Small business legal considerations: What business owners should know

Editorial Team

14 min read
Attorney going through paperwork with couple

Opening a small business is exciting, but entrepreneurs also need to follow legal guidelines in order to operate lawfully and stay in business.

From establishing a type of legal business entity, to following small business laws related to employment and taxation, a good business lawyer and some legal knowledge can help you open up successfully and avoid legal issues.

This small business guide explains legal requirements for business plan creators but doesn’t serve as official legal advice. For how to legally start a business, partner with a lawyer to ensure you meet all small business legal requirements to open up shop. Keep these legal requirements for starting a business in mind to help protect your employees, your operations, and your business livelihood.

Choosing the right business structure

Before you start your business, you need to select the appropriate legal structure. For example, will you have an LLC or corporation? The structure you choose will affect everything from your tax payments and benefits to business liability.

There are several types of business entities to choose from. These include:

  • Sole proprietorship: A sole proprietorship is a business owned by a single person. The business owner’s personal liabilities and assets aren’t separated from the business assets and liabilities. A sole proprietor must pay estimated taxes each quarter throughout the year. If the business incurs any debts or has other obligations, the sole proprietor is held personally liable.
  • Partnership: In a business partnership, two or more people own the business. The business owners share money contributions, profits, and losses for the business. There are two kinds of business partnerships: limited partnerships and limited liability partnerships. In a limited partnership, one general partner has unlimited liability, while the other partner(s) have limited liability and, thus, limited control over the company. Profits pass through to personal tax returns. The general partner with unlimited liability is also required to pay self-employment taxes. In a limited liability partnership, all partners have limited liability.
  • Limited liability company (LLC): With a limited liability company (LLC), the business owner’s personal assets are separated from business assets and liability. Profits and losses can apply to personal income and expenses without requiring corporate taxes. LLC members must pay self-employment taxes.
  • Corporation: A corporation can take a couple of different forms. One is a C corp, which is a business entity that’s separate from the owners. The corporation can be held legally liable but offers protection to owners from personal liability. Corporations pay income tax on profits and may also be taxed when dividends are paid to shareholders on personal tax returns. Shareholders in the corporation may leave the company or sell shares without disrupting the corporation’s business. An S corporation, also called an S corp, allows profits and some losses to pass through to the owners’ personal income without being subject to corporate tax rates. S corps are limited to having no more than 100 shareholders.

The business structure you choose will depend on different factors, including how much risk you want to take on as a business owner, what taxation you prefer, how much personal liability you’re willing to take on, and more. You can work with a legal advisor for small business to get guidance on what structure to choose.

Handling legal disputes

Small businesses may encounter legal disputes both as the plaintiff and as the defendant. For example, if another business steals your intellectual property, you may choose to sue them for damages. If a worker alleges you fired them wrongfully, they could sue your business.

One way to help avoid court is to first attempt to negotiate a dispute resolution outside of the courtroom. If your business retains an attorney, talk with them about your options.

Legal action could take place in small claims court or go to trial in litigation. Small claims court can generally be used for smaller amounts of money in dispute – check your state to find the limit. For bigger cases, those could require litigation.

Business owners should consult professional legal advice in areas including compliance with federal, state, and local laws; risk management, liability reduction, contracts and agreements, and taxes. You should also seek legal representation in cases where:

  • Someone is injured at your business property.
  • Someone is suing you for wrongful termination.
  • A state, local, or federal government has filed a complaint against you or is investigating your business.
  • Your business is involved with environmental issues.
  • A negotiation for the sale or acquisition of a company or assets.

Not having proper legal representation and counsel could seriously impact your business. When critical issues arise, seek the advice of an attorney.

Contracts and agreements for small business

Paperwork plays an important role in running a business. Written contracts can help protect you as a small business owner, in case a business partner fails to live up to the expectations set forth or takes advantage of you financially.

It’s helpful to work with a business attorney to determine the types of written business contracts you’ll want to create and the appropriate language that should be included in each one. Some of the most common types of business contracts include:

  • Employment contracts: Employment contracts/agreements define the relationships between an employer and employees. These are typically presented when an offer of employment is extended and detail the responsibilities and duties of the employee and the employer, as well as compensation, benefits, and termination stipulations. Find an example here.
  • Partnership contracts: If your business structure is a partnership, you’ll have a contract among all the partners. A partnership agreement outlines what each partner’s role in the business is and defines partnership management, business responsibilities, investments, and the division of business profits and losses among partners. Find an example here.
  • Enterprise service contracts: Enterprise service agreements are contracts between one entity and another that provides services, such as accounting or internet services, to a customer. As a business owner, you may be contracting out various services to other businesses. These contracts provide details including terms, costs, and service standards. Find an example here.

Key elements of most types of contracts include the service or offer, terms of acceptance, legal ramifications of violating a contract, and timelines of the contract. It’s best to have a business attorney draft any new contracts you need and read through any contracts you’re presented with before you sign.

Intellectual property protection

Intellectual property includes the ideas and innovation you create with your mind. It can range from inventions and product designs to names and brand creative elements.

Business owners who create intellectual property, such as designs, artworks, and brands, have the rights to own this property. In other words, another business can’t use your intellectual property without your permission.

For intellectual property protection, you can work with an attorney to obtain a copyright, trademark, or utility patent on the type of intellectual property you want to protect. For intellectual property that falls into the trade secrets category, you can put steps in place to hold and protect the trade secrets. This will help you if you choose to pursue legal action if someone steals your trade secrets.

Employment law for small businesses

The U.S. Department of Labor outlines employment laws for small businesses. No matter what type of small business you have, you’re legally obligated to:

Depending on the type of employees you hire (full-time employees versus independent contractors, for example), you’ll be legally required to follow certain wage, hour, and taxation laws. Misclassifying a worker can be costly and result in legal disputes, penalties, fines, and back taxes.

You’ll also want to be aware of potential employment discrimination and termination laws. Employers may be sued for wrongful termination, which includes firing an employee due to discrimination or because an employee reported and refused to participate in harassment, an illegal act, or a safety violation.

As you create your hiring strategy and determine your workforce needs, work with a business attorney to ensure your hiring terms are legal and that you have the right employer contracts in place.

Taxation and financial compliance

According to the IRS, there are generally five categories of business tax types. These include:

  • Income tax: All businesses, except for partnerships, must file tax returns for yearly income.
  • Estimated tax: Estimated tax refers to estimated taxes on income.
  • Self-employment tax: Self-employment tax applies to business owners who work for themselves.
  • Employment taxes: Employment taxes include taxes for employers who have employees. These taxes include Social Security and Medicare taxes, federal income tax withholding, and federal unemployment tax.
  • Excise tax: Excise tax applies to certain types of businesses that manufacture or sell specific products, use various types of equipment, and/or receive payment for specific services.

The IRS may conduct audits on small businesses to verify that documents, paperwork, and tax information are all accurate. If your small business is audited, the IRS may request documents that show taxable income, losses, deductions, and expenses.

A POS system that accurately captures transactions and produces financial reports can make it easier for your business to keep track of tax information. Some point of sale (POS) systems enable you to integrate transaction records with all other company financial information, so you can get a clear view of your small business accounting using one simple system.

Small business insurance

There are several types of small business insurance that can help protect your business and keep costs lower to operate. Depending on your business type, you may be legally required to purchase a specific type of insurance. According to the SBA, business insurance types include:

  • General liability insurance: General liability insurance protects against financial loss due to property damage, bodily injury, libel, defending lawsuits, and other business liabilities.
  • Product liability insurance: Product liability insurance protects businesses that manufacture and/or sell products against financial loss due to defective products that cause bodily harm.
  • Professional liability insurance: For businesses that provide a service, professional liability insurance protects against financial loss due to negligence, malpractice, or errors.
  • Commercial property insurance: Commercial property insurance covers businesses with a significant amount of property and physical assets, protecting them from loss and damage due to events like vandalism, natural disasters, and civil disobedience.
  • Home-based business insurance: For business owners who run a business out of their personal home, this insurance can be added to homeowner’s insurance to protect business equipment and provide liability coverage for third-party injuries.
  • Business owner’s policy: This type of insurance typically bundles various types of business insurance coverage to provide all-encompassing coverage for a lower price.

Workers compensation insurance is another type of small business insurance to consider. This type of insurance covers illness and injuries that occur due to work-related responsibilities.

You can typically get free business insurance quotes from insurance providers. It may be helpful to talk with several insurers regarding pricing and coverage options, so you can make the best choice for your business.

Registering your business

Once you’ve decided on a business structure, you must register your business with the relevant local, state, and federal agencies. The small business startup requirements for each state and city may vary, making it important to work with a business attorney to ensure you’re following the right steps. You can find the requirements for registering your business in your state here.

Generally, business registration will require completing the following actions after you’ve chosen your organization’s business structure:

  1. Choose a business address. Even if your business is completely online, you’ll still need a physical address to register your business and receive tax and legal paperwork. You might choose to use a home address, rent office space, or obtain a P.O. box.
  2. Register the business name. You’ll have to choose a business name to register, which may be different from the actual name you’re “doing business as”. Check with your state to see what kinds of naming options you have.
  3. Register with the Internal Revenue Service (IRS). Next, you’ll need to apply for an Employer Identification Number EIN with the IRS. You’ll use your EIN for payroll and taxes, as well as for actions such as opening a business bank account, applying for loans, and qualifying for wholesale pricing. You can apply for an EIN online
  4. Register the business with other local, state, and federal agencies. Check what other requirements your state and city have for tax, payroll, permit, licensing, zoning, noise, and unemployment purposes.

You may also want to register your business with the U.S. Small Business Administration (SBA), which offers small business owners guide and resources, including grants, loans, a business legal advice helpline, and business connections.

Compliance with industry regulations

Depending on the industry you operate in, you’ll need to understand and follow various industry and state-specific regulations and licensing requirements. For example, agriculture, aviation, firearms, tobacco, and alcohol industries all have strict requirements a business must meet in order to legally operate.

To remain legally compliant, you’ll have to:

  • Ensure all business operations meet compliance requirements at all times
  • File reports that confirm you’re operating in compliance
  • Pay fees to maintain licensure and meet any other requirements to ensure compliance

Failing to meet these requirements could result in fines, penalties, and other consequences. A business attorney who has knowledge about your industry can help.

Exit strategies for selling your small business

There may come a day where you decide to move on from your small business and sell it or pass it on to a loved one. In order to do so and ensure the business remains in legal operation, certain contracts and agreements must be executed in exit planning.

Some of the options small business owners have to exit a business include:

  1. Passing it on to a family member
  2. Merging the business with another business
  3. Selling the business to another company
  4. Selling the business to employees
  5. Selling a partnership stake in a business to another partner or investor
  6. Going public with a business through an initial public offering (IPO)

You may also choose to liquidate and close the business. In some cases, a business owner files for bankruptcy when they can no longer handle the debts of a business.

In any strategy, it’s important to work with a business attorney to draft the proper paperwork and protect your stake in the business or financial standing after moving on.

Hire a business attorney for legal strategy & advice

Small businesses can be fulfilling to open, but they also require following laws and regulations in order to operate successfully. Understanding the importance of legal requirements in business can help you protect your operation. Small business owners should consult with attorneys to learn more about requirements pertaining to this list of legal requirements for business:

  • Choosing the right business structure
  • Registering a business
  • Drafting contracts and agreements
  • Protecting intellectual property
  • Following employment laws
  • Meeting taxation and financial compliance laws
  • Securing the appropriate small business insurance
  • Handling legal disputes
  • Complying with industry regulations and licensing requirements
  • Getting exit strategy guidance

One way to organize your finances and make it easier to meet your small business tax requirements is to use Clover POS systems, including restaurant POS system and retail POS system options. Whether you sell in stores, online, or a combination, Clover POS solutions more accurately capture data and track transactions to help simplify small business accounting. Why wait? Elevate your business, and get started with a Clover POS system today.

This information is provided for informational purposes only and should not be construed as legal, financial, or tax advice. Readers should contact their attorneys, financial advisors, or tax professionals to obtain advice with respect to any particular matter.

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