5 Tips for Staying Legally Compliant as a Small Business

When starting your own business, there are many factors to consider. There is so much going on that it can be easy to overlook compliance.

Compliance can take many different forms, but in general it means making sure your business complies with relevant laws, policies, and regulations. As an independent professional it’s important to protect yourself from a legal standpoint, but you also want to offer your clients a level of assurance as well. Here are five tips to make sure your small business stays legally compliant.

1. Choose the Right Structure for Your Business

There are several ways to structure your independent business. There are advantages and disadvantages attached to each, and the one that works best for you will depend on your future plans for growth, how you plan to take tax deductions, and the types of clients you will be working with.

Many independent professionals begin their journey as sole proprietors. This business structure requires minimal paperwork and offers flexibility if you decide to freelance part-time. The next step up is an LLC. This business structure gives you some measures of legal protection that a sole proprietorship does not. S-Corps and C-Corps require more paperwork and expenses but have some advantages to consider. With an S-Corp, profits and losses pass through to the shareholder’s personal tax return, so the business itself is not taxed. The shareholder must be paid a fair market value, but any additional profit is not subject to self-employment tax. With a C-Corp, you are the majority shareholder of your company. This business structure provides limited liability, separating your personal and professional assets.

Learn more about different business structures here.

2. Review the Business Licenses You Need

After deciding on a business structure, you’ll need to choose and register your business name, get an Employer Identification Number (EIN) from the IRS, and investigate what permits and licenses are required.

If your business activities are regulated by a federal agency, you might need to obtain a specific federal license or permit. The U.S. Small Business Administration (SBA) lists federal requirements here. There are also state-, county-, and city-specific licenses and permits that may be required depending on where you are conducting work. The SBA recommends researching your own state, county, and city websites to find out which permits and licenses you will need.

How to Start a Small Business: Checklist

3. Make Sure You Have the Right Business Insurances

Business insurance is important because it helps safeguard your company against the risk of liability losses. It is also highly likely that the clients you work with will require you to have a basic level of insurance.

The two most common types of insurance are general liability and errors and omissions. General liability covers a wide range of incidents such as accidental damage to a client’s property, claims of libel or slander, and the cost of defending lawsuits. Errors and omissions gives protection in the instance that a client incurs financial harm due to a failure on your behalf to perform an integral part of your responsibility on a project. Most clients will require aa minimum of $1,000,000 in general liability insurance and another $1,000,000 in errors and omissions coverage.

Another type of insurance to consider is home-based business insurance. If you are working out of a home office, home-based business insurance can help cover losses. Typically, your homeowners’ insurance policy will not cover losses sustained out of a home office. There are a few different options for home-based business insurance, which you can check out here.

Common Small Business Insurance Requirements, Coverages, and Exclusions

4. Understand the Taxes You’re Responsible For

If you’re not familiar with how to pay taxes as an independent contractor, you will be soon! The most important thing to keep in mind is that you are responsible for paying both the employer and employee side of taxes (Social Security and Medicare—FICA). Estimated tax payments are due quarterly. You can wait to pay them until the end of the year, but you may be subject to additional fines and a very large tax burden if you do.

Think of it this way—as an employee, your taxes are taken out of your paycheck each month. As an independent contractor, you set aside those taxes and pay them every few months. A best practice is to set aside 30-35% of your gross income for taxes. This is an important number to take into account when considering how you will run your business and what you will charge.

One of the tax benefits of being an independent contractor are the many deductions you can take. There are likely a number of qualified business expenses that you will be able to deduct including certain travel costs, retirement savings, insurance, office equipment and space, etc.

5 Ways to Be Compliant when Filing Self Employed Taxes

5. Review Your Client Contracts

Another way to protect your business is through the contracts you create with clients. a contract is important not only to clearly establish project expectations, but to also provide as much protection as possible for both parties.

A well-written contract should include termination conditions (giving you or our client the right to cancel an agreement or end a contract due to nonpayment), the responsibilities of each party (including proof of insurance if required), bill rate and terms (including net terms), and a statement of relationship (to clearly define a contractor-client relationship). Think of your client contract as an opportunity to put those last measures of compliance in place to truly protect your business and your project from end to end.

What to Include in a Consulting Agreement: 7 Sections Every Agreement Should Have

The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.