Starting a small business involves more than just a solid business plan, strong market demand, and financial readiness. It also entails a comprehensive understanding of the complex legal requirements that come with business ownership. Each form you fill out, registration you complete, and contract you prepare shield your organization from potential legal liabilities and missteps. Ignoring these requirements, tedious as they may be, is not an option.

But legal compliance isn’t an insurmountable challenge. With a thorough grasp of the regulations and procedures, you can establish your business on solid legal footing. In this article, we’ll outline the key legal requirements for starting a small business, providing a comprehensive guide to help you lay a strong foundation for your venture.

What’s in this article?

• Identify your business structure
  
• Register your business name
  
• Apply for a federal tax ID number or EIN
  
• Register with the state revenue office
  
• Obtain business licenses and permits
  
• Register for state employer taxes
  
• Obtain insurance
  
• File organizational documents with the state
  
• Create an operating agreement
  
• Register any applicable trademarks or patents
  

1. Identify your business structure

When you’re establishing your startup, one of the important early decisions is determining the legal structure of your business. This isn’t merely a bureaucratic step—it has profound implications for your startup’s future growth, scalability, potential for attracting investment, liability, and tax implications. Here are some of the common entity structures you can choose from:

• Sole proprietorship
  If you’re a solopreneur launching a low-risk business, a sole proprietorship can be a cost-effective and straightforward option. However, you’ll be personally liable for business debts and legal issues. This could be risky if your startup operates in a litigious industry or one where debt is common.

• Partnership
  If you’re cofounding the startup, a partnership may seem like a natural choice. It allows shared responsibility, profit, and loss. However, conflicts can arise in partnerships, so it’s vital to draft a partnership agreement outlining roles, responsibilities, and processes for dispute resolution. An often overlooked drawback is that you may be personally liable for your partner’s actions.

• Corporation
  Corporations—most commonly S corps and C corps—are more complex to set up and manage due to regulatory requirements. However, they offer a major advantage for startups seeking venture capital: they allow for an easy division of ownership through the issuance of shares. This makes it much more straightforward to bring in investors. But they can be more expensive to establish and maintain, and they lead to double taxation—first on corporate income, and then on dividends to shareholders.

• Limited liability company (LLC)
  LLCs are often a good choice for startups. They combine the liability protection of corporations with the tax advantages and operational flexibility of partnerships. Unlike corporations, profits and losses can be passed through to owners without taxation at the corporate level. However, investors may prefer corporations, particularly C corps, because they allow for preferred stock.

Choosing a business entity requires a deep understanding of each of these structures—and how each might impact your startup’s long-term strategy. Before committing to one structure, consider your plans for scaling, funding, and your personal risk tolerance. While the advice of professionals such as attorneys or CPAs can be invaluable, founders should also have a solid grasp of these implications, as they’ll impact many aspects of your startup’s journey.

2. Register your business name

Establishing an original, recognizable name for your startup is important, for branding, marketing, and legal purposes. The process involves several steps and depends on the business structure you’ve chosen.

• Doing business as (DBA)
  If you’re a sole proprietor or a partnership, and you want to do business under a name that’s different from your personal name or your partners’ names, you’ll need to register a DBA, also known as a “fictitious name” or “trade name.” This process varies by state, but typically involves searching to make sure the name isn’t already in use, and then registering it with a specific state agency.

• Corporate or LLC name
  If you’ve formed a corporation or an LLC, the name you chose when you filed your articles of incorporation or organization is already registered and protected in your state. However, if you want to conduct business under a different name, you’ll also need to file a DBA.

• Trademarks
  If you want to prevent other businesses from using your business name in ways that could confuse your customers, you should consider registering it as a trademark. This is a more complex process, often requiring the assistance of a trademark attorney. You can register a trademark at the state level, but for the broadest protection—especially if you plan to do business or have an online presence outside your own state—you should register it with the United States Patent and Trademark Office (USPTO).

Choosing and registering your business name requires careful thought. Your business name is a key part of your brand and marketing strategy. It should reflect what your startup does and stand out in the markets you’re targeting. You also need to ensure that your chosen name doesn’t infringe on existing trademarks or business names, as this could lead to costly legal disputes down the road. Each state has its own laws and regulations regarding business name registration and trademark, so make sure you research the rules applicable in your specific state.

3. Apply for a federal tax ID number or EIN

An employer identification number (EIN) is essentially a Social Security number for your business. It’s a unique nine-digit number assigned by the Internal Revenue Service (IRS) to businesses for tax filing and reporting purposes. Even if you don’t plan to have employees, most businesses are still required to obtain an EIN.

• Who needs an EIN
  If your business is a corporation or a partnership, or has employees, you’ll need an EIN. Most banks also require an EIN to open a business bank account. An EIN is also necessary if you’re self-employed and want to create a tax-deferred retirement plan, or if you’re involved with trusts, estates, real estate mortgage investment conduits, nonprofit organizations, or farmers’ cooperatives.

• How to apply
  The process to apply for an EIN is straightforward and free of charge. You can apply online through the IRS website. You’ll need to complete the application in one session as you cannot save and return to it later, so make sure you’ve gathered all necessary information beforehand.

• Information needed
  To apply for an EIN, you’ll need to provide information about your business, such as its legal name, the county and state where it operates, and the nature of your business activities. You’ll also need to provide information about the “responsible party”—the individual or entity who controls, manages, or directs your business and its assets.

Securing an EIN early in the process of setting up your startup is beneficial because it allows you to keep your Social Security number private, reducing the risk of identity theft. Additionally, it enables you to complete other business setup activities that may require an EIN, such as opening a business bank account or applying for business licenses and permits.

4. Register with the state revenue office

Once you’ve established your business name and have your EIN, you’ll need to register with your state’s Department of Revenue or equivalent body. This registration allows your startup to pay state taxes, which can include sales tax, unemployment insurance tax, and income tax. The requirements can vary significantly from state to state, so it’s important to understand your specific obligations. Here are some of the taxes you might have obligations to pay:

• Sales tax
  If you’re selling a physical product, you’ll likely need to register for a sales tax permit. Some states also require sales tax for certain services. After registration, you’ll collect sales tax from customers and remit it back to the state. The frequency of these payments varies by state and can also depend on the volume of your sales.

• Employer taxes
  If you’re planning to hire employees, you will also need to pay unemployment insurance tax and employee withholding tax. The unemployment insurance tax goes into a state fund that pays benefits to workers laid off due to no fault of their own. The withholding tax is the income tax that employers withhold from employees’ wages and pay directly to the government.

• Income tax
  Depending on your business structure, you may also need to pay state income tax. For example, while an LLC itself isn’t subject to income tax (with the tax “passing through” to individual members), some states levy a franchise or privilege tax on LLCs for the privilege of doing business in that state.

Notably, not all states have the same tax structure. Some states do not charge sales tax, others don’t have an individual income tax, and a handful don’t have either. Furthermore, some cities and counties also impose additional taxes, so you’ll need to consider local regulations as well.

Addressing these state and local tax obligations can be complex, and the stakes are high. If you fail to properly register and pay your business taxes, you could face penalties, fines, and interest on any amount overdue. You may want to consider using the services of a tax professional, who can ensure that you’re meeting all your obligations and taking advantage of any potential tax benefits.

5. Obtain business licenses and permits

To operate legally, your startup may need specific licenses and permits. These requirements vary widely depending on your business’s location and industry. Failing to obtain the necessary licenses and permits can result in penalties and, in extreme cases, force you to cease operations. Here are some examples of licenses and permits you might be required to get:

• State licenses and permits
  Many states require specific businesses to hold licenses. For instance, if your startup is in the food service industry, you’ll likely need health permits and a food handler’s permit. Professional services, such as legal services, real estate, and medical care, often require professional licenses.

• Local licenses and permits
  In addition to state licenses, your city or county might require you to have certain permits. Common examples include signage permits, home-based business permits, and a general business license. The process to obtain these can often be found on your local city or county government website.

• Federal licenses and permits
  Federal licenses are typically only required for specific industries. For instance, if your business involves broadcasting, aviation, or selling alcohol, tobacco, or firearms, you’ll need a federal license or permit.

• Specialty permits
  Depending on your operations, you may need additional permits. For example, if your business affects the environment, such as certain manufacturing operations, you may need an environmental permit.

Securing the appropriate licenses and permits is an important step in your startup’s journey. The process can be time-consuming and complex, so it’s wise to start early. Ensure that your business is fully compliant with all regulations to avoid any future penalties or interruptions to your operations. Keep in mind that requirements can vary depending on your specific industry, location, and business activities, so thorough research or consulting with a business expert is highly recommended.

6. Register for state employer taxes

When you start hiring employees for your startup, you’ll need to fulfill specific tax responsibilities related to employment, including:

• Unemployment insurance tax
  In the US, businesses are required to pay state unemployment insurance taxes, also known as SUTA or SUI taxes, to fund unemployment benefits. The process of registration and payment varies by state. Usually, you’re required to register with the state’s labor department or unemployment insurance agency. The tax rate you’ll pay often depends on factors such as your industry and your company’s history of layoffs.

• Employee withholding tax
  As an employer, you’re also required to withhold certain taxes from your employees’ wages and pay them to the government. This typically includes federal income tax and FICA taxes, which fund Social Security and Medicare. In most states, you’ll also need to withhold state income tax. The specifics of this process depend on your state’s rules and the details of your payroll.

Managing these tax obligations can be complex, especially as your startup grows and your workforce expands. Stay organized, keep accurate records, and make timely tax payments. Many businesses find it beneficial to use payroll services or employ an accountant to handle these tasks and stay up to date with federal, state, and local tax laws, as they can change from year to year.

7. Obtain insurance

The right insurance can protect your business from financial losses caused by a variety of risks, including property damage, theft, legal claims, and even business interruption. Here’s an overview of some types of insurance you might need to deal with:

• General liability insurance
  This coverage protects your business if it’s sued for causing bodily injury or property damage. For example, if a customer slips and falls in your office or if you accidentally damage client property during a service call, general liability insurance can help cover legal costs and damages.

• Property insurance
  If you own or lease a physical space for your business, property insurance can protect your buildings and contents in case of fires, theft, or other disasters. Even home-based businesses should consider this coverage, as homeowners’ insurance may not adequately cover business property.

• Workers’ compensation insurance
  If you have employees, most states require you to carry workers’ compensation insurance. This coverage can help pay for medical expenses and lost wages if an employee is injured on the job.

• Professional liability insurance
  If your business provides professional services, such as consulting or financial advice, consider professional liability insurance (also known as errors and omissions insurance). It can protect you if you’re sued for negligence, misrepresentation, or inaccurate advice.

• Cyber liability insurance
  If your startup stores sensitive customer data (such as credit card information or personal details), cyber liability insurance can protect you in case of data breaches or cyber-attacks.

Choosing the right types and levels of insurance can be complex, and it depends on several factors including the nature of your business, its location, and its size. It’s a good idea to consult with an experienced insurance broker who understands your industry and can guide you to the appropriate coverages. Keep in mind that as your business changes over time, your insurance needs might change, too, so review your coverage periodically.

8. File organizational documents with the state

To formally establish your startup’s legal structure, you must file certain organizational documents with your state’s secretary of state or similar government agency. The exact documents and the filing process can vary by state and by your chosen legal structure. Here’s a brief overview of the requirements for different business structures:

• Corporation
  If you’re forming a corporation, you’ll need to file articles of incorporation. This document includes key details about your business, such as its name, principal office address, purpose, the number of shares the corporation is authorized to issue, and information about the registered agent.

• Limited liability company
  If you’re starting an LLC, you’ll file articles of organization. Much like the articles of incorporation, this document will include the name of your LLC, the principal office address, the purpose of the LLC, and information about the registered agent.

• Partnership
  If you’re forming a partnership, the requirements can vary. Some states require partnerships to file a similar document called a “Statement of Partnership Authority.”

After filing these documents, your business is officially registered with the state. But the paperwork doesn’t stop there. If you’re operating as a corporation or an LLC, you’ll also need to create bylaws or an operating agreement. While these documents don’t need to be filed with the state, they are important, as they outline the governance and operating procedures for your business.

Your business will also likely need to file an annual report and pay an annual fee to keep your business in good standing with the state. The due date, filing fees, and processes for these reports can vary greatly by state and business structure, so be sure to note these requirements.

9. Create an operating agreement

An operating agreement is a foundational legal document that outlines the operational procedures and ownership structure of your startup, particularly if you’re forming an LLC. Here’s what you need to know about this document:

• What it includes
  Your operating agreement should cover key aspects of your business, such as the percentage of ownership for each member, distribution of profits and losses, member roles and responsibilities, procedures for adding or removing members, dissolution of the company, and how to handle disputes among members. It can also specify details such as meeting frequency and voting rights.

• Why it’s important
  An operating agreement provides clarity and structure, prevents misunderstandings, and safeguards your limited liability status by separating your personal assets from those of the company. It provides a roadmap for decision-making processes and the resolution of potential disagreements among members.

• Legal requirements
  While not all states require an LLC to have an operating agreement, it’s highly recommended to have one—even for single-member LLCs. Some states may have default rules that govern LLCs without operating agreements, but these rules may not be suitable for your business needs.

Creating an operating agreement requires thoughtfully considering how you want to run your business and how decisions will be made. It’s a good idea to consult with an attorney or a professional advisor during this process to ensure your operating agreement covers all necessary details and is in line with state laws and regulations. The operating agreement isn’t a one-and-done document. As your business grows and evolves, the agreement should be revisited and updated to reflect changes in your business structure or strategy.

10. Register any applicable trademarks or patents

Intellectual property (IP) refers to creations of the mind, such as inventions, literary and artistic works, designs, symbols, names, and images used in commerce, that are legally protected by patents, copyrights, trademarks, or trade secrets. IP protection is an important step for many startups. Your IP—including your business name, logo, products, or services—can be some of your most valuable assets, and protecting them can be necessary for your success.

• Trademarks
  A trademark can protect a word, phrase, symbol, design, or a combination of these, that identifies and distinguishes your goods or services. It’s what makes your brand recognizable. Registering a trademark with the United States Patent and Trademark Office (USPTO) gives you exclusive rights to use the mark nationwide in connection with your goods or services. The process involves a comprehensive search to ensure your mark doesn’t infringe on existing trademarks, followed by an application that includes details about your mark and the goods or services it represents.

• Patents
  If your startup has invented a new and useful process, machine, manufacture, or composition of matter, you may want to consider applying for a patent. A patent grants the inventor exclusive rights to the invention, preventing others from making, using, selling, or importing it without permission. Patents are granted by the USPTO and can take several years and substantial resources to obtain. There are different types of patents (utility, design, and plant patents) each protecting a different aspect of an invention.

Securing intellectual property rights can be a complex process requiring detailed technical and legal knowledge—and mistakes during the application process can result in lost rights or unnecessary expenses. For this reason, it’s often beneficial to engage an IP attorney or a professional service to handle these applications. Protecting your IP not only secures your rights but can also add value to your startup, attract investors, and provide a competitive advantage in the marketplace.

This is not an exhaustive list of legal requirements, and the journey to starting a business may require additional steps or involve different considerations based on a variety of factors. The nature of your startup, the industry you’re operating in, and the specific regulations of the state or states where you plan to operate can all influence which steps you’ll need to take to start your business.

For example, a tech startup with a unique software solution might need to focus heavily on patent applications, while a restaurant would have different concerns, such as health permits and food-handling certifications. A company operating in multiple states will have to comply with different state regulations, requiring a comprehensive understanding of the varying legal landscapes.

The preceding steps serve as a general roadmap, but every business’s journey is different. Conduct in-depth research, consult with professionals such as lawyers and accountants, and seek advice from business advisors familiar with your specific industry and region to ensure you’re meeting all legal requirements. This will create a foundation for launching and growth that is best suited for your specific business.