When one is deciding to opening up a small business in their local community, there are several legal requirements that the entrepreneur needs to know and become familiar with before launching their new business. There is an abundance of laws ranging from updating corporate records to understanding and interpreting immigration laws. As the leader of a new business, it is your responsibility to become well versed and informed on these issues, because any slip up or deviation away from the legal norm can prove detrimental to your company’s future success. According to The Upstart Small Business Legal Guide by Robert Friedman, “The number of state and federal laws that can affect a business is so large that it is impossible to cover all of them within the covers of any one book.” He does mention that there are certain state and federal laws that affect almost all small businesses and the importance of understanding them.
Local Legal Requirements
Before you open your small business, you need to find a physical location to place your business, whether it be that you are buying out another local business, or starting construction on this property, which is an entirely other issue. Regardless of the situation, one must realize that the principles of general contract law require that in order for the sale or purchase of any property, an agreement must be in writing with the signatures of both parties present. However, before going forward with any commitments or financial investments, you must look into the local zoning laws which can vary from location to location. This can be a touchy process because one must notify the public and then the proposal must be voted on and approved by government agencies. This can be an extremely difficult process at times, especially when met with opposition from the local community. A specific example of this issue that we found came from an internet article titled Pfurious in Pflugerville regarding the issue of building a pari-mutuel race track in the local community of Pflugerville, TX. This proposal was met by fierce opposition coming from the residents specifically stating that they didn’t want to bring in the extra traffic into the already booming area. They also weren’t in favor of the concept behind bringing the gambling industry into their family focused community. Mayor Callen was criticized and many claimed that his support for the construction was a definite sign that “he too had sold out to wealthy gambling interests.” In the process of actually obtaining a zoning permit, it is very wise to consult the expertise of a lawyer who can get around the technical requirements of the regulations.
Obviously there is a vast majority of different ventures any one particular person could be interested in and want to base their business on. For example, if someone’s mom was planning on making and selling their own brand of jellies out of their home, they would be required to take several steps before they could start shipping out their own products. One of the first things that comes to mind when starting a new business is the name of the company. You simply cannot just come up with a catchy name for your company and go to the nearest sign maker and hang it on your building. If you come up with a fictitious name for instance, you must register with the county and have it approved. This can sometimes take a while because other businesses might already have the desired name you are looking for in your area, which will cause you to have to rethink your idea. It is almost like trying to get your name on your license plate. The odds that no one has your name aren’t really probable considering the vast amount of people that could possibly want to use that same name. Once you have your company name, the next step in the process leads you into copyright laws, patents, and trademark laws which help to protect your product or service. Often times it takes a new start up company quite a while to get through the legal jargon before being able to launch their product. In order to do it the right way, it very crucial to take the right legal steps early on, or you will have to deal with the many regulatory commissions down the road, which will put your company in severe jeopardy.
In the process of launching your business, it is important to consider how many employees you will need to carry out your day to day responsibilities. It is important to note that having just three or more employees on the payroll requires you to provide worker’s compensation, which compensates the employees if they are to ever get hurt on the job and have to miss work for any extended period of time. Another compensatory issue is that as a small business owner, you must comply with the federal minimum wage law, which sets the minimum amount of compensation you must follow when paying an employee. Currently, the federal minimum wage has been increasing significantly over the past three years, and as of the summer of 2009, the new minimum requirement that a business must pay on an hourly rate is $7.25 an hour.
Whenever someone goes into a business venture to make money, they are considered a for-profit entity. The business owner must contact the state tax agency because, like all home owners, businesses are also required to pay taxes to the government. The easiest way to get started in finding out where you should go for information is to contact a Small Business Development Center, which can provide you with your particular states’ resources and contact information for different licenses and registrations that are required before you can run your own business. If you are going into sales, you need to obtain a sales tax license. This allows you to collect sales taxes from customers, which you must keep track of along with any other financial statements. Depending on what services or products your business offers, each individual state has special licensing boards that you will have to contact if you want to sell certain items such as gas, firearms, liquor, as well as many other widely ranging commodities. If all else fails, it never hurts to get a legal opinion from someone who is trained with the specific knowledge that a first time small business owner might not be familiar with.
Health and safety requirements play a huge role in any particular industry. An organization such as OSHA, which stands for the Occupational Safety and Health Administration is responsible for making sure companies are in compliance with the laws and enforce the policies which you as a small business owner must comply with. Failure to comply with the rules and regulations set forth by the administration can lead to severe penalties and fines sometimes as extreme as losing the right to continue doing business. You are also responsible for complying with all of the labor laws such as the Americans with Disabilities Act, the Immigration Act, the Equal Employment Opportunity Act, as well as many more. In addition to following these acts, you must be trained in the implementation of them, especially if there is no one to oversee the human resource sector of your business. These are extremely important topics that you want to make sure you have done your homework on, especially since they are safeguarded and enforced by the Federal Government, which will have no problem sending someone to investigate the situation due to your failure to comply. Often, employees will claim foul play in their treatment on the job both verbally and financially, so you need to be able to deal with these people in an informed and professional manner.
Insurance becomes an extremely vital area in which you must protect yourself with in order to protect your assets as well as your companies’ longevity. Though some aren’t required by law, it is never a bad idea to have additional protection. Two very common types of insurance that you will find in most businesses are liability and property insurance. Liability insurance protects an employer from lawsuits involving the use of their product. Property insurance is used to replace any equipment or valuables damaged or destroyed in the case of an unforeseen event. If you are planning to run your business out of your home, it is a good idea to have some sort of home or office insurance to insure your equipment in the event that someone breaks into your house or a flood destroys your property. An interesting type of insurance is called a key man insurance policy which covers loans in the event that a key employee or owner dies. Though there are many other requirements, this particular requirement seems to be of great benefit to a small business owner, even though the expenses are tremendous. A small business trying to succeed in a quick to sue environment can’t afford not to have health insurance.
State Legal Requirements
As in most states, you will need to register your business with the Secretary of State. You must choose an organizational structure for your business. There are advantages and disadvantages to each type, and one might fit your business better than another. Your local Small Business Administration office should be about to point you in the right direction when choosing a structure.
The first and simplest type of business structure is a sole proprietorship. This means your business has one central owner who delegates every task, or handles it him/herself. The small business planner on the SBA government website says,
“Sole proprietors own all the assets of the business and the profits
generated by it. They also assume complete responsibility for any of
its liabilities or debts. In the eyes of the law and the public, you are
one in the same with the business.” (sba.gov)
This can be great if you’re looking for complete control, as well as complete responsibility. You decide what to do with all the money, who to hire, who to fire, and if you want the business to continue. Profits and losses are reported to your personal income tax return, and it is your complete responsibility to cover all debts of the company and your own. A sole proprietorship does not need to register with the state; you simply just state that they are going into business. You may need to acquire special licenses or permits, or acquire a D.B.A. in order to obtain a company bank account. It may be important to note that if you are running your business as a sole proprietorship, if sued, prosecutors can come after your house and other personal assets. Be sure to cover your business with the proper insurance.
Partnerships are much like sole proprietorships. All you have to do to form a partnership is join forces with another person and state your business intention. There is no paperwork that needs to be filed except for licenses or permits. Taxes “pass through” the company onto each partner’s personal income statements, but you still must file an informational return with the IRS. This document sets out each partner’s share of the partnership and provides quality information to review incase audited. Partnerships can greatly increase your chances of success. As our textbook describes, synergy can be a key to partners’ success. Through synergy, partners are able to cover exponentially more ground through sharing ideas, splitting the workload, and keeping partner(s) motivated. It is important to note that you are personally liable for the actions of you and your partner. For example, if your partner were to commit fraud and flee to Mexico, you would be responsible. Therefore, partnerships are like a marriage and you must have a partnership agreement much like a “pre-nuptial”.
Within partnerships, there is even further classification. You could form a General Partnership, assuming equal liability for each partner. You can also form a Limited Partnership, where one partner shares more power and liability. Limited Partnerships are not usually used for service based businesses or retail. The third and final kind of partnership is a Joint Venture, which is most like a General Partnership, but just for a single project or a short time.
The next organizational structure is a corporation. Many corporations are formed to protect the owner(s) from personal liability. They are their own entity and are completely separate than those who own it. It is owned by shareholders who are not a part of day to day decisions, but who have a say in the company’s overall interests and direction. “The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes” (sba.gov). Corporations cost the most to start, and are taxed more heavily and in more ways than other forms of ownership. The owner files his or her own tax return and then pays taxes for his organization with a special corporate tax rate. In order to form a corporation, you must file Articles of Incorporation with your state government, which usually costs around 100 dollars. You must also prepare corporate bylaws and issue stock certificates to shareholders. There are also certain formalities you must abide by which include holding annual shareholder and director meetings and keeping meeting minutes.
There are variations of Corporations as well. S Corporations are essentially a different way to be taxed while having a Corporation. Taxes in an S-Corp are treated like a partnership with business profits or losses being recorded on owner’s individual tax returns. The Small Business Administration explains it clearly:
“The catch here is that the shareholder, if working for the company, and if there is a profit, must pay him/herself wages, and must meet standards of “reasonable compensation”. This can vary by geographical region as well as occupation, but the basic rule is to pay yourself what you would have to pay someone to do your job, as long as there is enough profit. If you do not do this, the IRS can reclassify all of the earnings and profit as wages, and you will be liable for all of the payroll taxes on the total amount” (sba.gov).
The newest business structure is a Limited Liability Company. This form of business structure combines the best of both partnerships and corporations. For the most part, the company holds the liability, while the owners get the tax benefits as if they were in a Partnership. There are basic requirements that must be met to use this form. You must file articles of organization and produce an operating agreement that sets out the rights, responsibilities, percentage of interest, and profit share of each LLC member. LLC’s can be extremely beneficial and many owners are now choosing to use this business form.
After you choose the structure of your business you must then consider your employees. In the State of Texas, if you own a business with employees, you must pay the state unemployment tax. Employers pay around 3% on a part of the wages for each employee. Employers can apply for a new lower rate after a certain period.
Texas does not require that you register your business’ name; this is left up to the County Clerk as a DBA (Doing Business As…). Unless you operate with different names at different times, in which case you would have to file for an Assumed name with the Secretary of State. But even more than Unemployment Insurance and business structure, the State of Texas is concerned with getting their tax money. Texas has a Sales and Use tax that can be combined with the Local tax to equal up to 8.25%. To go along with skimming off your revenue, there are over 60 different types of taxes and fees in Texas. Depending on what kind of business you’re in, there are many ways for the State to impose charges on your income.
- 911 Emergency Service Fee
- 911 Wireless Emergency Service Fee
- 911 Equalization Surcharge
- Automobile Burglary and Theft Prevention Authority (ABTPA) Assessment
- Automotive Oil Sales Fee
- Bank Franchise
- Battery Sales Fee
- Boat & Boat Motor
- Cement Production
- Cigar, Tobacco Products
- Cigarette/Tobacco Advertising Fee
- Coastal Protection
- Coin Operated Amusement Machine Tax
- Controlled Substances
- Crude Oil
- Diesel Fuels
- Insurance Maintenance Tax – Workers’ Compensation Research
- Insurance Maintenance Taxes – Texas Department of Insurance
- Insurance Maintenance Tax – Division of Workers Compensation/Office of Injured Employees Counsel
- Insurance Premium Tax – Independently Procured
- Insurance Premium Tax – Licensed Insurers
- Insurance Premium Tax – Surplus Lines/Purchasing Groups
- Insurance Premium Tax – Unauthorized Insurance
- International Fuel Tax Agreement (IFTA)
- Liquefied Gas
- Loan Administration Fee
- Local Property
- Local Sales & Use
- Manufactured Housing
- Miscellaneous Gross Receipts
- Mixed Beverage Tax
- Motor Fuels Transporters
- Motor Vehicle – Gross Rental Receipts
- Motor Vehicle – Local Sports and Community Venue Sales and Use
- Motor Vehicle – Sales and Use
- Motor Vehicle – Seller-Financed Sales
- Motor Vehicle – Texas Emissions Reduction Plan (TERP) Registration Surcharge
- Motor Vehicle – Texas Emissions Reduction Plan (TERP) Surcharge
- Natural Gas
- Office of Public Insurance Counsel (OPIC) Assessment
- Oil & Gas Well Servicing
- Oyster Sales Fee
- Petroleum Products Delivery Fee
- Property Tax
- Public Utility Gross Receipts Assessment
- Retail Charge Account Delinquency Fee
- Retaliatory Tax
- Sales & Use
- School Fund Benefit
- Sexually Oriented Business Fee
- Texas Emissions Reduction Plan (TERP) – Off Road Heavy Duty Diesel Equipment Surcharge
- Telecommunications Infrastructure Fund (Repealed)
- Volunteer Fire Department Assistance Fund Assessment
Federal Legal Requirements
Surprisingly, small businesses don’t have any federal permits and licenses to worry about; however, they do need to be aware of federal tax registrations. The first registration is the Employer Identification Number, which every business must file. The form can be found at http://www.irs.gov. Sole proprietorships are allowed to use their social security number as their Employer Identification Number, however, it is advised that they have a separate Employer Identification Number as well. This is a way to separate personal and business issues. If your business is a corporation, but wants to become an s corporation, then the second registration applies to you. From 2553 must be filed, which is the Election by a Small Business Corporation form, and can also be found at http://www.irs.gov. Although small businesses don’t have federal permits and licenses that apply to the, there are many forms that a small business can take on, and it is important for one to be aware of how these different forms operate and how they are affected by tax issues.
Unique Legal Requirements: The Restaurant Business Example
The restaurant business is one of the most regulated industries. There are many legal requirements that restaurants must abide by while operating their business. Since many of us eat at restaurants on a regular basis, we thought it might be interesting to talk about all the various requirements of restaurants that most people don’t even realize. There is a step by step process that must be followed in order to start and run a restaurant. First, the restaurant must apply for their Employer Identification number that was discussed earlier as part of the federal requirements of starting a small business.
As a restaurant, a food service establishment permit must be obtained. It is a simple process that requires you to fill out general information about the restaurant and to pay a fee. If the restaurant is considered a non- profit business, was inspected and permitted by a County or Public Health District, or was licensed by the Texas Department of State Health Services as a food manufacturer and paid a higher fee, than the restaurant is exempt from this permit. If the restaurant intends on serving alcohol, a liquor license must be obtained. This form is quite extensive and can be found on the TABC website at http://www.tabc.state.tx.us/.
The third step requires applying for certain licenses and permits that your specific city or county may require. Some examples are a business license, a tax permit, a building permit, a health permit, an occupational permit, a signage permit, an alarm permit, and a zoning permit. If construction or modification of the business will take place, then generally a building permit is required. Occupational requirements are sometime required for home based businesses. Some areas require a signage permit before any signs for your business can be placed anywhere. An alarm permit is needed if your business has some sort of burglar system. If land is being developed for commercial use, then typically a zoning permit is required. Permit and license requirements for Brazos County can be found at http://www.co.brazos.tx.us/.
The next step is the business entity registration. This is required for every business entity except for sole proprietors. The forms for this step can be found at http://www.sos.state.tx.us/corp/index.shtml.
DBA, or Doing Business As, lets one create a name for create a different name for the business than their own name or the partners name. Sole proprietorships are required to have an assumed name certificate that states the names of each of the names that will be used. This certificate is to be on file in the county clerk’s office of each county that the restaurant will be operated. All other forms of business must register with the Secretary of State.
With any restaurant, there are certain tax regulations that must be followed. Restaurants are no exception to these regulations. Restaurants are required to keep records of their employment taxes for at least four years. It is highly recommended that restaurants keep good track of all their financial information in order to properly prepare financial statements and prepare tax returns. When restaurants employ employees, they are required to collect a W-4 form from each of their employees before the employees begin work. The W-4 should be sent to the IRS to ensure. The restaurant must also complete a W-2 form for each employee. The W-2 reports the amount paid and taxes withheld from each employee. These forms must be sent to the Social Security Administration no later than the last day of February. The last day of March is allowed if the restaurant is filing electronically. A copy of the W-2 must also be sent to each employee by the end of January. Restaurants must also follow the Fair Labor Standards Art, which provides regulations on child labor with full time and part time employees. The Act essentially protects the youth from working too long of hours and protects them from the hazards that may come from working at a dangerous job. Restaurants must also be aware of immigration regulations. Within three days of employing an employee, employers must complete an I9 form to confirm the employee’s citizenship.
Finally, restaurants are required by their state and the federal government to put up various signs around the work place. The signs can be ordered online at http://www.twc.state.tx.us/ui/lablaw/posters.html for free from different agencies.
The Texas Payday law poster basically states that employers are required to pay their employees who are exempt from overtime provisions at least once a month and other employees at least semi annually. The pay periods are to be on the poster.
The Uniformed Services Employment and Reemployment Rights Act, USERRA, protects those who voluntarily or involuntarily to leave their job to go work in the armed services. This Act also prohibits employers from discriminating against those who have already served in the armed forces. This Act must be made clear to employees by either a poster or a clear policy distributed to each employee.
If employers are covered by the Fair Labor Standards Act, then they are required to post a minimum wage poster which shows that they are required to pay minimum wage. The poster should visible for employees to see. If the business is covered by the Family and Medical Leave Act, they are required to post a poster letting employees know that they will receive up to 12 work weeks of unpaid leave if they have a child, or have an immediate family member that needs taking care, or if the employee has a serious health condition.
The Equal Employment Opportunity Poster informs employees that employers should be following non discrimination laws and affirmative action. The Office of Federal Contract Compliance Programs (OFCCP) information is on the poster if there are cases that need to be reported.
Restaurants must adhere to the Americans with Disabilities Act. This law was made to protect those with disabilities from being discriminated against. Restaurants are not permitted to discriminate against customers or employees based on disabilities. They are to provide accommodations to those disabled, unless it was cause undue hardship. Undue hardship is defined as something that involves significant difficulty, involves significant expense to the restaurant, or changing the basic nature of the business.
The Food and Drug Administration also has a great influence over the regulations of restaurants. The FDA “is responsible for protecting the public health by assuring the safety, efficacy, and security of human and veterinary drugs, biological products, medical devices, our nation’s food supply, cosmetics, and products that emit radiation.”
OSHA stands for Occupational Safety and Health Administration. OSHA writes and enforces federal rules. Some states have been allowed permission to run their own OSHA programs. All employers must post federal or state OSHA posters at their facilities that inform employees of their safety and health rights. OSHA has been other requirements similar to this one. For example, OSHA’s “Hazzard Communication Standard” requires employers to inform employees of any hazardous chemicals in the work area through training, Material Safety Data Sheets, and labels on containers. OSHA also requires employers to post a job safety poster informing employees of the protections of the Occupational Safety and Health Act.
This website http://www.dol.gov/elaws/posters.htm has a step by step series of questions that should be answered by the employer in order to inform the employer of what kinds of posters should be posted around their workplace.
Protecting Your Ideas
Many business owners have an idea or an invention that they want to protect but aren’t quite sure how. For some businesses, protecting these ideas is vital. Although your product may require a patent, a trademark, and a copyright, each particular category presents a distinct protection of your creative work. It can be confusing and hard to decide which of the three vehicles of protection to use, so we describe them in further detail below.
A patent for an invention is the grant of a property right to the investor which is issued by the United States Patent and Trademark Office. The term is generally 20 years from the date of filing, and is only effective within the United States territories. The USPTO website describes the advantage of a patent best by stating, “[a patent] is the right to exclude others from making, using, offering for sale, or selling the invention in the United States or importing the invention into the United States.” The website also goes on to explain that what is granted is not the actual right to make, use, or offer for sale a particular product. It is simply the right to exclude others from doing so. To obtain a patent from the federal government, an application must be filed in the U.S. Patent and Trademark Office. These forms can be found at http://www.uspto.gov/web/patents via downloadable form or electronic application.
There are three particular types of patents that a business owner can file for:
1. Utility patents, which may be granted to anyone who invents a new way of doing something. This includes discovering any new or useful processes, machine, article of manufacture, or composition of matter, or the “useful improvement thereof” (USPTO.com).
2. Design patents, which may be granted to anyone who invents an original design to a manufacturing article.
3. Plants patents, which can be granted to those who invent, discover, or produce any distinct variety of plant.
According to the sba.gov website, a trademark is any word, name, symbol, device, or any combination used or intended to be used in commerce to identify either the goods of one company or at least the source of those goods. In short, a trademark is a brand name. Business owners are not required to register their trademark with the federal government, but there are several advantages to doing so. First, the trademark serves as a notice to the nation that your firm owns a particular phrase. This registration and ownership can be backed up by the jurisdiction of the federal courts, and can also be used as a basis for obtaining registration in foreign countries. You can download the correct form of registration from the “Basic Facts About Registering a Trademark” on the sba.gov website.
A copyright is important because once registered, it has the ability to protect your work from being copied or publicly performed. The copyright protects original works such as poetry, novels, movies, songs, computer software, and architecture (www.sba.gov). The term of the copyright depends on how old a work is, whether or not it is renewed, and when or if the work was published. The terms are typically much longer than the 20-year term of a U.S. patent and can go as long as the lifetime of the owner and beyond. Under U.S. copyright law, a copyright application can be filed at any point. Registration offers many benefits to the owner. If someone else tries to copy your product, you may be eligible for statutory damages and for recovery of attorney’s fees. The idea is that registering for a copyright costs so little for how much damage can be done if you were to violate one of those laws that you may as well register. Registering for a copyright is easy and straightforward, costing little more than $20 and a small amount of time. Forms can be downloaded from the SBA website and can be mailed to the following address:
“Copyright Office, Library of Congress, 101 Independence Avenue, S.E.,Washington, D.C. 20559-6000.”
There are many legal requirements for starting your own business. Other than protecting your ideas and some unique cases, there is a vast amount of Local, State, and Federal laws to be considered. Making sure you have all your ends covered is a key for success. Being properly insured, filing your taxes correctly, and taking care of your employees are some of the ways you need to be prepared, just to name a few. It is your full responsibility as the business owner to make sure you understand and comply with all regulations.
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