Legal setup is the part of starting a business most people want to skip. It is also the part that causes the most expensive problems when it is skipped. The good news: for most small businesses, the essentials are manageable, and a few hours of professional advice up front can save a lot later.
This is a general overview, not legal advice. Rules vary by state, city, and industry, so check with an attorney or accountant about your specific situation.
Choose a business structure
Your structure affects your taxes, your personal liability, and your paperwork. The most common options are:
- Sole proprietorship: the simplest option, but there is no legal separation between you and the business.
- LLC: a popular choice for small businesses because it can help separate personal and business liability, with relatively simple upkeep.
- S corporation or C corporation: more formal structures that can make sense as revenue grows or if you plan to raise investment.
- Partnership: for businesses with more than one owner. Get a written partnership or operating agreement, even with a close friend.
An accountant can help you understand the tax side of each option for your situation.
Register your business
Depending on your structure and location, you may need to register with your state, file a “doing business as” (DBA) name if you operate under a name other than your own, and get an Employer Identification Number (EIN) from the IRS. An EIN is free from the IRS website.
Get the right licenses and permits
Many businesses need a general business license, and some industries need specific professional licenses or permits. Home-based businesses may also need to check local zoning rules. Your city or county website and your local Small Business Development Center are good places to start.
Understand your tax obligations
Business owners often need to pay estimated taxes during the year, and some businesses need to collect sales tax. Setting aside a percentage of every payment for taxes is a simple habit that prevents unpleasant surprises in April.
Use contracts
A clear written agreement protects you and your clients. At minimum, it should cover scope of work, timeline, payment terms, cancellation, and who owns the finished work. Templates are a reasonable starting point, but having an attorney review your main contract is usually worth the cost.
Protect your intellectual property
If your brand name, logo, or content matters to your business, check that nobody else is using it before you invest heavily in it. Depending on your situation, it may make sense to look into trademark registration.
Get the right insurance
General liability, professional liability, and property insurance are the most common for small businesses. What you need depends on what you do and where you do it. An independent insurance agent can walk you through options.
Keep business and personal finances separate
A separate business bank account makes bookkeeping and taxes easier, and it is especially important if you have an LLC or corporation and want to keep the liability protection meaningful.
Get referrals from people you trust
Finding a good attorney, accountant, or insurance agent is much easier with a recommendation. That is one of the most practical things a business community does. Ask in the WEN Facebook group, especially on Wednesdays when we ask the room, and you will usually get several names from people who have worked with them.
For the bigger picture of getting started, read 10 Steps to Take Before Starting Your Own Business.
