Legal Basics of Starting a Business: What to Know

Last Updated on May 23, 2023

Legal basics for starting a business refer to the fundamental legal requirements that new business owners must adhere to when setting up a company. Such requirements include registering the business, obtaining relevant licenses, choosing the appropriate business structure, and complying with tax obligations.

It is essential for new business owners to understand legal basics to avoid legal liabilities that may arise in the future. Non-compliance with legal requirements could lead to the closure of the business, penalties, and legal expenses. Business owners who adhere to legal basics also gain the confidence of investors, customers, and employees.

Read: What are the Key Elements of a Winning Business Plan?

Business Structure

Choosing the legal structure of your business is a crucial decision that impacts your taxes, liability, and legal obligations. Consider the following points:

A. Importance of choosing a legal structure

• Legal structure determines the taxes you pay and how you report them to the government.
  
  
• It determines your liability for debts and legal obligations.
  
  
• It affects how you can raise funds and manage your business.
  
  
• It impacts your ability to transfer ownership or sell your business.

B. Types of business structures

1. Sole Proprietorship: Simplest and most common structure, the owner controls all aspects of the business and has unlimited personal liability.
   
   
2. Partnership: Two or more owners share profits and losses, and each partner is personally liable for the partnership’s debts and obligations.
   
   
3. Limited Liability Company (LLC): Offers limited liability protection similar to a corporation but with more flexibility in management and taxation.
   
   
4. Corporation: A separate legal entity from its owners, who enjoy limited liability but are subject to double taxation.

C. Factors to consider when choosing a business structure

1. Taxation: Your legal structure determines how your business is taxed, including income tax, self-employment tax, and payroll tax.
   
   
2. Liability: Some structures offer more protection against personal liability than others.
   
   
3. Management and Control: Consider the level of control you want over your business, and the role of other owners or investors.
   
   
4. Credibility: Certain structures may be viewed as more legitimate or established than others.
   
   
5. Cost and Complexity: Some structures require more paperwork and fees to establish and maintain than others.

Choosing the right legal structure for your business is a critical step in starting and running your business. Consider your goals, needs, and resources carefully before making a decision.

Read: 8 Odd Businesses That Are Legal

Business Name and Registration

Choosing a business name is one of the initial steps when starting a business. It is a critical decision that can have a significant impact on the branding, marketing, and customer perception of the company. Additionally, registering the business name is essential to ensure legal protection and compliance with government regulations. Here are some guidelines to follow when selecting a business name and registering it:

A. Importance of Selecting a Business Name

• The business name is the first impression that potential customers will have of the company, and it should make a positive impact.
  
  
• The name you choose can affect the credibility, trustworthiness, and perception of the professionalism of the business.
  
  
• A memorable and unique business name can help to differentiate the company from competitors and increase brand recognition.

B. Guidelines for Choosing a Business Name

• Choose a name that is easy to pronounce and spell to make it easier for customers to find and refer others to.
  
  
• Make sure the name is unique and not already in use by another business to avoid potential legal issues and confusion among customers.
  
  
• Consider the nature of the business, the target audience, and the brand image when selecting a name.
  
  
• Avoid using generic or descriptive names, as they can limit the potential of the brand and make it difficult to stand out in search engines and directories.
  
  
• Finally, test the name with potential customers, friends, and family to get feedback and ensure that it resonates with the target audience.

C. How to Register a Business Name

Once you have selected a name, the next step is to register it with the relevant authorities. The registration requirements vary depending on the state or country in which you are doing business. Here are the basic steps to follow:

1. Check if the name you wish to use is available and not already in use by another business in the same industry and location.
   
   
2. If the name is available, register it with the appropriate government agency. For instance, in the United States, you can register the name at the federal or state level through the Secretary of State’s office.
   
   
3. File the necessary registration documents, such as articles of incorporation, articles of organization, or a fictitious business name statement, and pay the registration fee.
   
   
4. Wait for the registration to be processed, which usually takes a few weeks, and obtain a business registration certificate or a registration number.

Registering a business name offers legal protection and helps to establish ownership and control of the company. It prevents others from using the name or branding, and you can take legal action if someone infringes on your rights or causes confusion among your customers. Furthermore, a registered business name allows you to open a business bank account, apply for business loans, and enter into contracts and agreements with vendors and suppliers.

Starting a business can be an exciting, yet challenging venture. By following the legal basics of business name selection and registration, you can protect your brand, stand out in the market, and thrive in the competitive business world.

Read: What Business Skills Do All Founders Need?

Licenses and Permits

A. Types of licenses and permits required

Starting a business requires obtaining the necessary licenses and permits. Here are some common ones:

• Business license: allows you to legally operate your business within a city or county
  
  
• Zoning permit: ensures that your business is operating in a zone that is suitable for your type of business
  
  
• Building permit: necessary if you’re making changes to the building or engaging in construction activities
  
  
• Sales tax permit: allows you to charge and collect sales tax on your products or services

B. Steps to obtaining licenses and permits

The process for obtaining licenses and permits can vary depending on your business type and location, but here are some general steps to follow:

1. Research the licenses and permits required for your type of business and location
   
   
2. Fill out the necessary applications and forms
   
   
3. Provide any required documentation, such as proof of insurance or zoning compliance
   
   
4. Pay the required fees
   
   
5. Wait for approval, which can take several weeks or months depending on the type of license or permit

C. Importance of compliance with licensing and permit regulations

Complying with licensing and permit regulations is crucial for the long-term success of your business. Failure to obtain the required licenses and permits can result in legal problems and fines. In extreme cases, it can even lead to the closure of your business.

Additionally, failure to comply with regulations can damage your reputation and make it difficult to obtain funding or attract customers. It’s important to do your research and ensure that you’re meeting all of the necessary requirements.

Obtaining licenses and permits may seem like an overwhelming task, but it’s a critical step in starting a business. By understanding the types of licenses and permits required, following the necessary steps, and complying with regulations, you’ll be on your way to a successful business venture.

Read: Navigating the World of Business Taxes & Accounting

Taxes

Starting a business means understanding the legal obligations that come with it, including taxes. Here’s what you need to know:

A. Types of taxes

• Income tax – this is a tax on the income earned by a business.
  
  
• Sales tax – this is a tax that is collected on the sale of goods or services.
  
  
• Property tax – this is an annual tax on the property owned by a business.
  
  
• Employment tax – this includes Social Security and Medicare taxes, as well as federal and state unemployment taxes.

B. Tax obligations for businesses

All businesses are required to pay taxes, regardless of their size or structure. The specific tax obligations will vary depending on the business type and location but generally include:

• Filing annual tax returns
  
  
• Paying estimated taxes throughout the year
  
  
• Collecting and remitting sales tax (if applicable)
  
  
• Withholding and remitting employment taxes

C. How to obtain an Employer Identification Number (EIN)

An EIN is a unique identifier assigned to a business by the IRS. It’s necessary for tax purposes and to open a business bank account. Here’s how to obtain one:

1. Visit the IRS website and apply online
   
   
2. Mail or fax in Form SS-4
   
   
3. Apply by phone

D. Importance of compliance with tax regulations

It’s essential for businesses to comply with all tax regulations to avoid legal and financial troubles. Failure to pay taxes can result in penalties, interest charges, and even legal action. Here are some tips to ensure compliance:

• Keep accurate financial records
  
  
• Pay estimated taxes on time
  
  
• File tax returns on time
  
  
• Work with a tax professional to ensure compliance and minimize tax liability

Starting a business can be challenging, but understanding your tax obligations and complying with regulations will help you avoid unnecessary stress and legal issues. Keep these tips in mind as you embark on your entrepreneurial journey.

Read: What are the Legal Requirements for Starting a Startup?

Contracts and Agreements

The legal aspects of starting a business can be overwhelming, but understanding the basics can help set anyone on the right path toward success. Among the necessary legal items to consider, contracts and agreements are an essential part of any business. Here’s what you need to know:

A. Importance of Contracts and Agreements

Contracts and agreements are legal documents that establish the terms and conditions of a business relationship. These documents are essential as they outline the rights and expectations of every party involved. Without contracts and agreements, disputes and misunderstandings may arise, leading to significant legal problems that could disrupt a business’ operations.

B. Types of Contracts and Agreements

There are various forms of contracts and agreements that businesses should be familiar with. Here are some examples:

• Partnership agreements – for businesses with two or more owners defining each partner’s responsibilities, contributions, and sharing of proceeds.
  
  
• Service agreement – outlines the terms, conditions, and payment details of services provided by a vendor or supplier to a business.
  
  
• Non-Disclosure Agreement (NDA) – involved when a business shares confidential information with another party and binds the recipient from sharing such information.
  
  
• Employment agreement/contract – outlines a company’s employment policies, including employee duties, salary, benefits, and termination conditions.
  
  
• Lease agreements – defines the terms and conditions of a property lease between a business and a property owner.

Read: How to Create a Successful Business Plan for a Startup?

C. Elements of a Contract or Agreement

While contracts and agreements vary in complexity, they typically have common elements. These elements include:

• Offer – a clear and complete statement of what one party is offering to do.
  
  
• Acceptance – a clear expression by the other party that they agree to the terms offered.
  
  
• Consideration – something of value exchanged between the parties, such as money, goods, or services.
  
  
• Legal capacity – all parties entering into the agreement must have legal capacity, meaning they have the right to enter into a legally binding relationship.
  
  
• Legal purpose – the terms of the contract must be legal, and the purpose of the agreement cannot violate the law.
  
  
• Consent – all parties must enter into the agreement voluntarily and without coercion.
  
  
• The legality of formalities – in some cases, contracts may require specific formalities, such as signatures and notarization, to be legally binding.

It’s crucial to have a lawyer review contracts and agreements before signing them as they should be tailored to meet the specific needs of the business and protect its legal interests.

Contracts and agreements are an essential part of running any business, and having a clear understanding of them can save you from legal problems, disputes, and the additional expenses that come with them.

Remember to establish contracts and agreements with every party a business does business with, and ensure you have a competent lawyer who understands business law to draft and review the contracts you sign.

Read: Business Ethics and Corporate Social Responsibility: Strategies for Building a Stronger and More Ethical Company

Conclusion

A successful business requires taking care of legal basics. You should be aware of proper registration and government compliance to avoid future legal implications. Your business entity’s structure and legal agreements must also be established.

Seeking assistance from a trusted legal professional can save you time, resources, and stress. Legal professionals can provide the right legal advice tailored to your specific business needs. A good lawyer or attorney can help you avoid legal problems in the future while you focus on building your brand.

On a final note, starting a business requires complying with legal basics to ensure long-term success. Proper registration, entity structure, legal agreements, and compliance with government regulations are all vital. Seeking legal assistance is crucial to avoid future legal issues and help business owners achieve their goals. Keep these legal basics in mind as you start your business and move forward to achieve your business dreams.

Read: Navigating Legal and Regulatory Challenges for Your Startup

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