By Staff Writer | 04/07/2025
There’s no greater thrill than running your own company. From writing your business plan to coming up with a marketing strategy, you’re in control every step of the way as you pursue new opportunities.
Naturally, there are also the legal requirements when you want to start a small business. Taking the time to understand these requirements and their implications upfront will help you avoid unnecessary headaches in the long run.
First Requirement: Create a Unique Business Name
There’s a lot to consider when you’re naming a business. For example, you’ll need a business name that:
- Fits your business and is scalable
- Is memorable and unique
Choosing a Name That Fits Your Business and Is Scalable
Choosing a name that fits the products or services you plan to sell can be especially helpful. At the same time, you’ll want to anticipate how the business may grow and evolve.
For example, if you were planning to launch an interior design firm, you might do yourself a disservice by naming it “Homes by Jane.” Although your target market may consist primarily of homeowners this year, you might pursue commercial clients in the future.
Selecting a Business Name That Is Memorable and Unique
Ideally, a business name should be both memorable and unique. It is essential to search the trademark database from the U.S. Patent and Trademark Office (USPTO) to make sure any business names you come up with aren’t already taken.
Keep in mind that a trademarked name is a piece of intellectual property (IP). If your name is too close to another business which means its owner could take legal action against you for trademark infringement.
“If you clear the federal hurdle and find your name is available, you will want to check your state’s and neighboring states’ business name databases to make sure the name you have chosen is not being used locally or regionally,” says Dr. Susie Pryor, an adjunct professor at American Public University’s Dr. Wallace E. Boston School of Business.
Dr. Pryor has launched 10 successful small businesses of her own and directed small business development programs in the Midwest and California. She notes that choosing a business name can be a rather nuanced process.
According to Dr. Pryor, you may come up with a name and find that another company already has it. If that company operates in a different industry from yours, you may be able to use the name in question, anyway.
Still, it’s generally best to come up with an original business name, Dr. Pryor says. Choosing a name that’s already taken may prevent you from getting a federal employer identification number, also known as an EIN.
An EIN is issued by the Internal Revenue Service (IRS). This federal agency will reject employer identification number applications if they’re concerned about similar business names potentially causing confusion, Dr. Pryor warns.
Once you’ve selected a name for your business, it’s advisable to pursue a registered trademark so you can protect your intellectual property.
Second Requirement: Choose a Business Location
Naturally, the “right” location depends on the type of business you’re planning to launch. For instance, if you’re opening a restaurant, you’ll want a location with plenty of foot traffic. If you’re starting a mobile company like a cleaning service, then you may be able to register the business at your home address.
Nonetheless, taxes, zoning laws, and regulations vary by location, as the U.S. Small Business Administration (SBA) points out. State and local governments may also offer incentives to encourage business development in specific areas.
The SBA recommends visiting these resources for more information:
Third Requirement: Select a Business Structure and Create a Legal Business Entity
There are a lot of options when it comes to choosing a business structure. For example, you can technically operate a business without even registering a formal entity. Entrepreneurs who go this route are known as “sole proprietors.”
A sole proprietor is someone who runs an operation without any business partners. However, a sole proprietorship offers virtually no legal protection or tax advantages to its owner.
As the owner of a sole proprietorship, your personal assets are considered business assets, because there’s no separate legal entity to define your business.
Consequently, most small business owners who are serious about their endeavors opt out of this type of business structure, rather than risking their personal assets. They may prefer a more formal structure such as:
- A limited partnership (LP) or a limited liability partnership (LLP)
- A limited liability company (LLC)
- A corporation
Limited Partnership and Limited Liability Partnership
According to the SBA, the two most common types of partnership agreements are limited partnerships and limited liability partnerships.
“Limited partnerships have only one general partner with unlimited liability, and all other partners have limited liability,” the SBA states. The general partner is personally liable for the business’s debts and obligations.
Limited liability partnerships “are similar to limited partnerships, but give limited liability to every owner,” according to the SBA.
Limited Liability Company
Limited liability companies provide their owners – who are called members – with limited protection against personal liability. An LLC is a “pass-through” entity, which means it does not pay corporate taxes. Instead, profits and losses “pass through” LLCs and count towards members’ personal income.
Depending on the state in which a limited liability company exists, its owners may be legally required to create an official operating agreement. As the SBA notes, state default rules govern LLCs that don’t have their own operating agreements.
Corporation
The word “corporation” probably makes you think of major enterprises like Coca-Cola® and Apple®. Nevertheless, even small business owners can structure their companies as corporations. As a matter of fact, there are two common types of corporations to choose from when starting a for-profit business: a C Corp or an S Corp.
C Corp
As the SBA shares, a C Corp offers its owners the strongest personal liability protection, compared to all other business structures.
Unlike LLCs, corporations “can continue doing business relatively undisturbed,” even if shareholders leave. Moreover, a C Corp’s owners have the option to sell stocks when they need to raise capital.
Furthermore, the tax obligations for C Corp owners are also unique in that they pay income taxes on their profits, which can result in double taxation.
S Corp
The SBA describes this business structure as “a special type of corporation that’s designed to avoid the double taxation drawback of regular C corps.” Profits – and some losses – pass through S corps “directly to owners’ personal income without ever being subject to corporate tax rates.”
Fourth Requirement: Open a Business Bank Account
Commingling funds – or assets – is one of the biggest mistakes a business owner can make. When you use personal money for business expenses (or vice versa), you’re commingling funds, which a court can view as “piercing the corporate veil.”
Essentially, “piercing the corporate veil” erases the legal distinction between a business entity and its owner. As a result, the business owner can be held personally liable for company debts and obligations.
Consequently, having a business bank account is a must for keeping your personal and business finances separate. Ideally, you’ll want to open this bank account as soon as you form your business and receive an EIN.
You’ll need an EIN – or your SSN, if you run a sole proprietorship – to open a business bank account. The SBA mentions that banks may also request additional documentation, which can include:
- Business formation documents
- Ownership and/or partnership agreements
- Business licenses
Fifth Requirement: Secure All Necessary Business Licenses and Permits
Federal, state, and local regulations often require organizations to obtain business licenses and/or permits. Licensing and permit requirements vary depending on business activities, location, and government rules, the SBA explains.
According to the SBA, the federal government requires businesses involved in these industries to obtain licenses or permits:
- Agriculture
- Alcoholic beverages
- Aviation
- Firearms, ammunition, and explosives
- Fish and wildlife
- Commercial fisheries
- Maritime transportation
- Mining and drilling
- Nuclear energy
- Radio and television broadcasting
- Transportation and logistics
As a budding entrepreneur, you must also understand your state’s legal requirements for starting a small business. According to the SBA, here are some business activities that states regulate:
- Auctions
- Construction
- Dry cleaning
- Farming
- Plumbing
- Restaurants
- Retail
- Vending machines
As you review the legal requirements for your budding venture, remember to check when your licenses and permits will expire. Additionally, make sure to research the licensure and permit requirements set forth by your county or city government.
Also, note that business licenses are separate from professional licensure requirements. Recognizing this distinction is important if you’re starting a small business to provide professional services, such as tax planning or legal counseling.
Conducting business legally requires ensuring your business operations comply with both industry and professional regulations at the federal, state, and local levels. You will need to pay sharp attention to your legal responsibilities to avoid trouble.
Maintaining Compliance with Tax Obligations
Businesses, like individuals, have local, state, and federal tax obligations. Also, companies must pay employer taxes in addition to filing annual tax returns.
Tax rates reflect several factors, such as the industry and location in which a business operates. Each business structure also has specific tax implications.
According to the IRS, there are five general types of federal business taxes:
- Income tax – Businesses pay income taxes as they earn or receive income during the year.
- Estimated tax – Business owners pay income taxes, which may include self-employment taxes, by making estimated tax payments throughout the year. These payments are typically due quarterly.
- Self-employment tax – Also known as the “SE tax,” this tax is a Social Security and Medicare tax that certain business owners pay. Your business structure plays a role in whether you owe SE tax.
- Employment taxes – If you hire employees, then your business will need to account for federal income tax withholding. In addition, you will need to pay federal unemployment (FUTA) tax as well as Social Security and Medicare taxes.
- Excise tax – Federal excise taxes apply to certain goods, services, and business activities. For example, companies that manufacture certain products or sell new heavy trucks, trailers, and tractors may be required to pay excise taxes.
Aside from paying federal taxes, most businesses pay local and state taxes, which may include sales tax as well. Unsurprisingly, tax filing can be a complicated process for small businesses, even those companies that aren’t required to pay taxes on business income.
Each state’s government website provides general information about state taxes and other regulations that apply to business operations.
Understanding the Insurance Requirements for Your Small Business
Business insurance helps cover the cost of unexpected expenses. The SBA describes six common types of business insurance that entrepreneurs may wish to consider:
- General liability insurance – Suitable for any type of business, general liability insurance protects against financial loss resulting from a wide range of issues such as bodily injury, property damage, medical expenses, libel, slander, defending lawsuits, and settlement bonds or judgments.
- Product liability insurance – Businesses involved in the manufacturing, distribution, or sale of products may carry product liability insurance. This type of business insurance offers protection against financial loss resulting from defective products that cause injury or bodily harm.
- Professional liability insurance – Businesses that provide professional services can carry this insurance to protect against financial loss resulting from malpractice, errors, or negligence. There are different types of professional liability insurance, including medical malpractice insurance and errors and omissions insurance (E&O insurance).
- Commercial property insurance – Organizations can carry commercial property insurance to protect against loss and damage to physical assets. This insurance can provide coverage for fire, smoke, tornadoes, hurricanes, hailstorms, civil disobedience events, and vandalism, per the SBA.
- Home-based business insurance – Entrepreneurs who run their businesses from home can add this coverage to their homeowner’s insurance policies to protect business equipment. Home-based business insurance may also provide liability coverage for employee and/or customer injuries.
- Business owner’s policy – Per the SBA, this type of insurance is applicable to most small business owners, particularly those with home-based businesses. “A business owner’s policy is an insurance package that combines all of the typical coverage options into one bundle,” the SBA says.
There are also certain types of coverage that companies are legally required to purchase. For instance, small businesses often need to provide their employees with unemployment insurance, workers’ compensation insurance, and health insurance.
Complying with Federal, State, and Local Labor Laws
A small business can face enormous legal consequences for ignoring employment laws, cautions Dr. Pryor. Throughout her career, she’s seen firsthand the consequences of various employment law violations, including:
- Failing to understand the restrictions related to young employees
- Misclassifying employees as independent contractors
- Failing to pay overtime wages correctly
“Small businesses have some latitude in terms of minimum wage laws, but in many other respects, they’re held to the same standards as larger businesses. It is not uncommon for startup businesses to focus on keeping labor costs low, and this can lead to serious unintended consequences,” she says.
Entrepreneurship Degrees at American Public University
Launching a small business involves a lot of preparation and hard work, but it's also one of the most fulfilling things you’ll ever do. To help students pursue their own entrepreneurial endeavors, American Public University (APU) offers two degrees:
Both of these programs have received specialty accreditation from the Accreditation Council for Business Schools and Programs (ACBSP®), and courses introduce learners to concepts surrounding idea generation, IP protection, and business law. Other courses include practical law for the entrepreneur, legal practices for entrepreneurs, and technological innovation.
Students with existing inventions or small businesses can also learn how to refine their ideas and scale their operations. Visit APU’s business and management program page for more information.
Coca-Cola is a registered trademark of The Coca-Cola Company.
Apple is a registered trademark of Apple, Inc.
ACBSP is a registered trademark of the Accreditation Council for Business Schools and Programs.
