Legal Requirements for Starting a Business

A lot of creative work and planning is required to start a business. 

There are also less enjoyable but absolutely necessary legal requirements to comply with. Tax obligations, registrations, permits, and insurance may seem like a never-ending list if you don’t know what is absolutely necessary.

This guide covers the ten legal steps you must take as a new business.   

What are the legal requirements to start a business?

Don’t worry about completing these steps in the order presented. Most can, and should, be done simultaneously. Use this as a checklist to ensure you’re ready to officially do business.

Here is a brief overview of the most common business structures to get you started.

• Sole Proprietorship: A single individual owns and operates the business.
• Partnership: Two or more individuals jointly own the business.
• Corporation: A separate legal entity owned by shareholders.
• Limited Liability Company (LLC): Combines features of corporations and partnerships, offering liability protection to owners.
• Nonprofit: A business granted tax-exempt status because it provides a public benefit or furthers a social cause. 

Looking for more? Check out our full guide on business structures to learn about each option and how to select the right structure for your business.

At a minimum, you should register an “entity name” to protect your business name at the state level. You may also need a trademark to bar others in the industry from using the name at a national level.

An EIN is required if you: 

• Are registered as a corporation or partnership
• Withhold taxes on wages
• Use a tax-deferred pension plan 

You are required to change/replace your EIN if there has been a change in tax status, business name, address, management, or ownership. Check out our guide to learn how to apply.

Drafting a partnership agreement is a step many entrepreneurs miss and can be catastrophic if not done initially. Here’s what Noah Parsons, COO of Palo Alto Software, says about the need for a partnership agreement.

“I’ve heard way too many stories—several from people I know personally—who have skipped the step of documenting a partnership and had things go sideways in the worst way. The effort required to do this step is low, and the consequences of not doing it are significant.”

The only way to operate a business legally is to apply for the proper permits and licenses. They indicate that you’ve complied with the set regulations and requirements for running a business within a set jurisdiction.

Also, depending on the city or county, you might be required to apply for local business permits.

Need a quick overview of IP? Here are the most common Intellectual Property protections to consider.

1. Patents: A patent is a right granted to an inventor that prevents others from making, selling, or using their invention for a set period, typically 20 years. There are three main types of patents: utility, design, and plant.

2. Trademarks: Trademarks are symbols, names, and slogans for identifying goods or services. They help consumers distinguish one brand from another and assure the quality of the goods or services.

3. Copyrights: Copyright protects original works of authorship, including literary, dramatic, musical, and certain other intellectual works. This protection allows creators to control the use of their creations and earn revenue from their use.

4. Trade secrets: Trade secrets are practices, designs, formulas, processes, recipes, or any information that provides a business advantage over competitors who do not know or use it. Unlike other forms of IP, trade secrets are protected without formal government registration as long as they remain confidential.

5. Industrial designs: These protect the visual design of objects, such as the shape, surface, or ornamentation. They are applicable when the design isn’t purely utilitarian.

6. Geographical indications: These are signs used on products with a specific geographical origin and possess qualities, reputation, or inherent characteristics. For example, “Champagne” for sparkling wine from the Champagne region of France.

If you’re unsure whether to file for legal protection, consult an IP attorney for professional guidance.

As always, the content here is general knowledge, not legal advice. To be sure you are paying the correct taxes for your business, consult an accounting professional or contact the IRS. 

8. Select the right employee classifications

Before hiring anyone, you must understand the different employee classifications. Each classification varies in how it legally impacts employment, including wage laws, benefits, and tax implications. 

Here’s a brief summary of the primary employee classifications:

• Full-time employees: Workers who typically work a 40-hour week. They are usually eligible for all employer-offered benefits, such as health insurance, paid time off, and retirement plans.

• Part-time employees: Workers who work fewer hours than the standard full-time schedule. They might not be eligible for all the benefits full-time employees receive or receive them on a prorated basis.

• Temporary employees: Hired for a specific period or the duration of a particular project. They typically do not receive long-term employment benefits.

• Seasonal employees: Hired to work during a particular season, such as holiday or summer workers. They might not be eligible for standard company benefits.

• Independent contractors: Self-employed individuals hired to perform specific tasks or services. They are not considered employees, so they don’t receive traditional employee benefits and are responsible for their own taxes.

• Interns: Individuals, often students, who work for a company for a short period to gain experience. They can be paid or unpaid, but specific legal criteria must be met for an intern to be unpaid.

• Exempt employees: Typically salaried employees who are exempt from federal wage and hour laws, meaning they aren’t eligible for overtime pay. Common examples include managers and professionals.

• Non-exempt employees: Typically hourly workers covered by wage and hour laws, making them eligible for minimum wage and overtime pay.

• Remote or telecommuting employees: Workers who perform their tasks from a location other than the company’s primary location, often from home. With the rise of digital technology, this classification has become more common.

• Freelancers: Like independent contractors, freelancers are self-employed individuals who offer their services per-project basis. They handle their own taxes and usually don’t receive benefits from the companies they work for.

Understanding these classifications will prepare you to comply with labor laws, provide appropriate benefits, and manage your workforce effectively. Check out our hiring guide for additional guidance in choosing the right employees and roles for your business. 

If you’re unsure of what business insurance you need, these are the most common:

• General liability insurance: Protects your business from claims such as personal injury, damage to another person’s property, and bodily injury.
• Professional liability insurance: Protects a business from lawsuits filed by a client claiming a work mistake in the services offered.
• Workers’ compensation insurance: Insures employees if something happens when working. It pays for medical care, funeral costs, death benefits, and income compensation during recovery.
• Commercial property insurance: Covers machines or buildings used for business operations except for damage caused by earthquakes and floods.

You can check out our full business insurance guide for why, when, and what types of business insurance you may need.

Get your finances in order

By completing this requirements list, you can legally do business and are now ready to get your finances in order.

You now know all the costs associated with permits, applications, and insurance. And have your federal tax identification number. 

This means you can map out all of your startup costs, open a business banking account, and begin setting up an accounting process. But those are just a few steps to set up your finances. 

Check out the next step in starting a business for the full process.