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Legal Limitations to Consider When Starting a Business

Every business has certain legal restrictions and obligations. Before starting a new business, entrepreneurs should research the legal requirements for their specific business. Even an innocent oversight can result in serious legal trouble. This article focuses on common legal restrictions to consider when starting a small business.

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Limiting Professional Liability

Starting a new business is risky business. The business owner can be held financially responsible for the obligations of the business, especially in a sole proprietorship. To address this risk, a business owner may choose a business structure that limits their liability. This can be done by forming a corporation, a limited liability company, or a limited liability partnership.

The question of liability poses a particular challenge to licensed professionals, such as doctors, lawyers, engineers, architects, and accountants. Licensed professionals have a duty to their clients as a result of their profession. They can be held financially responsible for negligence and professional malpractice.

Some states, such as California, do not afford full liability protection to professionals for their personal negligence even if a professional business entity is used. Moreover, in some states, professionals are forbidden from forming limited liabilities companies and may instead have to form a professional corporation.

When a licensed professional wants to start a business then, how do they limit their personal financial risk while still being accountable to their clients?

In states where it is permitted, licensed professionals can operate a liability-limiting business. State legislatures recognize clients' rights to be compensated for malpractice. State laws limit liability for financial obligations of the business, but do not limit liability for professional malpractice. Professionals who wish to start a liability-limiting business should talk to a business law attorney. Get legal advice to ensure you receive the greatest protection allowed by law.

Employment Law

When a business chooses to employ people, it must comply with rules and regulations from the Department of Labor. The Department of Labor enforces more than 180 federal laws and regulations. Which regulations apply will depend on the kind of employees, the number of employees, and the type of business.

Become familiar with employment laws regarding:

  • Job classifications
  • The Fair Labor Standards Act (FLSA) sets standards for wages and overtime pay, age, and hour restrictions. (Minimum wage is set at the state and municipal level, but it cannot be lower than the federal minimum wage of $7.25 per hour.)
  • Non-discrimination in hiring and employee training to prevent discrimination and harassment
  • Tax laws and an employer's state taxes plus federal taxes to the IRS for employment taxes, social security, and timely filing of business tax returns
  • Workplace safety issues and the Occupational Safety and Health Administration (OSHA)
  • Workplace injuries, medical leave, and workers' compensation

Labor laws address the issues above, as well as collective organizing. Even small businesses can have unions.

Licensing and Permits

A new business may be required by federal, state, and/or local laws to obtain business licenses or permits. Many states have a bureau of business licenses that serves as a clearinghouse of information. Some publish a free directory that lists government-regulated activities and regulating agencies.

Licenses and permits are required by the federal government and state laws to:

  • Ensure the competency of practitioners of a profession or trade (professional license)
  • Ensure the safety of a building (fire department permit)
  • Ensure the safety of food (health department permit)
  • Prevent fraud (federal business license for investment advising)
  • Control the development of new technologies (patent, copyright, trademark, and licensing rights)
  • Authorize a business to serve as the state's agent for collecting sales and excise taxes

In addition, local government units may require licenses for:

  • Liquor and alcohol sales
  • Lottery ticket sales and gambling, where permitted
  • Gasoline and diesel sales
  • Firearm and weapon sales

Contact the municipal licensing department where the business is located for details.

Zoning Ordinances

Contact your local zoning board or planning commission early in the business planning process. Ask if there are any restrictions on business activities at your intended location. This is especially true if you are going to conduct a home-based business in an area zoned residential. It also applies to startups in heavily regulated industries, like medical marijuana.

Review local ordinances to ensure that your business can comply.

Environmental law

Depending on the type of business you will be operating, environmental regulations may be a factor. The Environmental Protection Agency (EPA) is the federal agency that regulates the environmental impact of industries. Review relevant federal laws and government regulations that apply to your industry.

Surety Bonds

State and local governments often require that licensed businesses obtain surety bonds. A surety bond is similar to an insurance policy. It guarantees that the business will perform on the contracts it entered into. Businesses that contract with government agencies must be bonded. Private firms, particularly in the construction industry, may require bonding as well.

Related Resources

The Small Business Administration (SBA) is a good place to start for any prospective new business owner. Find an SBA office near you.

Get Professional Help From a Business Lawyer

The best way to address legal limitations on a business is to work with a qualified attorney. Contact a business and commercial law attorney in your area.

Depending on the type of business you will be operating, environmental regulations may be a factor. The Environmental Protection Agency (EPA) regulates the environmental impact of industries. Review the relevant federal laws and government regulations that apply to your industry.

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