16 Key Legal Requirements for Launching a Small Business
September 01 2022
Authored by: Kristin Johnson • 4 Minute Read
Looking to launch your own small business? It’s important to cover all your legal bases. Lucky for you, we’ve rounded up the key points you need to consider before starting your own business.*
#1 Choose the business entity that best suits your goals
The type of business entity you form—whether it’s an LLC, a sole proprietorship, or a corporation—will directly impact your personal liability, tax returns, and ability to raise funds for your company, so picking the right one is key. Once you do, make sure to file the proper forms and pay all the necessary fees (if any) through your secretary of state.
Note that most small business owners typically elect to establish a sole proprietorship since it requires the least amount of effort and paperwork; however, that option, though simple, doesn’t offer much liability protection, leaving folks vulnerable to any debts and lawsuits incurred by their business.
#2 Find out which permits and licenses you need
Depending on your type of company and where it’s based, you’ll likely need to apply for certain licenses and permits within your city, county, state, or country. That includes health, safety, fire, and construction permits, liquor licenses, and more. Research all the ones pertaining to your business and submit them well in advance to ensure you are compliant with all tax regulations.
#3 Pay your taxes right
Paying business taxes can be daunting. Consider hiring an accountant or tax advisor to make sure you’re filing your returns correctly or use accounting software to help you determine the best time and method for filing taxes. (Need help? Click here for the IRS requirements.)
#4 Keep your records straight
Most places require business owners to record every transaction in accordance with a particular accounting method. Check to see what’s required in your city or state, and implement a bookkeeping system to help you track all your business documents.
#5 Create a founders’ agreement
If you’re forming a business with others, make sure each cofounder is fully aware of his or her rights and scope at the company. While corporations require you to sign a proper shareholder agreement and articles of incorporation, LLCs only require articles of organization and an LLC operating contract. Sole proprietorships don’t apply here, since they’re only owned by one person.
#6 Set a vesting schedule
Create a vesting schedule for all your employees who receive compensation in the form of stock options. Another great reason: It protects your business and prevents shareholders from selling the stock simply whenever it’s convenient for them.
#7 Write down your employer identification number (EIN)
Corporation and LLC owners are required to have an employer identification number, which you can request via phone or online through this website.
#8 Protect your IP
Intellectual property encompasses trademarks, copyrights, trade secrets and more. It can be very complicated and time-consuming, so be sure to file any patents or trademarks well in advance. Consult with an attorney specializing in IP to ensure you (and your ideas!) receive the greatest protection.
#9 Classify your workers correctly
It’s not uncommon for startups to unwittingly miscategorize their early employees. If you make the mistake of labeling them, for instance, as independent contractors instead of full-timers, you could be penalized with expensive fees and back pay.
#10 Hire a solid legal team
The first step? Finding a good lawyer or law firm—one who is knowledgeable in employment, contract, securities and IP. Listen to their legal advice and use it to figure out how to save thousands—even millions of dollars.
#11 Only work with accredited investors
The Securities and Exchange Commission places investors into eight different categories, the most general of which requires you to make $200,000 or more in annual income and have at least a million dollars in the bank. (Though it’s possible to raise money without enlisting accredited investors, it could create serious trouble in terms of securities and compliance enforcement.)
#12 Write a handbook
Company handbooks can help employees navigate long-standing business values and establish what is and isn’t acceptable behavior in the workplace, decreasing the chances of any foul play.
#14 Buy workers’ compensation insurance
Most companies in the U.S. are legally required to purchase workers’ compensation insurance, so don’t forget to purchase it for your employees. Laws governing workers’ compensation vary wildly across the country, so check to see which rules affect you directly, according to where you’re based.
#15 Be mindful of email regulations
Every country has its own set of regulations governing email correspondence. Prior to contacting your clients, study the rules of your specific state and apply them before sitting down to compose your email campaign.
#16 Stay in compliance with securities laws
Founders and investors of C Corps and LLCs are subject to federal and state securities laws. They are required to regularly update information about their company to encourage a fair market, not to mention protect against insider trading and fraud. Failing to comply with any regulations can force a budding business owner to rebuy all of their shares at the issuance price, even if the company has lost it all.
*This post is for your information and interest only. It is not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. Please seek advice tailored to your individual circumstances.
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