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What Are The Basic Legal Requirements For Starting A Small Business?

With a fledgling business, passion for a product or service usually comes easily. Less exciting are the legal requirements for operating legitimately. Requirements vary dramatically depending on the industry, the type of business and its location, so specific research will be required. While there’s no substitute for advice from experienced legal counsel, this guide outlines some of the most important legal requirements that small business owners should consider before getting too far into operations.

Business Structure and Designation Requirements

Once the mission and strategy of a business become clear, an important next step is to decide on the business’s legal structure. The choice you make can affect everything from the way you operate the business to the liabilities you’ll face to the way you pay taxes. Here are the most common options for small business owners:

Sole Proprietorship

The simplest structure for a one-owner business is a sole proprietorship. As a sole proprietor, a business owner has relatively few regulatory burdens and a high degree of control and flexibility. There’s no paperwork required to establish a sole proprietorship–it’s automatically created as soon as you start doing business. However, if you’ll be using a business name other than your own name, you’ll probably need to register your business name as a DBA with your state or locality.

A sole proprietorship does not form a distinct business entity, which means that there’s no legal difference between the business’s assets, debts and other liabilities and those of the owner. This creates a risky situation for owners, as they’re on the hook for any legal or financial failures of the business. You can’t take on partners and remain a sole proprietorship, and your ability to get a loan for your business will hinge on your personal credit. Sole proprietors report business income and expenses on their personal tax returns, and they pay income and self-employment taxes on their profits. Some business founders use sole proprietorships to test a business idea before committing to a more formal structure and paying the higher fees associated with those structures.


There are several kinds of partnerships. If you go into business with other people and don’t set up a formal business entity, your business is automatically considered a general partnership. Like sole proprietors, partners in a general partnership are fully liable for all business debts and obligations. They’re also liable for actions taken by their partners–a major reason why most lawyers encourage businesses to form an LLC or corporation rather than remain a general partnership. General partnerships are taxed similarly to sole proprietorships, with partners reporting their share of income, expenses, credits, profits and losses on their personal tax returns.

Other kinds of partnerships include:

  • A Limited Partnership or LP, which stipulates that at least one “general partner” assumes personal liability for the business’s affairs, while other partners are passive investors with limited liability. Limited partnerships are common in certain industries such as real estate development.
  • A Limited Liability Partnership or LLP, also provides limited liability for partners, but the specifics vary by state. In some states the liability protection is the same as for an LLC, but in other states the protection only extends to liability for other partners’ negligence. Some states require one general partner to remain fully liable. And some states restrict LLPs to certain licensed professionals like doctors, lawyers and architects.

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