Starting a small business involves more than choosing a name and finding customers. The decisions you make about ownership, contracts, taxes, and intellectual property can affect how your company operates and how much personal risk you take on.
The right starting point depends on your business model, location, industry, and growth plans. Some steps are legal requirements; others are practical protections that help prevent expensive disputes.
Use this legal checklist for starting a small business to identify the issues worth addressing before you launch.
1. Choose a business structure that fits your plans
Your business structure affects ownership, management, taxes, and personal liability. Consider who will own the business, whether you expect to raise outside capital, and how you intend to distribute profits.
Common options include:
Sole proprietorship. A business owned directly by one individual, without a separate entity such as an LLC or corporation. It can be simple to operate, but it does not separate the owner’s personal liability from the business’s obligations.
Partnership. If you start a business with another person, understand what type of partnership you are creating and what liability each owner may face. A general partnership typically exposes general partners to personal liability. Limited partnerships and limited liability partnerships have different rules.
Limited liability company. An LLC can offer liability protection and flexibility in management. Its federal tax treatment depends on its ownership and tax elections. A single-member LLC is generally disregarded for federal income tax purposes unless it elects corporate treatment; a domestic LLC with multiple members generally defaults to partnership taxation. IRS guidance on LLC taxation
Corporation. A corporation has shareholders and a formal governance structure. Corporations are used by small businesses as well as larger companies. A C corporation generally pays federal income tax on its profits, and shareholders may also owe tax when those profits are distributed as dividends. IRS guidance on corporations
S corporation tax treatment. An S corporation election is a tax choice available to qualifying corporations and eligible LLCs. It generally allows income and losses to pass through to owners, subject to applicable rules. Eligibility restrictions include limits on shareholders and permitted ownership arrangements. It is not automatically the best choice for every small business. IRS S corporation requirements
Discuss the legal structure with a business attorney and the tax consequences with your accountant. Forming an entity does not, by itself, create tax savings or make an expense deductible.
2. Document the owners’ rights and responsibilities
A formation filing does not answer every question about how the owners will work together.
If you are starting an LLC, consider an operating agreement. A corporation will need appropriate organizational documents and may benefit from a shareholder agreement.
Depending on the structure, address:
- Each owner’s investment and ownership interest.
- Who manages the business and can sign contracts.
- How profits are distributed and additional funding is handled.
- What happens if an owner leaves, dies, becomes disabled, or wants to sell.
- How disagreements and management deadlocks will be resolved.
These conversations are easier before money is committed or a dispute develops. Even a business with one owner benefits from clear records documenting its organization and major decisions.
3. Keep business finances and obligations separate
An LLC or corporation can help limit personal exposure, but that protection is not absolute.
Open a separate business bank account, maintain accurate records, document owner contributions and withdrawals, and sign agreements in the company’s name using your proper title. Follow the governance requirements that apply to your entity.
For example, a company contract should identify the company as the contracting party. Separately review any language requiring you to provide a personal guarantee.
Entity formation does not eliminate liability for your own wrongful conduct or obligations you personally guarantee. Whether a court can disregard an entity’s liability protection depends on applicable law and the facts. Avoid treating the business account as an extension of your personal finances.
4. Obtain the necessary tax registrations
An Employer Identification Number, or EIN, identifies a business for federal tax purposes. Whether you need one depends on your structure and activities.
Do not assume every LLC has the same requirement. A single-member LLC treated as a disregarded entity may not need a separate EIN for federal tax purposes if it has no employees or applicable excise tax obligations. A bank or state requirement may still make an EIN necessary. IRS guidance on single-member LLCs
An EIN also does not complete every tax registration. Ask your accountant which state and local registrations, sales tax obligations, payroll accounts, and estimated payments apply to your business.
5. Check licenses, permits, and location restrictions
Registering an entity does not necessarily authorize it to conduct every business activity.
Requirements depend on what you sell, where you operate, and whether your work is regulated. Check for applicable professional licenses, industry permits, zoning approvals, and local operating requirements. A home-based business may also face location restrictions.
If you form the business in one state but operate in another, determine whether additional registration is required. The SBA’s business launch guidance outlines the different registration and permitting steps.
Check these issues before signing a lease, purchasing specialized equipment, or committing to an opening date.
6. Clear your business name and protect your intellectual property
Before investing in branding, investigate whether your proposed name or logo conflicts with someone else’s trademark rights.
A state’s acceptance of your company name, an available domain, or an unused social media handle does not establish that the brand is legally clear to use.
A trademark review should consider similar marks used for related goods or services, not just exact matches. The USPTO recommends checking both federal records and relevant unregistered uses. USPTO guidance on clearance searches
Once you have assessed the risks, discuss whether federal trademark registration makes sense for your business.
Other assets may require different protection. Copyright can protect original writing, artwork, and software code; patents may protect qualifying inventions; and trade secret protection concerns valuable confidential information. Copyright generally arises automatically when an eligible work is fixed, although registration provides additional enforcement benefits. U.S. Copyright Office overview
Confirm ownership before assuming an asset belongs to the company. Paying a freelancer to create a website, logo, or software does not necessarily transfer copyright ownership. Work-made-for-hire treatment applies only in qualifying circumstances. Depending on the work and relationship, the agreement may need an express assignment, an appropriate license, or both. Copyright Office guidance on work made for hire
7. Put practical business contracts in place
Your contracts should reflect how your business actually operates.
Depending on your activities, you may need customer agreements, master services agreements, statements of work, vendor contracts, confidentiality agreements, contractor agreements, distribution agreements, or software licenses.
A useful business contract should address the questions that are most likely to cause a disagreement:
- What exactly will each party provide?
- When is payment due?
- How are changes, delays, and additional work handled?
- Who owns the work product?
- What happens if either party wants to end the relationship?
- How are liability and disputes addressed?
A template can provide a starting point, but it may contain obligations that do not fit your services or leave out protections you need. Have counsel review significant agreements before you sign, especially the other party’s standard terms.
If you plan to hire, also review worker classification, payroll, onboarding, and applicable workplace requirements. Calling someone an independent contractor in an agreement does not, by itself, determine their legal classification.
8. Review insurance and ongoing compliance
Entity protection and insurance serve different purposes. Discuss your operations with an insurance professional to identify appropriate coverage and any legal or contractual requirements.
Depending on your business, relevant policies may include general liability, professional liability, cyber liability, property coverage, and workers’ compensation. Requirements vary by jurisdiction and circumstances; not every business needs every policy.
Also create a calendar for recurring obligations, such as entity reports, tax filings, license renewals, insurance renewals, and important contract deadlines.
Revisit the checklist when you add an owner, hire employees, enter a new state, introduce a new product, or begin handling more sensitive customer information.
Starting a business in New Jersey?
Brown & Blaier helps New Jersey business owners address entity formation, ownership arrangements, commercial contracts, and intellectual property concerns.
If you are preparing to launch, explore our flat-fee startup packages or tell us about your business through our intake form. We can discuss the legal work your business needs and an appropriate scope and fee.