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7 Important Legal Requirements for Starting a Small Business

— September 17, 2021

From finding a unique business name to buying insurance plans and creating detailed contracts, there is a lot that you need to do. 

Regardless of the type of business you want to start, you need to invest time in understanding the legal requirements for starting a small business. Before you start operating a business, you need to ensure that your business is legal and complies with all regulations.

That brings us to the question:

What legal formalities do you need to finish to establish your business in the US?

From work permits to state and federal-level licenses, there are a lot of things you need to take care of before starting a small business. As an entrepreneur, it can be confusing to figure out the exact legal requirements.

If you’re struggling to understand how to legally establish your business in the US, you should read the next section carefully.

Legal Requirements for Starting a Small Business: A Checklist

We’ve listed all the legal requirements for starting a small business. Take a look at this section to get more clarity on the key requirements.

1. Get Your Business Name Registered

The first legal requirement for starting a small business is to get your business registered. Think of a unique name for your business and get it registered as a legal entity with the office of the Secretary of State.

To ensure that other businesses don’t copy your business name, it is a good idea to get a trademark. For marketing purposes, you should also consider buying a domain name for your website that reflects your brand values or ideology.

While getting a trademark or domain name aren’t legal requirements for starting a small business, they can help you run your business operations smoothly.

2. Choose a Business Structure

Based on your industry, investment sources, operational needs, and profit-sharing and ownership preferences, you should select a business structure. For entrepreneurs, the most popular types of business entities are LLCs (Limited Liability Corporations) and Corporations.

The reason why LLCs are so popular is because they offer pass-through taxation, minimal compliance requirements, and have a flexible management structure. It also provides you protection against any personal liability. 

Another advantage of starting an LLC is that it is easy to form. You just need to file Articles of Organization with the office of the Secretary of State and create an Operating Agreement. 

On the other hand, forming a Corporation requires more effort and legal documentation. You need to file Articles of Incorporation with the office of the Secretary of State. 

In addition to this, you’ll have to create corporate bylaws to define the overall functional and financial details of your small business.

Despite these requirements, it is a popular entity type because it is usually easier to find investors for Corporations. 

Whether you decide to establish a Corporation, LLC, or any other type of entity, make sure you complete the legal documentation properly. 

GovDocFiling offers packages to expedite your paperwork and make the business formation process smoother. You can opt for it if you want to ensure you meet all the legal requirements in a hassle-free manner.

3. Apply for Your Tax ID Number

Every business needs to get an Employer Identification Number (EIN) from the IRS. The nine-digit number is useful for taxation purposes.

If you establish a small business as a Sole Proprietorship, getting your Tax ID is not actually a mandatory legal requirement. You also have the option of using your security number. 

It is, however, a good practice to get your EIN to keep your business expenses separate from your personal transactions.

4. Apply for the Required Licenses and Business Permits

Depending on the industry that your small business operates in, you may be required to get special permits and licenses. 

Rules vary across different states in the US, so make sure you find the requirements for the state where you are opening your business.

5. Open a Separate Bank Account

Brightly colored paper clips with business papers, calculator, and pen; image by Alexander Stein, via, CC0.
Image by Alexander Stein, via, CC0.

To maintain separate records for your personal and business transactions, you should open a separate business account. In case of business debts, you can protect your personal assets if you have separate bank accounts.

To open your business bank account, you’ll need the following legal documents:

  • Employer Identification Number (EIN)
  • Business license
  • Documents of business formation
  • Documents of ownership agreement
  • Other relevant information depending on specific bank requirements

6. Buy Insurance Plans

Buying an insurance plan can help you protect your business from any potential threats like accidents, property damage or even defective products. While it is not a legal requirement to purchase insurance plans, it is highly recommended.

Some commonly purchased business insurance plans include:

  • Commercial property insurance
  • Workers’ compensation coverage
  • General liability insurance
  • Product liability insurance
  • Business income insurance

7. Create Relevant Contracts and Agreements

Before you start your small business, you need to prepare in advance for any conflicts that may arise at a later stage. 

Carefully worded contracts and agreements can ensure that you’ve laid out all the expectations right from the start. This can minimize misunderstandings and professional issues.

Ideally you should have separate legal contracts for your vendors, employees, freelancers, and business partners.

Are You Ready to Establish Your Business Legally?

From finding a unique business name to buying insurance plans and creating detailed contracts, there is a lot that you need to do. 

Make sure you follow all the steps that we’ve mentioned in this post. Now that you know all the legal requirements for starting a small business, it’s time to get started. All the best!

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