Small businesses are the backbone of the world’s economy, especially in developing countries. They make up 90 percent of businesses, employing around half of the population. As of 2020, there were approximately 212.98 million small to mid-sized enterprises worldwide.
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Starting a small business can be an attractive option for many, especially with the world experiencing limited employment opportunities due to the pandemic. But aside from an idea and some startup capital, you need to comply with local and national regulations as well.
If you’re planning to go the small business route, here are some requirements you need to take care of protecting yourself and your business on the legal front.
Choose the Right Business Structure
First, you need to set up your business as a legal entity with a business structure. This will depend completely on the scale of your business, the industry you are in, who is involved, and what you see in its future.
A business structure also determines the kind of taxes you have to pay and the level of control you have over the business. Here are some of the most common business structures to choose from:
- Sole Proprietorship: A sole proprietorship only has one owner and needs no paperwork to establish. There is no separation between your personal finances and business finances.
- Partnership: A partnership can be similar to a sole proprietorship but with more than one person involved. There are several types of partnerships, and one can determine each partner’s liability through a partnership agreement.
- Limited Liability Company: A limited liability company (LLC) balances the personal liability protection of a corporate structure without the high cost of corporate taxes. However, its owners will need to pay self-employment taxes.
- Corporation: A corporation is an entirely separate legal entity. It can take legal actions as itself, protecting its owners’ personal and private property from liability. However, corporations need to pay corporate taxes, and owners might experience double taxation.
Check What Licenses and Permits Your Business Needs
Depending on the business you want to establish, you might need to obtain various licenses and permits.
For example, if you plan to enter the food and beverage industry, you will need health permits alongside your business permit. This requirement helps ensure the safety of your customers and establishes your authority to provide said services.
Register Your Business Name
A registered business name helps the government keep track of your activities. Unless you have a sole proprietorship operating under your name, you will need a business name under which you operate.
You automatically get a business name once you file for a business entity, such as a corporation or LLC. However, if you want a business name different from the name of your business entity, you need to register for a trade name or “doing business as (DBA).”
Get an Employer Identification Number (EIN)
To file your business tax returns and open a business bank account, you need an employer identification number (EIN). To apply, you need a valid taxpayer identification number, usually of the owner or CEO.
The simplest way to obtain an EIN is through their online application form, although you may also apply in person.
Get The Right Insurance
No matter the safeguards your business structure may give you, operating a business always involves risk. Getting the right insurance policies will help protect your business from possible problems that may come along the way.
If you have employees, it is a requirement to get worker’s compensation insurance. Other typical insurance policies for businesses include general liability insurance, product liability insurance, errors and omissions insurance, and commercial property insurance.
If you’re not sure which to get, you can consult a broker to help you decide.
Every business thrives on ideas and innovation, but you need to keep it anchored to the ground first. Dealing with these legal requirements might not be as fun, but they will serve as a stable foundation for your business to grow.