Starting a small business marks the beginning of an entrepreneurial journey. It can be an exciting yet challenging experience, especially for a first-time business owner. Beyond the products or services that you will offer, you have to consider plenty of requirements before launching a profitable small business.
According to the U.S. Small Business Administration, there are around 31.7 million small businesses in the U.S. as of 2020. Given the rise in the number of small businesses in the U.S., this proves that the U.S. economy has opened many opportunities for small entrepreneurs. But to be one of them, business owners need to have a firm legal and financial foundation to have a better chance at achieving long-term success.
A business involves many things, from planning the business structure, making financial decisions, and following a set of legal activities. Complying with these responsibilities can help you focus on nurturing your business in the long run.
To make your business journey a fruitful one, here are the eight crucial requirements that you need to follow before launching a business startup.
1. Legal Consultant
Knowing all your legal responsibilities as a new business owner can be overwhelming. To ensure you understand all the legalities of starting a business, make sure to hire a legal counsel for small businesses.
Those who are new in the world of entrepreneurship, never hesitate to hire an attorney. By hiring a consultant, entrepreneurs can protect their assets and prevent common pitfalls in starting a business.
2. Business Structure
The next legal requirement is to determine the structure of your business. Having a business structure will identify your federal tax obligations and the forms you will use to report your taxes.
You have plenty of options to consider for your business structure. These include sole proprietor, limited liability company (LLC), S corporation, and C corporation. You also have the option to combine different business structures, but they are less common and tough to set up.
3. Business Name
Every business requires a name. If you haven’t decided yet, choose a name that tells about your brand and ensure that no one has claimed it yet. Afterward, it’s time to register your business name.
Signing up for your business involves four ways:
- Entity name legally protects your business at the state level
- Trademark legally protects you at the federal level
- Doing Business As (DBA) doesn’t provide legal protection, but some states legally require you to operate a business
- Domain name protects your business website address
4. Federal Tax ID Number
The federal tax identification number is also the same as the Employer Identification Number (EIN). You will need an EIN for your business if you are hiring employees, filing tax returns, and operating as a corporation or partnership.
5. State Tax ID Number
If your state collects taxes from small businesses, you need to have a state tax I.D. number. To know whether you need to create a state tax I.D., learn more about your state’s laws in terms of income and employment tax obligations.
6. Business Permits and Licenses
Like any other business, you need to secure proper permits and licenses before you operate. You can apply for these requirements at the federal and state government level. Federal licenses are for businesses run by a federal agency, while state licenses vary depending on the location. Other specific licenses will depend on your business location and industry.
7. Business Insurance
Keep in mind that any financial or legal problem faced by your business will also affect you directly. To avoid further risk of losses and liability, business insurance will protect your personal and business assets. The type of insurance that works for your business will vary depending on the industry you work in, business size, client base, etc.
Here are three types of insurances commonly used by small businesses:
- General Liability – This type of insurance covers a range of incidents such as accidental damage, claims of libel or slander, injury, lawsuit settlements, and medical issues.
- Errors and Omissions – Also known as professional liability insurance, it offers protection when a client creates financial harm because of an error or omission and lawsuits claiming you made a mistake.
- Product Liability – This insurance policy will protect your business if one of your products or services is defective or injures your customer.
8. Business Bank Account
Separating your personal and business bank account is crucial to avoid financial confusion. Failure to do this will lead to severe consequences, such as disorganized records, overspending, and legal issues.
Choose a bank that caters to your business needs. You can also look for banks that offer lower banking fees for small business owners. When opening an account, you need to submit necessary information and documents, such as EIN, formation documents, business license, ownership agreement documents, and other documents required by your chosen banking institution.
Starting a new business indeed involves a lot of work, as it requires plenty of legal obligations. So if you want to focus on building your business in the long run, make sure to comply with all your legal responsibilities to avoid legal issues.