Small Business Legal Checklist — Essential Steps for New Businesses

Small Business Legal Checklist — Essential Steps for New Businesses

Starting a new business is exciting, but the legal requirements can be daunting. Missing a critical step — like failing to register your business properly, neglecting employment law, or operating without the right licenses — can result in fines, lawsuits, or even the forced closure of your business. This checklist covers the essential legal steps every new business owner should take to build a solid legal foundation.

1. Choose Your Business Structure

The legal structure you choose affects your personal liability, taxes, ability to raise capital, and administrative requirements. The most common options are:

Sole Proprietorship — The simplest structure. You and the business are legally the same entity. There is no liability protection, meaning your personal assets (home, savings, car) are at risk if the business is sued or cannot pay its debts. Best for very low-risk, single-owner businesses. Limited Liability Company (LLC) — The most popular structure for small businesses. An LLC provides personal liability protection (your personal assets are generally shielded from business debts and lawsuits) with flexible tax treatment. LLCs can be single-member or multi-member and are relatively easy to set up and maintain. Corporation (C-Corp or S-Corp) — Corporations offer the strongest liability protection and are preferred for businesses that plan to raise investment capital or go public. C-Corps are taxed at the corporate level, and shareholders pay taxes on dividends (double taxation). S-Corps avoid double taxation by passing income through to shareholders' personal tax returns, but they have restrictions on the number and type of shareholders. Partnership (General or Limited) — For businesses with two or more owners. General partnerships offer no liability protection. Limited partnerships have at least one general partner with unlimited liability and limited partners who are only liable up to their investment. Recommendation: For most small businesses, an LLC provides the best combination of liability protection, tax flexibility, and simplicity. Consult with a business attorney or accountant to determine the best structure for your specific situation.

2. Register Your Business

Once you have chosen a structure, you need to register your business with the appropriate government agencies.

• Register with your state. LLCs and corporations must file formation documents (Articles of Organization for LLCs, Articles of Incorporation for corporations) with the state's Secretary of State office. This usually costs between $50 and $500 depending on the state.
• Register your business name. If you are operating under a name different from your legal name or entity name, you may need to file a "Doing Business As" (DBA) or fictitious name registration.
• Register with your city or county. Some localities require additional business registrations or permits.

3. Obtain an Employer Identification Number (EIN)

An EIN is a federal tax identification number issued by the IRS. Think of it as a Social Security number for your business. You need an EIN if you have employees, operate as a corporation or partnership, or file certain tax returns. Even sole proprietors and single-member LLCs benefit from having an EIN because it allows you to open a business bank account and keep your personal Social Security number off business documents.

Applying for an EIN is free and can be done online at IRS.gov in a few minutes.

4. Obtain Required Licenses and Permits

The licenses and permits your business needs depend on your industry, location, and activities. Common requirements include:

• General business license from your city or county
• Professional licenses for regulated industries (law, medicine, accounting, real estate, cosmetology, construction)
• Health department permits for food-related businesses
• Zoning permits if operating from a commercial or home-based location
• Sales tax permit if selling taxable goods or services
• Federal licenses for businesses in regulated industries (alcohol, firearms, aviation, broadcasting)
• Home occupation permit if running a business from your residence

Failing to obtain the correct licenses can result in fines, penalties, or being shut down. Research the requirements at the federal, state, and local level for your specific business type.

5. Draft Essential Contracts and Agreements

Contracts are the backbone of business relationships. Having clear, written agreements protects you from disputes and misunderstandings. Essential contracts for most businesses include:

• Operating Agreement (LLC) or Bylaws (Corporation) — Governs how the business is managed, how profits are distributed, and what happens if an owner leaves or the business dissolves. Even single-member LLCs should have an operating agreement.
• Client/Customer Contracts — Define the scope of services, payment terms, deadlines, warranties, and dispute resolution.
• Vendor/Supplier Agreements — Establish terms for purchasing goods or services from other businesses.
• Partnership Agreement — If you have business partners, this document outlines roles, responsibilities, profit sharing, decision-making authority, and exit procedures.
• Non-Disclosure Agreement (NDA) — Protects confidential business information shared with employees, contractors, or potential partners.
• Independent Contractor Agreement — Clearly defines the relationship with freelancers and contractors (as opposed to employees) to avoid misclassification issues.

6. Understand Employment Law Basics

If you plan to hire employees, you must comply with a range of federal, state, and local employment laws from day one.

• Worker classification. Properly classify workers as employees or independent contractors. Misclassification can lead to penalties from the IRS and state agencies.
• I-9 verification. You must verify the identity and work eligibility of every employee using Form I-9.
• Payroll taxes. You are required to withhold federal income tax, Social Security and Medicare taxes (FICA), and applicable state and local taxes from employee paychecks. You must also pay the employer's share of FICA and federal and state unemployment taxes (FUTA/SUTA).
• Workers' compensation insurance. Most states require businesses with employees to carry workers' comp insurance.
• Wage and hour laws. Follow the Fair Labor Standards Act (FLSA) and your state's laws regarding minimum wage, overtime pay, meal and rest breaks, and record-keeping.
• Anti-discrimination laws. Federal laws (Title VII, ADA, ADEA) prohibit discrimination based on race, color, religion, sex, national origin, disability, and age. State and local laws may provide additional protections.
• Employee handbook. While not legally required in most states, an employee handbook sets clear expectations and helps protect you in disputes.

7. Protect Your Intellectual Property

Your business name, logo, inventions, creative works, and trade secrets are valuable assets that deserve protection.

• Trademarks protect brand names, logos, slogans, and other identifiers that distinguish your business in the marketplace. Register trademarks with the U.S. Patent and Trademark Office (USPTO) for nationwide protection.
• Copyrights protect original creative works — written content, software code, designs, photographs, and videos. Copyright exists automatically upon creation, but registration with the U.S. Copyright Office provides additional legal benefits.
• Patents protect inventions and novel processes. Patent applications are complex and typically require the assistance of a patent attorney.
• Trade secrets — proprietary recipes, customer lists, manufacturing processes — are protected through NDAs and reasonable security measures, not through registration.

8. Get the Right Business Insurance

Insurance protects your business from financial devastation caused by lawsuits, accidents, natural disasters, and other risks.

• General liability insurance covers bodily injury and property damage claims by third parties.
• Professional liability insurance (Errors & Omissions) protects against claims of negligence or mistakes in professional services.
• Commercial property insurance covers damage to your business property.
• Workers' compensation insurance is required in most states if you have employees.
• Cyber liability insurance covers data breaches and cyberattacks — increasingly important for all businesses.
• Commercial auto insurance if your business uses vehicles.

9. Understand Your Tax Obligations

Tax compliance is not optional, and the penalties for getting it wrong can be severe.

• Federal income tax. How your business is taxed depends on your structure. Sole proprietors and single-member LLCs report business income on their personal returns. Partnerships and S-Corps file informational returns and pass income to owners. C-Corps pay corporate income tax.
• Self-employment tax. Sole proprietors, partners, and LLC members must pay self-employment tax (Social Security and Medicare) on business income.
• Estimated quarterly taxes. If you expect to owe $1,000 or more in taxes, you must make quarterly estimated tax payments to the IRS.
• State and local taxes. These vary widely and may include state income tax, franchise tax, sales tax, and gross receipts tax.
• Payroll tax obligations. If you have employees, payroll tax compliance is an ongoing responsibility.

Keep meticulous financial records from day one. Use accounting software like QuickBooks or Xero, and consider hiring a bookkeeper or accountant.

10. Stay Compliant

After launch, your legal obligations continue. Keep these in mind:

• Annual filings. Most states require LLCs and corporations to file annual reports and pay a fee.
• Registered agent. Your business must maintain a registered agent — a person or service authorized to receive legal documents on behalf of the business.
• Regulatory compliance. Stay current with industry-specific regulations, safety standards, environmental rules, and data privacy laws.
• Contract reviews. Periodically review and update your contracts, employee handbook, and policies.

When to Hire a Business Lawyer

While you can handle many of these steps yourself, certain situations call for professional legal advice:

• Choosing a business structure with complex ownership or tax considerations
• Drafting contracts with significant financial stakes
• Navigating industry-specific regulations
• Resolving disputes with partners, employees, or customers
• Protecting intellectual property
• Dealing with lawsuits, government investigations, or compliance issues

A good business lawyer is not an expense — they are an investment in protecting the business you are working so hard to build.

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