Before a small business can legally begin, it must comply with federal environmental regulations as well as get the required tax and securities registrations and, in some cases, business licenses. None of these requirements are difficult or even terribly time-consuming. But finding out what you need to do can be like putting together a jigsaw puzzle without knowing what it should look like.
Below, we set out a general outline of these requirements at the federal level. For information on municipal permits and regulations, see Local Start-Up Requirements for Small Businesses. For details on state registrations and licenses, see State Start-Up Requirements for Small Businesses. For information and links to federal and state small business resources, see Nolo's Small Business Resources page.
The various permit and license requirements for new businesses have three main purposes:
You should know about two kinds of federal tax registrations.
Employer Identification Number. The first is the Application for an Employer Identification Number (EIN), Form SS-4, which is available free at www.irs.gov. All corporations, limited liability companies (LLCs), and partnerships, as well as sole proprietors who will hire employees, must apply for EINs.
Although using an EIN is a good way to keep your business and personal affairs separate, the IRS doesn't like to give an EIN to a sole proprietor without employees. In that case, you will probably use your own Social Security number rather than a separate EIN.
S Corporation Tax Form. Second, if your business is a corporation and you want to elect status as an S corporation (for special tax treatment), you need to file Form 2553, Election by a Small Business Corporation, also available at www.irs.gov.
You're not likely to need a federal license or permit unless your business activity or product is supervised by a federal agency, such as:
It's possible that you'll become involved with environmental regulations at the federal level (overseen by the Environmental Protection Agency, or EPA). For example, you may buy a piece of contaminated industrial property that needs cleaning up, or you may need a license to dispose of toxic by-products from your manufacturing process. For more information, go to the EPA's Small Business Gateway at www.epa.gov/smallbusiness.
If you're starting out your business as a corporation, a limited liability company, or a limited partnership, and you'll be sharing ownership with people who will not be actively working in the business, you may need to comply with federal (as well as state) securities laws.
Securities laws are meant to protect investors from unscrupulous business owners. They require businesses to register the sale of certain kinds of ownership interests with the federal Securities and Exchange Commission (SEC). This registration takes time. It typically involves extra legal and accounting fees.
Fortunately, many small corporations get to skip the registration process because of securities "exemptions." For example, SEC rules don't require a corporation to register a "private offering," which is a nonadvertised sale of stock to either:
If you and a few associates are setting up a business that you'll actively manage, you will no doubt qualify for an exemption, and you will not have to file any paperwork. For more information about federal exemptions, visit the SEC's website and read their small business Q & A at www.sec.gov/info/smallbus/qasbsec.htm.
For more information on state, local, and federal requirements for small businesses, as well as everything else you need to know to start your own business, get Legal Guide for Starting and Running a Small Business, by Fred Steingold (Nolo).