Legal Requirements for Small Businesses

Written by Emily Liu

On June 24, 2020

When starting a small business, company owners should thoroughly prepare themselves. Only having capital and a business plan is not enough. Preparing necessary legal documents is also essential for business operations. These legal documents allow business owners to run their company with all required licenses and permits. However, some inexperienced business owners jump into a competitive marketplace without fulfilling the legal requirements, which makes their business susceptible to failure. Here we provide three critical legal requirements that entrepreneurs need to consider before launching a business.

Registering a Business Name

The first legal requirement is to register a business name. The business name is also known as “Doing Business As” (DBA) and “Assumed or Fictitious Name.” If the business owner doesn’t register a DBA name, the name of the business will default to the name of its legal owner. The DBA name registration allows business owners to create and use the name they want for their brand. It also lets the state government know under which name the entrepreneurs operate their business. The registration process varies depending on the state or region. Typically, entrepreneurs should register the DBA name with the state government’s business department or the local county.

Get Licenses

The second legal requirement is to get the necessary licenses and permits. For some industries, such as medical and education, permissions are required before opening the door. There are both federal level and state level licenses. Entrepreneurs will need to get federal licenses if a federal agency regulates their business activities. The state-level licenses that companies need will depend on the location. Business owners should check the industry licenses list before leaping straight into the marketplace.

Pay Taxes

The third legal requirement is to pay both federal taxes and state and local taxes. The responsibilities for federal taxes depend on the structure and size of the business. For federal taxes, entrepreneurs need to file an annual income tax return with the Internal Revenue Service. If the entrepreneur is a sole proprietor, he/she needs to pay a self-employment tax. If the business owner has employees, he/she has to pay social security and Medicare taxes, and federal unemployment tax. Businesses of the manufacturing industry also need to pay excise taxes.
In addition to federal taxes, entrepreneurs have to pay state and local taxes. Tax laws vary with different locations. The most common types of state and local taxes are income tax and employment tax. We highly recommend business owners to check with state and local governments to determine their state tax obligations before starting the business.

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