Are you ready to start your own business? Starting your own business, no matter the size, can be one of the most exciting (and terrifying!) moments in your life. It’s a chance to break off on your own and try your hand at doing something that’s entirely your own — but the reward doesn’t come without risk. As with every big opportunity to succeed comes the possibility of failures along the way, which is why it’s essential to be prepared and understand the financial and legal requirements for starting a business.
The legal requirements for starting a business can be lengthy, and sometimes complicated. Not to mention, many new business owners have never started their own business and may be unaware of the legal requirements for starting a business. And further, one of the most common reasons businesses shut down is financial issues — 82% of businesses close after experiencing cash flow problems, according to one study.
That’s why we’ve enlisted the help of local business attorney, Beth Grazio, to provide some insight into the legal side of starting a business. Keep in mind this blog post is simply offering some introductory advice for informational purposes. Feel free to reach out to Beth directly for personalized advice about your business!
Ready to dive in? Here’s a few things you need to know before starting a business:
Checklist: Financial & Legal Requirements for Starting a Business
Here are the most common requirements for starting a business:
- Picking a proper business entity: Pick from sole proprietors to partnerships to C-corporations, S-corporations, or an LLC, depending on the best fit for your business and purpose.
- Registering your business name: When you’re building your business, it’s key to find the right name. This won’t apply if you opt to operate as a sole proprietor under your own name. Otherwise, you will need to file a Fictitious Business Name (FBN) or Doing Business As (DBA). These names will be registered with the local and state government.
- Getting your Employer Identification Number (EIN): Once you have your business entity and business name set up, it’s time to get your EIN. This is like a Social Security number, but for your business. You can use your EIN to perform crucial functions like opening your bank account and getting business licenses. The easiest way to apply for your EIN is to go through the IRS website.
- Getting business insurance: Business insurance is absolutely crucial to help protect yourself from liability. Even if it’s not legally required, you should ensure your business is protected from natural disasters, lawsuits, and other possible issues. Consider workers’ compensation insurance, general liability insurance, property insurance, to start.
- Making your first hires using background checks: Hiring your first employees can open up a whole new sphere of legal requirements. Of course, bringing on new employees can be a big business boom – but it can also expose you to liability. When hiring, you should be conducting background checks as well as ensuring employment eligibility and ensuring the employee has the proper paperwork.
- Ironing out your federal taxes: Federal taxes as a business owner can be complicated. You will need to pay some combination of income tax, self-employment tax, excise tax, employer tax, estimated tax, and sales tax. However, how much of each and what type will depend entirely on your business structure. That’s why it might be wise to hire an accountant, tax advisor, or financial advisor to help manage some of the day-to-day or year-to-year finances, to ensure you comply with laws.
- Following the proper legal onboarding process: The legal requirements don’t end when you hire your first employee. Once you have made your first hire, you have to register with the Department of Labor, report to your state labor agency, and pay state unemployment compensation taxes. It can be a lot for a first-time business owner, and there are other obligations as well. It might be worth working with a specialist to ensure you stay up-to-date with regulations.
In addition to these legal requirements, there are some questions you should be sure to ask your lawyer AND your financial advisor…
Questions to ask your lawyer
The legal requirements for starting a business are perhaps the most important aspects of your new business. It’s important to make sure you are legally compliant. However, the steps you take to fulfil your legal obligations will vary depending on your entity, your business, and the location of your business.
For many new business owners, who might not be experts in the law, it’s important to think ahead. So many people will make the mistake of not hiring a lawyer until they need one. But at that point, it might be too late.
When do you consult with a lawyer, consider asking some of these important questions:
- What business structure works best for my business?
- Are there any rules or regulations around naming my business?
- How can I minimize my risk?
- How can I better protect my intellectual property?
- What should be in my operating agreement?
- What contracts will I need to operate my business?
- Is there any other risk I need to consider?
- Is there anything else you’d recommend for my business?
Questions to ask us, the financial experts!
When you’re building your new business, it’s easy to feel overwhelmed with the financial side of it. After all, many small business owners are not financial experts – and might not understand how to go about running a financially smart business.
Here are some questions to ask a financial expert as your build your business:
- Am I financially ready to start a business?
- How much money will I need to pay expenses, or open a storefront?
- Should I take on debt to build my business?
- When it comes to taxes, learn about what taxes you will need to pay and what you will need to track. For example, what deductions do I need to track?
- How much insurance do I need for my specific business?
- What types of insurance would you recommend for my business?
- How can I manage payroll and business finances?
The value of a partner on your side
Starting your own business can be a paperwork-heavy endeavor and hard-to-navigate legal requirements can make it even more difficult to get all your ducks in a row — which is why many business owners find it helpful to have a legal and financial partner on their side. At Arsenal Financial, we’re experts in working with small business owners and entrepreneurs to help them get their business off the ground. We can point you in the right direction of a trusted legal professional, as well.