Legal Requirements for Starting a Small Business

Here’s a detailed guide to starting up a business that includes information on licenses, registration, taxes, zoning, and construction.

Updated by Amanda Hayes, Attorney · University of North Carolina School of Law

If you're starting a business, you'll need to follow certain local and state requirements before you open your doors. These requirements could range from filing organizational papers and getting a license for your occupation to registering for taxes and complying with environmental regulations.

This article will take you through the process of starting your small business, including rules and requirements to follow. It'll also explain when you might want to work with a lawyer to get your business going.

Table of Contents

  1. Licenses: Professions, Products, and Services
  2. Tax Registration
  3. Business Entity Filings
  4. Fictitious Business Name Registration
  5. Employer Responsibilities
  6. Zoning Ordinances
  7. Building Codes
  8. Environmental Regulations
  9. Where to Get Specific Information to Start Your Business

Licenses: Professions, Products, and Services

Right off the bat, you'll want to figure out whether you need a license or licenses for the kind of business you'll be running.

Professional Licenses

States give licenses to people practicing certain professions, such as lawyers, doctors, accountants, teachers, architects, and engineers. States also license people in a broad range of trades, from auto mechanics and barbers to real estate agents and tax preparers.

You can't guess whether you'll need an occupational license, so you'll just have to ask. Your state website or trade association is a good place to start.

Individual vs. business licenses. Sometimes licenses are issued to the business, while other licenses are taken out by the individual. For example, in Virginia, you don't need a CPA license to practice accounting, bookkeeping, or tax services unless you refer to yourself with the title "CPA" or "Certified Public Accountant." And CPA firms that provide basic financial and accounting services have to hold a license if more than half of the firm's owners are CPA licensees. (Va. Code §§ 54.1-4409.1, 54.1-4412.1 (2023).)

Licensing procedures. The licensing procedures will vary depending on your trade, but you'll probably have to show evidence of training in the field—such as a certain number of course hours—and you might have to pass a written exam.

Sometimes you have to practice your trade or profession under the supervision of a more experienced person for a while before you become fully licensed. For instance, in North Carolina, registered barbers have to first complete one year of apprenticeship before becoming licensed. (N.C. Gen. Stat. § 86B-23 (2023).)

Some licenses are good for a limited period before there's retesting. Others require proof of continuing education in the field.

Licenses for Products

Your state might require you to get a license if you make or sell certain products. You'll usually have to get a special license or permit if you make or sell:

  • liquor
  • beer and wine
  • food
  • tobacco products
  • lottery tickets
  • gasoline, or
  • firearms.

Licenses for Services

Apart from holding an occupational license, you might need to get an operational license if you provide certain services. If you provide gaming or gambling services—such as through a casino, racetrack, or arcade—you'll likely need to apply for a gambling license.

Figuring Out Licensing Requirements

If your profession hasn't made it obvious, you can't find the answers on your state's website, or the license requirements are particularly complicated, you should speak with a small business attorney. They should be able to provide you with answers quickly and put together the licensing forms you'll need to file.

Tax Registration

If you engage in retail sales or provide taxable services, you probably need to get a sales tax license or seller's permit. The license or permit lets you collect sales taxes from your customers, which you'll pay to the state. (You need this permit even if you're also selling goods or services that are exempt from your state's sales tax.)

If your business offers both goods and services, it'll be important to separate your labor sales from your product sales. Most states tax goods; fewer states tax services.

Usually, if a state taxes services, it'll only tax certain ones. For instance, Texas taxes a range of services, including sightseeing tours, laundry cleaning, and dog grooming. But Texas doesn't tax day camps or call centers. (34 Tex. Tax Code § 3.298 (2023).)

Five States Don't Impose General Sales Taxes

Alaska, Delaware, Montana, New Hampshire, and Oregon don't have a statewide general sales tax. In those states, you might not be required to get a state seller's permit. However, cities and counties within those states might issue sellers' permits and charge sales taxes.

If your business is in another state, you might owe both state and local taxes.

Sales Tax vs. Use Tax

For some transactions, you'll have to pay a use tax instead of a sales tax. A sales tax is the tax on a good or service that's paid at the time of the purchase. Usually, businesses charge a sales tax to customers that they then pass on to the government.

A use tax is a tax on a good or service that's paid after the time of the purchase. Use tax applies when someone purchases a product or service in one state where sales tax isn't collected and then brings it to another state to be consumed or used.

For example, suppose you travel to Oregon to buy desks and office furniture for your business and don't have to pay sales tax on the purchases. You then bring the furniture back home to California for your team to use in your building. In that case, you'll probably need to pay a use tax to California on the office furniture.

Income and Business Taxes

You'll likely have to register with your state's treasury department or department of revenue. In most states, you'll need to pay income taxes and other business taxes. Corporations and multi-member LLCs will probably have to pay a corporate tax; sole proprietorships and single-member LLCs will probably have to pay estimated taxes.

Some states don't collect personal income tax, like Tennessee and Nevada. Other states don't collect a corporate tax, such as Wyoming and South Dakota. You can look at your state tax agency's website for the specific requirements of your state.

Figuring Out Tax Obligations

If you need assistance determining your tax payment and reporting obligations, you should talk with a tax attorney. Taxes can become complicated quickly, so it's best to reach out to a professional who can help you set up your tax structure and plan appropriately from the beginning.

Business Entity Filings

If you've chosen to start out your business as a corporation, limited liability company (LLC), or limited partnership, you'll need to file organizational documents with your secretary of state's office, department of state, or similar office. Most states have sample or form documents online.

Here are some other filing and documentation considerations for businesses.

Corporate Stock

If you own a corporation and the corporation has issued shares to investors who don't help run the business, you might need to comply with state (and federal) securities laws. Securities laws require corporations to register a share of stock before it can be issued. But many small corporations are exempt from this registration requirement. Check your secretary of state's website for state-specific rules to see if you qualify for the exemption.

Partnerships

If you're starting off with a partner (in a partnership) or by yourself (as a sole proprietorship), you might not have any state filing to do. A general partnership is created automatically when you agree to go into business with someone, so you don't legally have to write anything down or file any official paperwork.

However, a written partnership agreement is generally a good idea. Partnerships can go awry, and you'll need a written agreement to help you manage any disputes or liabilities. Outside of any disagreements, you and your partner will find a written document laying out each party's responsibilities, contributions, and profit distributions to be helpful in the day-to-day management of the business.

Determining Your Business Structure

Consider speaking with a small business attorney if you're unsure which business structure fits your goals. A lawyer can also help you register your business and draft any company agreements or other organizational documents.

Fictitious Business Name Registration

Sometimes your business name doesn't contain your legal name as the owner (for a sole proprietorship or general partnership) or doesn't match the company name that's on file with the state (for a corporation, limited partnership, or LLC). If your business doesn't use its legal name, then you'll have to register your fictitious business name (FBN)—also known as an "assumed name," "doing business as" (DBA), or "trade name."

For example, suppose Charlie Cale is a sole proprietor who offers IT services to businesses around town. She uses the name Applied Technologies to identify her business to her customers, and that name is written on her website and business cards. Because Charlie is a sole proprietor who operates under a name that isn't "Charlie Cale," she has to register her FBN.

Some states require registration at the state level. But most states instead require local registration, meaning you'll most likely need to register your name with the county clerk in the county where your business is located.

Sometimes, you'll be required to register in every county where your business operates. For instance, if your office is located in County A, but you regularly travel to do work in Counties B and C, you might need to register your FBN in all three counties.

Check your secretary of state's website and county clerk's office for specific requirements.

Employer Responsibilities

Here's information on key requirements for businesses that'll have employees.

Unemployment and Worker's Comp

If you have employees, you might have to register with your state's labor department or with the agency that administers the laws on unemployment compensation and workers' compensation.

Health and Safety Requirements

If your state has a version of the federal Occupational Safety and Health Act (OSHA), your business could be required to meet certain health and safety standards.

Tax Requirements for Employers

A business with employees or independent contractors has a number of tax requirements. If your business hires employees or independent contractors, you'll have to:

  • get an employer ID from state (and federal) tax authorities
  • withhold income taxes and employment taxes (Social Security/Medicare or Federal Insurance Contributions Act (FICA)) from the paychecks of employees
  • possibly withhold other items, such as payments for disability insurance
  • report these figures (to the employee, the state, and the IRS), and
  • pay the withheld taxes to the tax authorities.

If you hire independent contractors, you need to report contract payments annually on a Form 1099, which goes to the contractor and to the government.

Don't Forget to Pay the Taxes You Withhold

Many small businesses get into big trouble by failing to pay employment taxes after their cash flow hits a dry spell. If you don't pay your taxes, the state could put a tax lien against your business property. A tax lien could hurt your credit, and it can't be discharged (or the debt "forgiven") through bankruptcy.

Figuring Out Your Responsibilities as an Employer

If you need help determining your responsibilities as an employer, you should talk to an employment lawyer. If you need tax-specific instruction, you can reach out to a tax attorney. A tax attorney can give you general tax advice as well as employer-specific tax guidance.

Zoning Ordinances

Before you sign a lease, you need to know that the space you plan to rent is properly zoned for your usage. If it's not, you'll need to get the property rezoned or get a variance or conditional use permit from the planning department so you can operate your business out of your desired location.

You should make the lease contingent on your getting the appropriate zoning permission to open your business. If the landlord doesn't accept this contingency, then you might need to look elsewhere. You don't want to be stuck leasing a building that you can't use.

Zoning laws can also regulate:

  • off-street parking
  • water and air quality
  • waste disposal, and
  • the size, construction, and placement of signs.

Special Zoning Considerations

If you're looking at property in a historic district, you'll likely face strict standards and rules. You could need permission for small changes to an existing building, such as changing the paint color or switching out light fixtures.

If you operate your business out of your home, you might be required to get a home occupation permit. In addition to the zoning hurdles you'll face with a home business, you might be restricted by planned development rules—called "covenants, conditions, and restrictions" (CC&Rs).

Keep in mind that you could trigger a zoning compliance investigation when you apply for a construction permit for remodeling or when you file tax information with the municipality.

Figuring Out Zoning Requirements

If you're not sure how your property is zoned or you need help applying for rezoning, a variance, or a special permit, you should talk to an attorney with land use and zoning experience. They can help you talk to your local officials and prepare an application. They also might be able to help you negotiate a lease with zoning-specific terms.

Building Codes

For any construction but the most minor renovation, you're likely to need at least one permit from the department or office that enforces building ordinances and codes. (In some cases, more than one department enforces the state building code and local ordinances.)

You might also need separate permits for electrical, plumbing, heating, and ventilating work.

"Grandfathering"

Building codes are amended frequently, and each revision seems to put more requirements on the building owner. Municipalities often exempt existing businesses from having to bring their premise into compliance at each revision. This exemption is sometimes called "grandfathering."

You might look at space in an older building and figure that you'll have no problems doing business there because the current or most recent tenant didn't. But if the prior occupant was "grandfathered in," the new owner might be required to comply with the newest building code revisions when they take over the property.

Figuring Out Building Requirements

An experienced contractor can help you determine the building and safety requirements that apply to a particular space and the probable costs of compliance. For more complex or ambiguous building codes, you might need to reach out to a lawyer to help you interpret the appropriate standards and requirements to follow.

Environmental Regulations

Many small businesses need to think about what they must do to avoid contaminating or harming the environment. You might need a special permit (and to do more recordkeeping) if any of the following apply to your business:

  • Your equipment vents emissions into the air.
  • You need to discharge or store wastewater.
  • Your business involves or produces hazardous wastes.

Environmental regulation isn't limited to manufacturers. Small businesses like stained glass makers, dry cleaners, and photo processors, need to know how to dispose of the dangerous metals or chemicals used in their work.

If your business operates in a heavily regulated industry, you should talk to an environmental law attorney before you begin operations. A lawyer can help you comply with federal and state regulations and help you avoid any pitfalls that could result in fines or business closure.

Where to Get Specific Information to Start Your Business

If your city doesn't have a central office that provides business start-up information (and only a few large ones do), there are bound to be many other offices with lots of helpful information for you.

You can look to the following individuals, offices, and departments for help with setting up your small business:

  • the city clerk and the county clerk
  • the building and safety department
  • the health department
  • the planning or zoning department
  • the tax office
  • the fire department
  • the police department, and
  • the public works department.

The assessor or treasurer can tell you about local taxes on property, fixtures, equipment, inventory, and income or gross receipts.

The health department can advise you about permits and regulations if your business involves food preparation. The health department probably also needs to test your water if you work in an area where water comes from wells or goes into septic systems. The police, fire, or building and safety departments can help you with issues of crowd control and safe exit from your premises.

Other Sources of Information for Businesses

Other unofficial but often extremely helpful sources of information include:

  • the local chamber of commerce
  • trade associations
  • commercial contractors
  • fellow business owners, and
  • small business lawyers.

Your state's small business development center (SBDC) or another agency might offer a "one-stop shop" website that advises you on the licenses and permits you need for your particular type of business. For instance, California offers a website that will provide you with a list of all federal, state, and local permits you need for your particular business. The Small Business Administration maintains a list of SBDCs on its website.

Seeking Professional Help

The process of opening a business is multi-faceted, and you'll have various considerations ahead of you. You'll want to get everything right in the beginning so you don't have to devote time and resources to fix a growing problem.

If you need help through the starting-up process, consider reaching out to an attorney for guidance. Talking to a small business attorney will often get you off to a good start; they can help you register your business, apply for a license, and draft organizational documents.

If you're relatively comfortable with your understanding of requirements for new businesses, you can probably successfully start a business on your own. But if you encounter an issue that's especially dense, confusing, or time-consuming, it's a good idea to reach out to a lawyer for guidance.

For specific questions, consider talking to an attorney with experience in the individual area of law you need help with. For instance, if you need guidance on how to collect and report sales tax, you should speak with either a tax attorney or a small business attorney with tax experience.

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