Legal Steps For Starting And Running A Business

6 min read • Jul 04, 2022 • Lyle Solomon, Guest Contributor

The most crucial factors to consider when starting a business are the legal obligations. New entrepreneurs must consider several legal requirements, including tax obligations, legal rights, and employment laws. Before you start a business, make sure you fulfill the essential legal responsibilities required to run your business smoothly. 

Draft Your Plan

Though an adequate amount of investment and knowledge is required to start a business, alone they are not enough for the smooth running of the business. Without a proper strategy, you won’t be able to estimate your legal obligations and liabilities. 

You have to make other decisions, like whether you would prefer to hire employees or if being a solopreneur sounds better based on your preferences. Every business owner has different ways and requirements to establish their business. But at the same time, every business has to go through a unique set of legal procedures. In short, you need a solid business plan. You can learn how to create a business plan here.

Your business plan will do more than help you maintain a focused course with your business — it will be linked to future federal tax obligations as well. The categorical division of companies is vast. In layman terms, this means you need to choose a business structure. The options below include a brief overview of most structures that you could choose, but if you’d prefer details, read this information from the U.S. Small Business Administration

  • Limited Liability Company [LLC]. This structure is created to provide security to business owners when handling liabilities. An LLC provides legal protection of the owners’ personal assets plus it’s a much simpler and safer version of a sole proprietorship. 
  • Sole Proprietor. The sole proprietorship is another option you can consider when starting a business. This is a simple business structure since most sole proprietors conduct businesses under their personal Social Security numbers. Still, even as a sole proprietor, you can obtain an Employer Identification Number (EIN) by applying for a Taxpayer Identification Number (TIN). If you do apply for an EIN, also register for a Doing Business As (DBA) to create a legal identity of your business’s name.
  • S Corporation (S Subchapter). The IRS has identified this business structure as S Subchapter. It is considered to be a separate entity apart from its owner. There are some IRS requirements that the business firm must qualify for to gain the S corporation status. Business entities must operate domestically, consist of only a single class, and have up to 100 shareholders to be eligible for the S corporation status. Revenue generated from an S corporation is reported on a tax form 1120-S
  • C Corporation (C-corp). Ownership and shareholders in a C-corp business structure are separately taxed from the business entity, and they are treated individually by the IRS. This structure has the potential to bring in huge revenue. 

Register Your Business’s Name

When you are sure about the business structure that best fits your needs, you must register your business name legally. Make sure you choose a unique name representing your brand and the goods and services you provide. If your business operates within a certain state, an entity name will protect your business, but a trademark protects your business at a national level. A DBA (Doing Business As) can also be a good option for sole proprietors, but it does not provide legal protection. 

Apply For An Employer Identification Number (EIN)

If your business needs to hire employees, you must legalize it by applying for an Employer Identification Number (EIN). It also allows you to file tax returns, open a business bank account, and apply for business licenses. You can apply online for an EIN through the IRS EIN Assistant. Sole Proprietors and single-member LLCs do not need an EIN as they are not hiring employees. 

Apply For Necessary Business Permits And Licenses

The process of obtaining business permissions and licenses is critical. The location and the type of goods and services your business provides will determine whether you need a federal license or a state-level license. Any business that offers goods and services supervised by a federal agency will require a federal license. The licenses and permits required by the state will differ based on the location. 

Familiarize Yourself With State And Local Tax Requirements

You need to get a clear picture of the tax requirements once you set up a business. Apart from income tax, independent contractors must also pay self-employment tax. Tax structure may vary depending on the business, and a clear understanding of the tax requirements is necessary. The IRS website can provide you with adequate information based on your unique needs. 

Develop A Compliance Strategy

Even as a small business, you’ll still be subject to some of the laws meant for large corporations, including ones governing marketing, advertising, intangible assets, and privacy. Hiring employees will add to the state and federal laws that apply to your business. Check the laws to identify which rules apply to your business. 

Add Business Insurance Protection

Business insurances shield your business from unforeseen events. Your business strategy’s protection will only protect your personal assets, but business insurance will guard both your business and personal assets. An uninsured business is likely to fall into massive debt for an unpredictable event such as a natural calamity. A tremendous amount of debt can stand in your way of improving and widening the areas of your business operation. Consolidating your debts might help you through the repayment process. Since certain circumstances do not knock before coming, it’s best to provide your business with protection against such potential risks. 

Common Small Business Insurance Options: 

  • General Liability Insurance. General liability insurance provides your business protection against accidental damage of property, lawsuits, and other kinds of financial losses. 
  • Product Liability Insurance. Businesses involved in the selling of goods must purchase this insurance. This insurance typically protects you if any product you sell ends up faulty or hurts a customer. 
  • Commercial Property Insurance. This insurance protects your business from any catastrophic damage caused by a natural calamity or an accident. 

Bottom Line

These were some points in your checklist of setting up a business and operating it from a legal perspective. The best way to ensure that you have covered all the legal procedures is to talk with an expert, and a lawyer can guide you through all the legal responsibilities before opening your business.

Disclaimer: The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of Lendio. Any content provided by our authors are of their opinion and are not intended to malign any religion, ethnic group, club, organization, company, individual or anyone or anything.The information provided in this post does not, and is not intended to, constitute business, legal, tax, or accounting advice and is provided for general informational purposes only. Readers should contact their attorney, business advisor, or tax advisor to obtain advice on any particular matter. 

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Lyle Solomon, Esq.

Lyle Solomon has extensive legal experience as well as in-depth knowledge and experience in consumer finance and writing. He has been a member of the California State Bar since 2003. He graduated from the University of the Pacific's McGeorge School of Law in Sacramento, California, in 1998, and currently works for the Oak View Law Group in California as a principal attorney.