The laws to follow when starting a new small business depends on three major factors
- jurisdiction or the state of operations
- the structure of the business
- the nature of business
All businesses need to comply with all federal legislation connected with the business.
The business needs to comply with the laws of not just the state where the business is located but also of all the states where the business conducts its operations. While small businesses usually remain confined to a single state, mailing a product into a particular state through internet transaction is also a form of doing business in that states.
The exact requirements vary from state to state. Good contact points for comprehensive information on the licensing and legal compliance applicable to the area include:
- State’s Attorney General’s office
- State’s Business Resource Office
- Local office of the Small Business Administration
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The legal structure adopted by the business has an impact on the laws to follow when starting a small business.
The two common form of legal structure of a small business is sole proprietorship and general partnership. Other legal structures include other forms of partnerships, Limited Liability Company, and various types of Corporations. All the options have different legal, financial and tax considerations.
Selection of the suitable legal structure depends on factors such as:
- the nature of business
- source of funding
- level of desired control
- tax implications
- vulnerability of the business to lawsuits, and more
Sole Proprietorship is the most simple and default legal structure.
The legal structure is not permanently binding and the entrepreneur can change the structure during the course of business operations.
Registering the fictitious business name, also known as ‘Doing business as (DBA)’ or ‘assumed business name’ is one important law to follow when starting a new business. Although many states do not such registration mandatory, this step nevertheless remains an accepted business practice.
The legal name of the business needs mention on all government forms and applications, including applications for further legal requirements such as employer tax IDs, licenses, and permits.
By default, the legal name of the business is the name of the person or entity that owns the business. The default name of a sole proprietorship business is the name. The default name of a partnership business is either the name given in the partnership agreement or the last names of the partners. The default business name for limited liability corporations (LLCs) and corporations is the name under which the LLC or corporation is registered.
License and Permits
All businesses require a general business license from the state before starting business operations. Obtaining business licenses is a simple and straightforward process, usually from the local county office.
In addition to the general license, the business might also require industry-specific operating permits from state and local government agencies. For instance, a restaurant may need license from the health department or to serve liquor, a childcare service may require special permits from social service or educational agencies, and the like.
Some city and/or county have separate laws governing business operation, covering aspects such as zoning, parking, signage and others. Some cities for instance have zoning regulations that restrict certain business operations from residential areas.
Federal Law require most businesses to have an Employer Identification Number (EIN), also known as Federal Tax Identification Number
Businesses that require EIN include:
- businesses structured as partnership or corporations
- all businesses hiring employees
- businesses that file tax returns on employment, excise or alcohol, tobacco and firearms
- businesses that withhold taxes on income, other than wages, paid to a non-resident alien
- businesses that have a Keogh plan
- trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns, Estates, Real estate mortgage investment conduits, Non-profit organizations, Farmers’ cooperatives and Plan administrators
The Income Tax of the business depends on the legal structure. In addition to income tax, small businesses have additional federal tax obligations.
Most businesses having employees need to disclose and pay employment taxes such as
- Social security and Medicare taxes
- Federal income tax withholding
- Federal unemployment (FUTA) tax
Proprietors who work by themselves need to pay Self-employment tax (SE tax), which is a social security and medicare tax.
Some businesses may also have to pay excise tax such as
- Environmental taxes
- Communications and air transportation taxes
- Fuel taxes
- Tax on the first retail sale of heavy trucks, trailers, and tractors
- Manufacturers taxes on the sale or use of a variety of different articles
- Tax on certain trucks, truck tractors, and buses that ply on public highways
- tax on wagering
Businesses that sell tangible personal property or provide specific services need to collect and remit sales and local tax in most states, and as such require Sales Tax Permit from the state’s revenue agency in addition to the EIN.
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Small businesses that have employees on payroll need to follow labor laws.
Labor laws to follow when starting a new small business, applicable to all businesses include:
- Fair Labor Standards Act (FLSA)
- Social Security Act
- Federal Insurance Contributions Act (FICA)
- Equal Pay Act (EPA)
- Immigration Reform and Control Act (IRCA)
- Federal Unemployment Tax Act (FUTA)
Businesses employing more than 10 employees also need to comply with the Occupational Safety & Health Administration Act (OSHA)
Businesses employing 15 or more employees also need to comply with:
- Title VII Civil Rights Act
- Americans with Disabilities Act (ADA)
- Pregnancy Discrimination Act
Businesses employing 20 or more employees also need to comply with:
- Age Discrimination in Employment Act (ADEA)
- Older Worker Benefit Protection Act (OWBPA)
- Consolidated Omnibus Budget Reconciliation Act (COBRA)
Businesses employing 50 or more workers also need to comply with
- Family Medical Leave Act (FMLA)
Businesses employing 100 or more employees also need to comply with
- Worker Adjustment and Retraining Notification Act (WARN)
- Employee Retirement Income Security Act (ERISA)
Other laws to follow when starting a new small business usually includes:
- Obtaining a National Standard Employer Identifier (NSEI) for electronic health transactions and to provide health insurance for employees
- Applying for trademark for business name and or logo, if required
A good legal base makes for a solid foundation for the business and ensures seamless growth in the days ahead.
- Business.gov. Steps to Registering a Business. https://www.business.gov/register/steps-to-register.html
- New York State Governor’s Office of Regulatory Reform. Starting A Business. https://opal.gorr.state.ny.us/gorr/pas/pas2.nsf/StartingaBusinessBrochure2009.pdf?Open
- IRS.gov Business Taxes. https://www.irs.gov/businesses/small/article/0,,id=98966,00.html