The process of starting a small business involves many legal procedures. It is essential to follow the legal requirements to ensure that your company is in compliance and profitable. If you’re a small-business proprietor it is your responsibility to learn about the applicable laws and comply with the rules. This can be difficult at first, which is why we’ve compiled a list of the most basic legal requirements you must review prior to setting up your company.
1. Select the Business Structure you want to use
Business structures are legal arrangement which determines key aspects of your business, including how you pay tax as well as how and if you can borrow capital, the person who is the owner of the business, and also the way profits are distributed. When deciding on which business structure you should choose begin by asking yourself some questions:
- What are my long- and short-term objectives for my business?
- What kind of service do I offer?
- Do I intend to employ employees in the near future, or is this an individual business?
- What amount of capital do I have to draw upon and what future financial needs are I facing?
This information can help you make an informed decision. Each person has their own requirements for their company and legal entities aren’t an all-encompassing solution. Although some may believe that their job isn’t at chance of being sued and others may decide to prepare their business for greater growth, which can bring more risk.
Four possible business structures to think about when you start a new company:
1. Sole Proprietor
Many entrepreneurs start their careers by operating as sole owners. To be tax-efficient sole proprietors typically work with their own personal Social Security number, but you may apply for an Taxpayer identification Number (TIN) to run your company instead. This type of business structure requires only minimal documentation and allows for flexibility should you want to freelance part-time.
2. Limited Liability Company (LLC)
An LLC (Limited Liability Company) is a type of business structure that offers a compromise between the operation of a corporation and sole proprietorship. it permits the tax-pass-through of sole proprietorships while offering the limiting liability of corporations. LLCs are very popular because of their ease of use, and also provide solid legal protections for an organization that protect personal assets. Consider it the next step after the sole proprietorship.
3. S Corporation
When you have S Corporations, also known as S Corporation, or S-Corp the profits and losses flow onto shareholders’ personal tax returns and the business cannot be taxed. The shareholder is required to pay the fair market value of his investment however any additional gain will not be taxed under tax on self-employment.
4. C Corporation
If you have C Corporations, also known as C Corporation, or C-Corp you will be the largest shareholder in your company. This type of business structure is a way to limit liability, and separates your professional and personal assets. Although this is among the most complicated business structures however, it’s also one of the highest-end, which makes it a desirable option for those who are self-employed.
2. Create Your Business Name
If you decide to run the business under sole Proprietor The name of the company will be based on the the legal owner. For instance, if your namesake is Rachel Smith and you form an organization for consulting the legal name of the company will take the form of “Rachel Smith.” However should you choose to call your business “Rachel Smith Consulting,” you’ll have to register the name as an DBA name.
This procedure allows your local or state government know what name you operate your company under. This permits you to design and use the name you prefer to promote your brand without needing to incorporate. Specific DBA registration regulations differ between states.
If you are seeking to form a legal entity it is necessary to file an application with the state of your residence in order to obtain the filing of either Articles of Incorporation or Articles of Organization. No matter if you opt for someone else’s name, such as an LLC, S Corp, or C-Corp in the first step above, you’ll have to register an official name for your business with the state you reside in.
3. Trademark Logos, names or Slogans
If you plan to expand nationally or offer internet-based services, then you might be interested in having your company’s name registered with a trademark. The DBA name or incorporation of a business name won’t provide branding protection within the 50 states in which your company is not registered. While trademark registration is not required, it can give you more protection for your business’s name. The process involves registering trademarks through the U.S. Patent and Trademark Office. If you decide to seek trademarks, begin with a thorough search to ensure that the name you wish to use is in use.
4. Find your Employer Identification Number (EIN) from the IRS
A business that operates as either a partnership or a corporation, and has employees will need to obtain An Employer Identification Number (EIN) from the IRS. An EIN is a way to identify your business to tax purposes. Think of it as an official Social Security Number for your business. It is also the number you utilize it to open a company bank account as well as file tax returns or apply for a business licence.
The simplest method of applying to get an EIN is online using The IRS EIN Aide. If you run sole proprietorship or a sole member LLC, you’re not required to get an EIN however, having one can make it easier to distinguish between personal and business liability, and it can protect your social security number from being used on documents that are used for business and also safeguard against identity theft.
5. Learn about the Local and State Taxes
The tax on income is not likely to be the only tax that you’re accountable for paying It’s crucial to be aware of any other tax obligations you might face. Most independent contractors are deemed as self-employed, and are therefore liable for the Self-Employment (SE) taxes in addition, to tax on income. SE Tax is both the employer and employee facets in the case of Social Security as well as Medicare (FICA).
However, there are certain situations where your tax situation could be different. For instance, the way your company’s structure may determine which tax you must contribute to. Furthermore to that, whether or not your business has made a significant profits in the previous year is also an important factor. Additional information on tax regulations is available at the IRS website.
6. Get the required business permits and licenses
Like any other type of firm, independent contractors are required to be licensed and have the proper permits. Depending on your field of work and the location where your company has its headquarters, it might need to be licensed at the federal level, as well as at the local or state level. Federal permits are required for all businesses that are involved in any operation that is controlled and controlled by a federal government agency. The state-specific licensing and permits differ depending on the place of business.
7. Develop a Compliance Plan
As a small-scale company owner, you’re still subject to the same laws and regulations that are applicable to large companies. They include marketing, advertising finance intellectual property, privacy laws. If you have workers, you must be aware of also laws and regulations from the federal and state levels that must be observed in certain situations. The SBA provides helpful guidance for ensuring your small business stays up to date.
Furthermore, small-scale businesses need to make sure that they are safe and free of confusions. This is not only an issue for your business as a whole, but also to your future customers.
8. Create an account with a Business Bank Account
Legally having a separate bank account specifically for business transactions will help you keep monitor the progress of your earnings and expenses. It is highly recommended that you set up an account for your business prior to receiving any payment from your clients, however it is even more beneficial to do this once you have started establishing your business. Find out what you can about and choose the best bank for your requirements. It is common to require various pieces of information when opening a bank account for business for example:
- You must have your EIN (Employer Identification Number) or your social security number if your company is an sole proprietorship
- Form documents for your company
- Your ownership agreement documents
- Your business License
9. Obtain Business Insurance
The choice to create small-scale business implies that you are accountable for the financial and legal security of your business. Be aware the fact that your company are the business, and if legal or financial issues occur that impact your business and its employees, they can also impact you directly. It’s crucial to secure your business from the threat of financial losses, not just because many clients will need the insurance however, it is will also protect you and your security in the future.
The kinds of insurance that work for your company will differ in a significant way and depend on the industry you operate in and how big your company and the type of clients you deal with in addition to other aspects. Here are some of the most typical kinds of business insurance that numerous independent contractors carry:
1. General Liability Insurance
The general liability policy is usually required for those who work independently. The insurance covers a wide variety of risks, such as the possibility of accidental damage to a customer’s home, the cost for Libel or Slander, as well as the costs of defense against legal actions.
2. Insurance for errors and omissions
Insurance for errors and omissions is also referred to as professional liability insurance offers protection in the event that a client suffers financial damage because of an error or an omission, or a inability on your part to carry out an essential portion of the responsibility for an assignment.
3. Home-based business insurance
Although an insurance policy designed for businesses that are home-based isn’t available to everyone, it’s a good idea for entrepreneurs who decide to operate out of their home office. The majority of homeowners’ insurance policies don’t provide coverage for losses that occur from the home office, however an insurance policy specifically designed for businesses that are based at home could provide the security that your clients and you need.
10. Take a look at the ways you can manage Your Legal Back Office
Back-office management encompasses all the administrative and support duties that have to be accomplished to manage your business. This includes preparing documents, tracking expenses, tax filing, and billing clients. Although managing your back office isn’t technically an legally required obligation however, the way you decide to handle these tasks could be a legal issue in the future.
Some entrepreneurs choose to hire staff to assist with administrative tasks, and others opt for a DIY option by using online tools and software to generate invoices, keep track of expenses, and bill customers. Plan out how you’ll take care of these tasks is a wise choice for a brand new small business owner. It will allow you to concentrate your time and attention to clients more than regular business maintenance.
The information contained on the MBO Blog is not any legal, tax or financial advice. It doesn’t take into consideration your individual situation, goals or financial and legal situation or requirements. Before taking action on any information contained in the MBO Blog, you should think about the suitability of the information for your specific situation and consult with an experienced professional advisor of your choice.