Starting a Business: Legal FAQ
Legal requirements are among the most critical aspects of starting a business. Small-business owners should understand legal procedures and laws when forming their businesses or startups.
Depending on your business, you may want help from a business lawyer.
This article answers some of the most common legal questions startup business owners ask.
We make business formation EASY. Learn about our DIY business formation services here.
- Which legal structure should I choose for my small business?
- What is the best way to get a business loan?
- Do I need to legally register my business?
- How do I get a federal employer identification number?
- What management documents does my business need to start?
- How do I choose and protect a business name?
- What licenses, registrations, and permits does my small business need?
- What business taxes do I have to pay? How do I pay them?
- What legal requirements come with having employees?
- What is the maximum number of employees I can have as a small business?
- How do I protect my company from liability and lawsuits?
- How do I protect my intellectual property?
- What types of insurance does my business need?
- Do I need a lawyer to start my business?
There are several legal structures for businesses. Each type of structure has its own requirements for formation. The tax status and owner's personal liability also vary depending on the type of business structure.
Sole proprietorships are for the self-employed business owner. With sole proprietorships, there is no distinction between the business and the owner. A sole proprietorship structure offers no limited liability protection for the owner — meaning the owner is personally liable for all business activities.
Partnerships are businesses with more than one owner. Partnerships can take various forms, including:
- General partnership
- Limited partnership (LP)
- Limited liability partnership (LLP)
- Joint venture
Limited liability companies (LLC) and professional limited liability companies (PLLC) combine the best aspects of a sole proprietorship and a corporation. The owners are protected from personal liability but are not required to observe corporate formalities.
These formations also offer a tax advantage. An LLC is not subject to double taxation like a C corporation, where the company pays taxes, and the shareholder pays income tax. An LLC enjoys pass-through taxation, similar to a partnership or sole proprietorship.
A PLLC is specifically for owner-members who have a professional license. Owner-members must have proof of licensure before registering the business. Only some states provide formation processes for PLLCs. For example, California instead allows professionals to form professional corporations (PCs), which the IRS may tax as C or S corporations (explained below).
Corporations are legal entities separate from their owners. This business structure shields owners from personal liability (except in certain situations). Owners of a corporation are called shareholders — investors or other financial providers with a share or stake in your business. Corporations distribute profits to shareholders as dividends.
Corporations are complex and typically have more startup costs than other legal structures. There are three general types of corporations:
The primary difference between a C corp and an S corp is taxation and the number of allowed owners. Like an LLC, a small business corporation (S Corp) enjoys pass-through taxation provided certain IRS requirements are satisfied.
There is also a growing movement for corporations to certify as B corps (short for benefit corporations). This private certification is awarded to for-profit corporations by B Lab, a global nonprofit that promotes social and environmental responsibility. Certified B corps can choose a C corp or S corp tax and liability structure.
A nonprofit corporation has no shareholders and issues no dividends. It is tax-exempt as a 501(c) organization. Nonprofits use all profits to fund their charitable missions. While nonprofits are often exempt from local taxes (like sales tax and property tax) they may still need to pay employee taxes to federal and state governments.
The legal structure you choose for your business entity depends on your budget, tax needs, and risk tolerance.
Several factors impact your eligibility for business loans, including:
It is generally best to exhaust other forms of funding before pursuing loans to start your business. If payments on the loan come due before your company earns enough to cover them, it can put intense pressure on your cash flow.
Before going to the bank to borrow, look into other financing options:
- Private placement
- Loans from friends and family
- Business incubators and accelerators
If you take out a loan to fund your business, research lenders and compare interest rates. Check with the U.S. Small Business Administration (SBA) and local business development organizations. Agencies with subsidized programs usually offer better rates and more favorable terms.
Talk to an accountant and a business attorney before applying for financial assistance so you choose the right option for long-term success.
Most states require registering your business with the secretary of state's office. For most small businesses, this is as straightforward as registering your business name and legal structure with state and local municipalities.
Besides filing for a federal Employer Identification Number (EIN), most small companies aren't required to register with the federal government unless they are federally regulated businesses.
The forms you need to file to register your business will vary depending on the type of business entity you have created.
You could benefit from the help of a lawyer to file your business's registration paperwork. Companies of all sizes can benefit from consulting a business attorney for help drafting articles of incorporation and corporate bylaws.
For simple startup businesses, FindLaw's Legal Forms and Services area may provide all the help you need to assemble legally sound business formation documents.
You don't need an Employer ID Number (EIN) to register your business as a sole proprietorship. You can use your personal Social Security number for tax purposes or get an EIN to safeguard your Social Security number.
All other new businesses will need to get a tax ID number in the form of an EIN after filing formation papers with the secretary of state. Only secure your EIN directly from the Internal Revenue Service (IRS) website or mail-in application.
There is no fee for securing an EIN. Third-party websites not affiliated with the IRS will ask for fees, but those are scams.
The forms you will need depend on the type of business you are forming. You may need any of the following:
- Partnership agreement
- Bylaws for a corporation or nonprofit
- Operating agreement for an LLC
- Shareholder agreement
For a sole proprietorship, a business name can be as simple as the business owner's name. You can choose another name too. A business name needs to be easy to remember and distinct from competitors.
Before registering a name, you must ensure it is legally available. The broader your market, the more thorough your search needs to be. You can investigate whether the name is available yourself. However, it's strongly recommended you hire a business lawyer who focuses on intellectual property to do the extensive search for you.
You may also operate under a fictitious business name (dba, or "doing business as"). You must register fictitious business names with the state or county. Check with your state laws regarding fictitious business names.
To protect your business name, consider filing a state and federal trademark. A federal trademark allows you to protect your brand nationally and receive attorney's fees and damages when someone else uses it without permission.
Your small business's license and permit requirements vary depending on your business activity and where you operate. All businesses need a city or county general business license. You may need both.
Certain businesses require a professional license from the relevant state board or regulatory agency. These include:
- Health care providers
- Accountants and other finance professionals
- Personal care and cosmetologists (like hair stylists, nail technicians, and estheticians)
- Legal services and attorneys
- Childcare providersstart-up-tax-issues.html
- Cannabis businesses
County, state, and federal governments issue most business licenses and registrations. The local government typically issues permits for zoning and building matters.
Permits for natural resource use are typically issued at the federal or state level. To learn more, see Business Licenses and Permits.
While your tax obligations will vary depending on the type of legal structure you choose for your business, there are a couple of key startup tax issues to know:
- You must keep good records.
- You should keep your business bank account and personal bank account separate.
The law has much to say about how you manage your bookkeeping and tax returns. The law requires you to record all business transactions using a specific accounting method. Research what your industry and location require for record-keeping obligations.
Commingling funds and failing to observe other business formalities may subject you to personal liability. This is true even if you operate under a registered business entity like an LLC or corporation.
First, you must know how to properly classify your employees — especially if you believe you have contractors. Misclassifying an employee as an independent contractor could expose your company to costly penalties and back wages. Sometimes it's clear and sometimes it's not. If you are unsure how to classify your employees, consult an employment law attorney.
You will also be responsible for collecting employment taxes (both state taxes and federal taxes). You also must forward the business and employee share of Social Security and Medicare taxes.
Most employers must pay into their state's unemployment insurance and carry workers' compensation insurance. You can learn more about the legal responsibilities of having employees at the Small Business Administration (SBA).
Second, you cannot discriminate against your employees and applicants based on age, race, sex, religion, national origin, genetic makeup, or disability. This extends to job application questions and on-the-job interactions. You must also adhere to Equal Pay requirements that include benefits.
It depends on your type of business.
The Small Business Administration (SBA) sets the standards for what qualifies as a small business. The SBA uses three factors to determine whether a company meets the criteria for a small business:
- Number of employees
- Average annual revenue
The number of employees you can have and maintain small business status varies by industry and ranges between 250 and 1,500. Discrimination statutes apply to all businesses regardless of employee size.
Every company faces some legal liability. These liabilities can look like:
- A customer falling in your shop
- A defective product
- A mistake in handling an employee complaint
One of the early things you need to do to limit risk to your business is to purchase business insurance. The kind of insurance you need depends on the type of business you are operating. A business attorney can advise on the particular areas of liability your company may face.
As a small-business owner, you may need to trademark or patent your intellectual property.
- Trademarks protect symbols, names, slogans, and logos
- Patents protect inventions (think proprietary products and processes)
- Copyrights protect original artistic works in tangible forms like books and movies
Business owners can handle most simple trademark registrations at the U.S. Patent and Trademark Office (USPTO). However, some business ideas may need more protection than a simple trademark. Entrepreneurs often work with patent attorneys to secure a patent for their inventions.
The types of business insurance you need for your small business depend on your industry and any contract requirements you may have. The following are common insurance plans for startup businesses:
- Business operations policy, known as a BOP
- Property insurance
- Premises liability insurance that covers slip and fall and injuries at your business
- Workers' compensation insurance (this is a requirement in most states where you have employees or you will face a fine)
- Errors and omissions for professional service businesses like consultants, lawyers, and doctors
- Automobile insurance if your business involves driving
Small business insurance plans vary in cost and scope, so research before committing.
You do not necessarily need a lawyer to start a business. It depends on your business's complexity, the amount of advice and support you have from other sources, and your business knowledge.
There are several points throughout starting and running your business you may want help from an attorney:
- Some would-be entrepreneurs seek legal advice when they have developed a business plan. They hope to catch potential legal problems early.
- Some seek legal help with business formation, although the owner can register simple businesses.
- Some pursue legal advice only when they have a problem, using business assistance from the Small Business Administration or their local Small Business Development Center.
FindLaw's Small Business Law section is an excellent resource for small-business owners to help decide if they need a lawyer.
Work With a Business Lawyer for Help
Frequently asked questions will only take you so far. Contact a business organization attorney for guidance on the business licenses you need and the best business structure for your company.
Getting professional help early in your business process can help you avoid major legal issues later.
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.