money in the long run. When legal problems are present, a good attorney is worth their weight in gold.
If you choose to hire an attorney, consider someone proficient in intellectual property law, securities law, contract law, and employment law. General lawyers can be useful, but spreading the load across several firms is also possible.
The process of starting a business isn’t easy. There are challenges along the way, and you need to be flexible to handle them. If you work through all the legal requirements early, it can prevent potential headaches later on.
Meeting all legal requirements includes several things you can do all on your own. However, for complicated questions or tasks, reach out to an attorney who focuses on small businesses. It’s well worth it to ensure that you don’t run into any issues later. They’re often more challenging to solve when you have an established small business.
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