Legal Requirements for Starting a Small Business

Many entrepreneurs who want to start their own small businesses are mostly focused on market research and finances required to actually start a business. That said, many entrepreneurs aren’t even aware of the legal aspects of starting a business. Sure, you might have heard that you have to file some paperwork to make things official but you’ll cross that bridge when everything else is settled, right? Quite wrong, unfortunately. 

Neglecting the legal aspects of starting a business can get you in a lot of trouble before you even begin your entrepreneurial journey. You can end up paying high fees and penalties, not to mention face legal claims and lawsuits. 

That’s why you must take care of the legal obligations before you officially launch your small company on the market. You might forget about your legal requirements towards the government but you can be sure that the government won’t forget about you. With that in mind, here are a few legal requirements for starting a small business.

Choose a business structure

The first thing that should be on your agenda is a business structure for your company. Deciding on a business structure early on is important for two reasons. The first, a business structure will help you determine the rest of the paperwork you’ll need to file, such as licenses, permits, insurances, and taxes. The second reason is that a business structure will determine the amount of liability for the owner. 

As an example, many entrepreneurs opt for a sole proprietorship when starting out. Although this structure is the simplest and cheapest to implement, it also carries the most liability for the owner. In other words, any claims against your company go directly to you. On the other side of the spectrum is a corporate structure. 

This structure is the most complex and expensive to set up but it also entirely protects the owner from any liability whatsoever. Somewhere in the middle is a Limited Liability Company (LLC) structure. This is an ideal structure for small businesses as it doesn’t require a mountain of paperwork and it protects you from liability to some degree. 

Register a business name

A name for your business is not just crucial for branding or other marketing efforts in the future but it’s also crucial as a legal requirement. Another important reason why you must register a name for your business is that if you don’t, the government will assign a default name for your business, which is the name of the business owner. That said, if your name is John/Jane Doe, your business name will be John/Jane Doe unless you register a different one. 

You can register a business name via “Doing Business As” (DBA) or “Fictitious Business Name” (FBN). What’s more, you can also decide to register a business online should you choose to do so. Note that registering a name doesn’t provide trademark protection. That’s a separate entity you will have to take care of. What it does, it gives you the right to use the name in branding purposes without the need to incorporate it. 

Obtain the necessary licenses and permits

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Every small business is required to obtain specific licenses and permits. Which licenses or permits you’ll need, depends on the nature of your business and your business structure. For instance, the licenses may vary based on state, federal, and local laws. Some businesses require special permits, such as Health Department permits for food businesses, more specifically the Health and Safety inspection. What’s more, you may require a special permit to run a home-based business by your local zoning office. 

In any event, licenses and permits allow your business to operate legally. You will have to do some research and ensure you get everything you need for your small business. Otherwise, you’ll end up getting penalized which is something that’s best avoided at any cost, especially at the beginning where you don’t have enough capital for developing a business and paying fines. One thing that all small businesses have in common is that they require a general business license to operate.

Obtain the necessary insurances

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In some countries, insurances may not be a legal requirement per se while others do treat them as such. Regardless of whether or not your country treats insurances as a legal obligation, you do, in fact, need them. Insurances can protect both yourself and your business from legal claims and lawsuits. Again, which insurances you should obtain depends on the nature and the structure of your business. 

For some general pointers, every business requires a General Liability insurance policy. This insurance policy protects you from legal claims if your products or services caused property or physical damage to third parties. Another policy you should consider, especially if you plan on hiring employees, is a worker’s compensation policy. 

This policy will cover any medical bills and lost salaries for employees who get injured on the job. In exchange, employees forfeit their right to sue you. Last but not least, you should consider Errors and Omissions insurance if your business is in the service sector. General liability protects your business from claims regarding products or services, whereas Errors and Commissions protect you from professional liability claims, such as giving faulty advice to a client. 

 

Legal obligations are arguably the most important ones when starting a small business. No one can hit you harder than your beloved government should you decide or forget to pay your dues. That’s why you should not just research your legal obligation as the future business owner but also take care of everything before you officially start your small business endeavor.