The legal basics for starting a business are less scary than they sound, and most of them come down to a short list you can work through in order.
Legal basics for starting a business: what to settle first
Before you open, there are a few decisions that are hard to undo later. This guide covers the legal basics for starting a business in plain language. It is general information, not legal or tax advice, and rules differ by state, city and industry, so confirm the details where you plan to operate and talk to a licensed attorney or accountant when the stakes are high.
Work through the steps in this order: choose a structure, register a name, get an EIN, handle licenses and permits, understand your taxes, put agreements in writing and decide on insurance. The SBA guide to launching your business follows a similar sequence.
- Choose a business structure
- Register your business name
- Get a federal EIN
- Check licenses and permits
- Understand your tax duties
- Use written agreements
- Decide on insurance
Legal basics for starting a business: pick a structure
Your structure affects your taxes, paperwork and personal risk. A sole proprietorship is the simplest, but there is no legal separation between you and the business. An LLC can separate personal and business liability in many cases and is popular with small owners. A corporation is more formal. Our guide on LLC versus sole proprietorship compares the first two.
No structure removes every risk, and the right one depends on your state and your plans. A short session with an attorney or accountant is often money well spent here.
- Sole proprietorship: simple, but no separation of personal risk
- LLC: more paperwork, possible liability separation
- Corporation: formal, and suited to larger plans
Register your business name
If you operate under a name other than your own legal name, many places require you to register it. This is often called a DBA, or “doing business as.” Our guide on DBA versus LLC explains what a DBA does and does not do. Check that the name is not already in use in your state, and consider checking trademarks through the U.S. Patent and Trademark Office so you do not build a brand you cannot keep.
- Search your state business records for the name
- Register a DBA if your state or city requires it
- Search for trademark conflicts before you print anything
Get an EIN and open a business account
An EIN is a federal tax ID for your business. The IRS issues it free, and our guide on how to get an EIN walks through it. Be careful with websites that charge a fee for something the IRS gives away at no cost. Once you have one, open a business bank account so business and personal money stay apart, which also helps with the legal basics of keeping your liability protection intact.
- The IRS EIN is free
- Keep business and personal money separate
- Keep your formation papers in one safe place
Legal basics for starting a business: licenses and permits
Many businesses need some combination of local, state and federal permission to operate. Common examples are a general business license, a sales tax permit, a professional license, a health permit for food, or a zoning approval for a home-based business. The official U.S. government business guide and your local SBDC can point you to what applies. Skipping this step is one of the legal basics people most often regret.
- Ask your city or county about a general business license
- Ask your state about a sales tax permit
- Check zoning rules if you work from home
Taxes, contracts and insurance: legal basics for starting a business
Business owners usually owe income tax and often self-employment tax, and some owe sales tax or payroll tax. The IRS small business and self-employed tax center explains the basics. Keep clean records from day one.
Put important agreements in writing, including client terms, vendor terms and any partner arrangement. If you are buying a business or signing an opportunity agreement, read our guides on the business purchase agreement and how to evaluate an opportunity first. Ask an insurance agent what coverage fits your risks, such as general liability or property coverage.
- Track income and expenses from the start
- Use written terms with clients and vendors
- Get insurance quotes before you open
When to call a professional
Some situations justify paying for advice: choosing a structure, signing a franchise or purchase agreement, hiring employees, or dealing with a dispute. Free advice is also available through SCORE, which pairs owners with volunteer mentors. The legal basics for starting a business do not need to be expensive, but mistakes can be.
- Franchise or business purchase agreements
- Hiring your first employee
- Anything involving a dispute or a large sum of money
Related reading on legal basics for starting a business
- LLC vs. Sole Proprietorship: Setting Up Your Business Opportunity Correctly
- DBA vs LLC: What Each One Does
- How to Get an EIN for Your Business
- How to Open a Business Bank Account
- Business Purchase Agreement: Key Terms to Review Before You Sign
- How to Evaluate Any Business Opportunity Before You Invest
- Business Opportunity Scams: 12 Red Flags to Check
- SBA guide to launching your business
- USA.gov guide to starting a business
- America’s SBDC small business advising
- SCORE free business mentoring
- USPTO trademark basics
- IRS small business and self-employed tax center
