Small Business Legal Requirements

Being conversant with small business legal requirements is an essential skill for entrepreneurs including knowing the federal and state requirements.3 min read

Being conversant with small business legal requirements is an essential skill for entrepreneurs. Before starting a business, make sure to acquaint yourself with federal and state requirements. These requirements were instituted to enable businesses to function properly.

Business Structure

Before commencing businesses activities, you are required by federal law to choose a business structure. Choices include a limited liability company, partnership, corporation, and sole proprietorship. The choice of business structure determines the kind of documentation that must be filed with the IRS as well as the federal taxes the business is required to pay.

For sole proprietorships and partnerships, owners pay their business taxes through their personal income tax return. Although LLCs have the same tax structure as partnerships, owners' personal assets are protected from business liability.

For S corporations, owners also pay their business taxes through their personal income tax return, although they are usually paid a “reasonable compensation.” For C corporations, the taxes are paid by the company. Non-profit organizations are usually exempt from all federal taxes.

The IRS has specific tax forms for each of the business structures listed above. They can be found on the U.S. Small Business Administration or IRS website.

Although sole proprietorships (who don't intend to hire employees) are exempt from this rule, all other business structures are required to obtain EINs.