What is the bare minimum required to start a business?
While not necessarily recommended, it is technically possible for you to start a business without engaging in any preliminary setup aside from actually running the business. This approach, however, can lead to considerable risks depending on the type of business you have, and may result in potential financial penalties. Nonetheless, it's fairly common for freelancers or independent contractors to formalize their business after they get their first big client or contract. Even if you plan to bootstrap your business, having a Business Plan is a critical component to success.
Until your business is formally established as a separate entity, it will be considered a sole proprietorship. While you may take steps to set your business up for success, if nothing is done to structure the business as a separate entity, it will more than likely be considered a sole proprietorship legally and for tax purposes. This means that you will be personally responsible for any debts, property damage, or personal injuries that occur as a result of doing business. You will also pay the business's taxes through your own personal tax return.
For many industries, there may be legal regulations, or a minimum requirement to be licensed or insured. For example, offering legal services requires meeting specialized licensure requirements. If you plan to hire employees, there are many more federal and state requirements that you may need to meet, as not doing so can lead to costly fines. State and local laws sometimes also require businesses to register with local authorities, and if a business owner fails to do so, it can lead to fines.
What are the minimum best practices when starting a business?
At a minimum, you will want to check to see if you are required to formally register your business with state and local government authorities. These registrations often have rather minimal costs, while the penalties for not registering can be burdensome.
Next, consider getting an Employer Identification Number (EIN) from the IRS if you plan to hire employees. Your business will use its EIN when filing taxes and opening a bank account.
It is a best practice to start a separate bank account for your business and avoid having personal transactions in your business bank account. Mixing personal and business transactions makes it more difficult to prepare your accounting and may also lead to legal trouble if your business is sued or audited.
If you own your own home, or have other significant assets, you may want to set your business up as a separate legal entity. Forming a separate legal entity for your business, such as a limited liability company (LLC) or corporation, helps reduce the risk that you will be personally liable if your business is sued. There may be tax benefits to being organized as a corporation or LLC, and certain banks and lenders may require it as well.
If you are bringing on employees, it may be important that your business follow some basic hiring practices, such as performing background checks and checking references. In addition, as part of the hiring process, there are a variety of documents that you may want an employee or contractor to sign, such as an Offer Letter, Employment Contract, Noncompete Agreement or Independent Contractor Agreement.
You may also be required to get or want to consider business insurance. The exact type and amount of insurance that you may need generally depends on the business you operate. Experienced insurance brokers, including our trusted partner Simply Business, can help you find the right policies and coverage for your business.
What if I do not meet the minimum requirements before opening my business?
Doing business without going through the proper channels can be risky. To limit personal exposure, it is generally recommended that you conduct business activities in a limited liability company, limited partnership, corporation, or some other business structure that reduces the risk to your personal assets. If you were to get sued without having a separate legal entity set up for your business, for example, your personal assets, such as your home, car, and savings may be in jeopardy because of your business activities.
If you choose not to form a separate business entity, you may want to increase your business insurance coverage so it is high enough to cover possible lawsuits. Although it may be wise to always consider obtaining business insurance, the need may be even greater if your personal assets are at stake.
Failing to register the business with your state or local government may also negatively impact your taxes and result in penalties or fines.
If you do not obtain an EIN for your business, and you have employees, then you may be required to use your own Social Security number, if you are sole proprietor. Before hiring your first employee, you may want policies that are in line with federal, state and local employment laws.
A business may get into legal trouble if it fails to:
- Withhold and remit state and federal payroll taxes when required.
- Register with state agencies.
- Obtain worker's compensation insurance, if required.
The penalties for failing to follow employment laws range from fines, penalties, back taxes, to being forced to stop conducting business in a particular state or city.
What are the next steps after starting a business?
After starting your business, it is important to focus on following your Business Plan. Making adjustments along the way may be necessary, but if you start from a solid plan, your next steps will have already been created by you.
After you have been in business for several months, or a year, you may want to make sure that the fundamental parts of your business remain in good standing and fit your needs. For example, it is good practice to file and pay taxes on time. Most states require corporations to submit annual or biennial entity reports to the state. Failure to submit those reports can cause your business to face penalties, suspension, or even to be dissolved.
Learning how to maintain the books or hiring someone to do your bookkeeping is another important step after starting a business. This will make your life easier when tax season comes around. Keeping accurate books may also help you track how your business is performing, so you can make changes more quickly if you notice that the business is underperforming.
From time to time, you may want to check that your contracts, business structure and tax structure are still appropriate for your needs. Tax laws and business laws change frequently, and the structure that is best for your business may change over time. Having a lawyer review your business structure and contracts annually is a good way to ensure that you are keeping up with any recent changes in the law, or your industry. Similarly, it can often be beneficial to meet with an accountant before the end of each year to determine if there is anything that you can do to lower your tax liability or better position the business for the future.
To learn more about the legal requirements of starting and operating a business, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.