Re-thinking the Legal Requirements for Starting a Business
Today we’re going to talk about all those “legal requirements for starting a business” articles floating around on the internet and why you might want to re-think what they’re telling you.
I’m guessing if you landed here that you already know the articles I’m talking about, but if you’re not sure, let me tell you: they’re those articles on the internet that say something like “THE FIFTEEN THINGS NEW BUSINESS OWNERS MUST DO” before you can possibly think about making your first dollar.
Well, I’ve got some news for you: most of those lists are serving up a whole lot of what I like to call “legal shoulds” and labeling them as “legal needs” or requirements.
This article will focus on the following:
What is the difference between a legal should and a legal requirement (legal need in my universe)?
How do I know/identify the legal requirements for my business?
How do I decide which legal shoulds to do for my business?
If you’re ready, let’s jump in.
Why This Matters
But first, let’s real quick talk about why this matters. If you’re new here, then you may not know that my goal at The Everyday Lawyer is to teach everyday business owners to stand your legal ground. That means I’m focused on telling you the things you need to know to make confident decisions in your business that make good business sense.
Oftentimes, that looks like poking a hole in the legal industry’s so-called “standard” or best practices. Why? Because so many of those “standard” practices are designed for giant corporations. That means those practices were created without the little guy, or what I call the under dogs in mind.
So I spend a lot of my time on this site questioning whether that standard practice makes sense for small business owners and in doing so, I hope that I’m inviting you to question the standard legal practices you come across online and equipping you with the tools you need to decide whether that “standard” practice actually makes sense for your small business.
And yes, you’ve guessed it. That so-called standard list of legal requirements for starting a business was created with large corporations in mind. Oftentimes, these lists are clearly targeting startup founders, whose goal is to scale from idea to billion-dollar business. But if you’re an everyday business owner who is just building to enough, whatever that looks like for you, then a lot of the “requirements” on these lists you’re looking at may actually be options.
Let’s take a look.
What is a legal requirement?
A legal requirement is a non-negotiable. It’s an action that you need to take to ensure that your business follows all the laws that apply to it. This is often referred to as legal compliance.
And the reason you should think about these things as non-negotiable is because there is usually some sort of government agency tasked with the job of ensuring that businesses are following certain laws. If you’re found to be violating a law you’re required to follow, you could be fined and those fines are often really expensive.
What are some examples of legal requirements for starting a business that apply to small businesses?
I won’t try to create an exhaustive list of legal requirements for small businesses here, especially since they vary widely by industry, but below are a few that most people who participate in my programs need to pay attention to:
Website Policies: If you have a website, then you need policies for that website. Usually at a minimum, you need a Terms-of-Use, Privacy, and a Cookies policy. There are a ton of services online that generate and maintain these policies to comply with the ever-changing laws around these issues.
Taxes and Bookkeeping: It’s always, always important to keep track of your business’s income and expenses. Learning how to keep your business’s books, or hiring a bookkeeper to do it for you is something to do as soon as you start your business. The IRS is not an agency you want to hear from about errors so ensuring that you get things right the first time and every time is critical.
Other legal requirements include acquiring the appropriate permits from your state and local government to operate your business, especially if you are selling products, and registering your business with the Secretary of State (this varies depending on what state you’re in).
What is a Legal “Should”?
A legal “should” is a legal thing that would probably be a good idea for your business to do for whatever reason, but that aren’t necessarily required. A potential reason might be something like protecting your business from the risk of a potential lawsuit.
The purpose of a legal “should” is to manage risk in your business. If you need a primer on what legal risk is, you can check out my article on understanding legal risk. Legal “shoulds” are about preventing future problems but they’re not actually required to operate your business legally.
Here are some examples of legal should for a business
Registering your business as a formal legal entity: This is my #1 legal should. You don’t have to register your business as an LLC, C-corp, partnership, or other legal entity form, but it’s a good idea. The reason it’s a good idea is that registering your business as a formal legal entity can protect your personal assets from being used to fulfill any judgments against your business in a lawsuit.
Get an EIN for your business: This is required if you register your business as a formal legal entity, but it's optional if you choose to operate your business as a sole proprietorship. But I like to tell people that an EIN is important because then when you send your W9 to clients, you aren’t sending your social security number to every client. You’re using your Employee Identification Number (EIN) instead.
Trademarking your business name: This is a lovely idea, but if you’re just started out and strapped for cash, it’s also wholly unrealistic. The truth is that trademarks are very valuable, but they are even more valuable when you’ve established a product-market fit for your business. So it’s not that you can’t register a trademark when you first start your business, the question is whether it makes good business sense to do so. To better understand your options about trademarking, you can check out this article which is a primer on all things trademark law.
Business insurance: Again, for some professional businesses, having business insurance can be a requirement, but for most people it is an option. Business insurance can be a powerful way to avoid and/or transfer the risk of potential financial losses in your business and a lot of people purchase it for that reason. But a lot of people also don’t. In fact, some of my clients who have been in business for 15 to 20 years have never carried it and have been fine.
So now that you know the difference between a legal requirement and a legal should, what should you do?
I always recommend that people start by prioritizing the specific legal requirements for starting a business that apply to their specific situation.
Once you do that, deciding what to do (and when to do it) about legal shoulds is a matter of risk management planning. That means you need to take time to understand the legal risks inherent in their business. You need to get a full picture of the potential risks, both financial and repetitional, to your business. Once you identify your business’s risks, then you’ll want to prioritize them in order of importance and decide how you want to manage each risk.
The nice thing about legal shoulds is that you can make a plan for dealing with them over time that includes a timeframe, certain business KPIs, and a budget so that as your business grows, you’re automatically building in increased protection against legal risks.
Remember: This isn't about ignoring legal protection - it's about right-sizing it for where you are right now so you can make legal decisions that actually make good business sense.
Because at the end of the day, the law should be a tool to help your business grow, not a barrier to getting started.