Small business owners are often energetic, creative, and independent-minded people.
They are also passionate and cannot wait to begin working in their industry doing what they love.
These are the fun parts of starting a business, and you can probably relate to feeling passionate and excited about what you do.
At the same time, launching a new small business is no easy feat. You must meet several legal requirements, from choosing a business structure to obtaining business licenses and permits.
This guide walks you through how to meet the six most important obligations that most states require of new businesses.
Register Your Business Structure
Choosing the correct business structure is one of the most important things you will do as a new business owner.
The choice you make impacts how you pay taxes, how much you pay, your other liabilities, and the general operation of your new company from day to day.
Below is information you need to know about the four most common business structures, starting with the most complex.
Corporation
When owners of a corporation form a business, their liability for business debts is only as much as they have personally invested in the company.
Any individual or company that sues the business cannot go after the personal assets of any of the owners.
This type of business formation also has the most rigid structure of all the types. Every corporation must appoint people to the following roles:
- Board of Directors
- Officers
- Owners, alternatively known as shareholders
Corporations also have the strictest recordkeeping requirements of the four types.
When it comes to taxes, corporations may pay them on a pass-through basis or pay straight corporate income taxes.
Creating a new corporation requires its members to file articles of incorporation paperwork with the Secretary of State in the state where they intend to do business.
The members also need to write bylaws that serve as an operating guide. New business owners hoping to attract investors typically do well as a corporation, since its structure is so predictable and it’s simple for leadership to transfer shares to investors.
Limited Liability Company (LLC)
People who form an LLC together are known as members from a legal standpoint. Like members of a corporation, LLC members aren’t personally liable for business debts.
Another thing corporations and LLCs have in common is that both must file articles of incorporation with their state before they receive legal recognition. LLCs also create operating agreements.
The IRS considers LLC members self-employed, which means they pay taxes on an individual rather than a corporate basis. You also have the option of paying taxes as a corporation as an LLC member.
Business Partnership
The IRS assigns the designation of general partnership whenever two or more people go into business together without establishing a formal business entity.
The business partnership structure offers less protection than registering as a corporation or LLC, which means that you risk losing your personal assets if someone sues your company.
All business partners are legally liable for the actions of other business partners.
From a tax standpoint, people involved in a business partnership use their personal income tax return to report the following:
- Credits
- Expenses
- Income
- Losses
- Profits
Business partnerships can be either a limited partnership or a limited liability partnership.
With the first type, one partner accepts responsibility for the affairs of the business.
The IRS considers all other partners passive investors, and they have limited liability for the business.
Limited liability partnerships are similar but rules regarding their operation vary between states.
Sole Proprietor
A sole proprietor is a person who works for themselves and has no employees. Many businesses start out this way.
Unless you choose differently, the name of your business is your legal name, and its identification number is your social security number.
If you do want to call your business something else, you will need to complete Doing Business As paperwork with your Secretary of State.
The government views you and your business as a single entity when you work as a sole proprietor.
That means you don’t have legal protection for your personal assets if a customer sues you.
You may want to consider changing your business entity type as it grows to protect your hard-earned money.
Obtain An Employer Identification Number (EIN) For Tax Purposes
You need an EIN before you can hire employees, pay taxes at the federal level, open a bank account for your business, or apply for business licenses and permits. The process is free and simple through the IRS website.
Appoint A Registered Agent
A registered agent is an individual or business eligible to receive legal documents and official notices on behalf of the business.
By law, you must appoint a registered agent if you choose to register your business as a corporation, LLC, limited partnership, or limited liability partnership. The requirement doesn’t apply to general partnerships.
When completing your business formation paperwork, you must list the name of the person or business you appointed as a registered agent. Your registered agent designation becomes a matter of public record.
Most new small business owners choose to hire an attorney or legal service to act as the company’s registered agent.
The person or business you choose receives and logs your legal documents and official notices and then forwards them to your company.
The registered agent also accepts the responsibility of notifying you of any actions you must take and the deadlines for those actions. However, you can’t appoint just anyone.
Requirements For Registered Agents
Before you appoint a registered agent, keep in mind that the appointee must meet the following requirements:
- Be at least 18 years old.
- Be available to receive mail on behalf of your company, and sign for it if required, between normal business hours.
- Maintain a physical address in the same state where you do business.
- Individuals must reside in the same state.
- Businesses can be located either within or outside of the United States, but they must have the legal authorization to operate within your state.
These are only general guidelines. Regulations on who can fulfill this role may vary significantly between states.
If you decide to appoint an individual, it could be yourself, a member of the business, an officer, or business partner, as long as these people meet the above requirements.
Business Insurance
All businesses need insurance, but some require more than others depending on the industry and federal, state, and local regulations.
Errors And Omissions
Alternatively known as professional liability insurance, errors and omissions offer you financial protection if your client loses money due to a mistake or overlooking critical details.
Service-related businesses, such as doctors, lawyers, wedding planners, and insurance agents, need this type of coverage.
General Liability
Most businesses need this type of insurance. General liability covers such things as the cost of being on the receiving end of a lawsuit, libel, slander, and you or an employee causing accidental damage to property owned by your client.
Product Liability
If you plan to sell products for your new business, you need this type of coverage in case a customer suffers harm due to a defective product.
Property Damage
If your business structure sustains damage due to an accident, weather disaster, arson, or another situation outside of your control, your property damage coverage provides some reimbursement for you to repair or replace it.
Workers’ Compensation
All states except Texas require employers to purchase workers’ compensation insurance.
Licenses And Permits
Businesses that operate within an industry fully or partially funded by the federal government need a license or permit. Common examples include:
- Agriculture
- Alcoholic beverage consumption
- Broadcasting
- Transportation
- Use of natural resources
You might also need a state or local permit. States that collect sales tax, which is all but Alaska, Delaware, Montana, New Hampshire, and Oregon, require you to obtain a seller’s permit.
Most municipalities in the United States require new businesses to obtain a permit or general business license.
Be sure to check federal government regulations regarding permits, as well as those at the state and local level, before you set up shop.
You can also check with the Small Business Administration to learn more about the types of businesses that require licenses and permits at the federal level and apply for them online.
Open A Business Bank Account
Separating your business and personal finances from the start will make your life much easier.
You can open a business checking account once you have your EIN, and you may wish to consider opening a savings account and applying for credit as well.
Start Spreading The Word
You’re ready to tell the world that your new company exists once you have completed all these steps.
This is the time to identify your target market and determine what you can offer them that the competition doesn’t have.
You will want to start marketing as soon as possible, which usually involves building a website, conducting market research, and investing in online and offline marketing campaigns.
Ella Marcotte
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