Starting a small business is both exciting and challenging. After doing your research, writing a business plan or roadmap, and deciding on a business structure, you’ll want to consider the other legal requirements involved so your business operates with all of the required licenses and permits.
What is required to start a business?
Here are seven important legal requirements to review and understand before launching your small business.
1. Register Your Business Name
To register your business name you’ll likely register a “Doing Business As” (DBA) or “Fictitious Business Name” (FBN). This process lets your state or local government know the name you are operating your business under. This registration doesn’t provide trademark protection, but it does allow you to create and use the name you want for branding purposes without having to incorporate.
If you don’t register a DBA name, the name of the business will default to the name of the legal owner of your business. For example, if your name is Rachel Smith and you form a consulting company, the legal name of the business will be “Rachel Smith.” However, if you decide to name your company “Rachel Smith Consulting,” you’ll need to register this as a DBA name. Specific DBA registration rules vary from state to state.
The only time you don’t need to register a DBA name is if you’re a sole proprietor and decide to operate under your own name. Likewise, if you do intend to create an official business structure like an LLC or corporation, your chosen business name will automatically register with the state.
If you are planning on operating nationally or providing online services, you may want to consider getting your business name trademarked. A DBA name or incorporated business name will not offer brand protection in the 49 states where your business is not registered. While trademarking is not a requirement, it will provide stronger protection for your brand. This process involves applying for a trademark with the U.S. Patent and Trademark Office. If you do want to pursue a trademark, start by conducting a comprehensive search to make sure the name you want to use is available.
2. Get an EIN
Any business that operates as a corporation or partnership or has employees will need an Employer Identification Number (EIN) from the IRS. An EIN identifies your business for tax purposes—think of it as a Social Security number for your business—and you can use to open a business bank account, file tax returns, and apply for business licenses. The easiest way to apply for an EIN is online via the IRS EIN Assistant. If you operate as a sole proprietorship, you are not required to obtain an EIN, although obtaining one is a way to create additional separation between business and personal liability.
3. Determine Your Business Structure
Independent professionals also need to be aware of federal tax obligations—income, self-employment, estimated, employer, and excise taxes. Your specific business structure will determine your federal tax obligations as well as the forms you use to report these taxes. The U.S. Small Business Administration (SBA) provides information about these taxes and forms.
Here are some options to consider when creating your business:
- Sole Proprietor: Many independents begin their journey as sole proprietors. For tax purposes, you generally operate under your personal Social Security number, but you can apply for a Taxpayer Identification Number (TIN) for your business by filing an IRS SS-4 asking for an Employer Identification Number (EIN) as your TIN instead of using your personal Social Security number. The business is generally run under your legal name. If you want to give the business an alternate name, you’ll register a Doing Business As (DBA) to state the name you intend to give your business. This process lets your state or local government know the name you are operating your business under. Specific DBA registration rules vary from state to state. You may also apply for a Federally registered business trademark or trade name.
- Limited Liability Company (LLC): Originally designed to protect owners of a business from certain business-related liabilities, the LLC structure has since become popular for independents due to its simplicity, yet strong legal protections of a corporation shielding your personal assets. Think of it as the next step above a sole proprietorship.
- Subchapter S Corporation or S Corp: Also referred to as an S-Corp, this is a business structure that has received the Subchapter S designation from the IRS. According to the IRS, S-Corps are considered by law to be a unique entity, separate and apart from those who own it. With this structure, subject to similar exceptions as described above for LLCs, you have the limited legal liability (separation of personal assets from your business) of a separate legal corporate entity as well as the separate tax entity. Provided the owners are eligible to make and make a timely election with the IRS, the profit from your business is reported under a separate tax return filing form 1120S, but the taxable profit passes through to your personal tax return on form 1120 K-1. Thus, there is generally just a single level of tax.
- C Corporation or C Corp: An attractive option for the savvy independent professional, C-Corps make owners shareholders. A C-Corp has the same status that Fortune 500 businesses hold—they are corporate entities separate from their owners. In the case of an individually owned C-Corp, you are not just the owner of your company, but the majority shareholder. Because the corporation is a separate legal entity, it is an individual taxpayer in the eyes of the IRS. While this structure is one of the most complex business arrangements available, it is also the most sophisticated, making it an attractive option for independents.
4. Prepare to Pay State and Local Taxes
Income tax may not be the only tax you are responsible for, so it’s important to understand other possible tax requirements you may face. The majority of independent contractors are considered to be self-employed and are therefore subject to paying self-employment tax in addition to income tax.
However, there are situations and circumstances in which this tax may not apply to you. For instance, how your business is incorporated may affect your obligation regarding this tax. In addition, whether or not your business made a significant profit during the past year could also be a factor. More information about self-employment tax requirements can be found on the IRS website.
5. Get Required Business Permits and Licenses
Just like any other business, independent contractors must obtain proper permits and licenses. Depending on your industry and where your business is located, you may need to be licensed on the federal level as well as on the state level. Federal licenses are required for businesses involved in any sort of activity that is supervised and regulated by a federal agency. State licensing and permits will vary depending on location.
6. Create a Compliance Plan
Even as a small business owner, you’re subject to some of the laws and regulations that apply to large corporations. These include advertising, marketing, finance, intellectual property, and privacy laws. Review and understand which of these laws may apply to your business.
7. Protect Your Business with Insurance
The decision to start your own business as an independent professional means that you are responsible for ensuring the legal and financial wellbeing of your consultancy. Remember that you are your business—if any legal or financial problems arise that affect your company, they will also affect you directly. It’s important to protect your business against the risk of liability losses not just because many clients will require you to have these insurances, but it also to protect yourself and your future security.
Of course, the types of insurance that are right for your business will vary greatly and depend on your industry, the size of your business, and the type of clients you work with, among other factors. Here are a few common types of business insurance that many independent contractors carry:
- General Liability Insurance: General liability insurance is often necessary for independents. This insurance covers a wide range of incidents, including accidental damage to a client’s property, claims of libel or slander, and the cost of defending lawsuits.
- Errors and Omissions Insurance: Errors and omissions insurance, also known as professional liability insurance, provides protection in the instance that a client incurs financial harm due to an error or omission—that is, a failure on your behalf to perform an integral part of your responsibility on a project.
- Home-based Business Insurance: While an insurance policy for a home-based business doesn’t apply to everyone, it’s relevant for independents who choose to work out of a home office. Most homeowners’ insurance policies do not cover losses sustained out of a home office, but an insurance policy for a home-based business can provide the protection you and your clients need.
When starting a small business, there are many legal details, reports, and forms to work through to remain compliant. MBO Partners has extensive experience assisting independent contractors in starting their businesses and can provide support and guidance to ensure your business is set up correctly.
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.
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