Information obtained from the SBA small business guide
It may be inconceivable to you that your home-based consulting service or handknit sweater business would have to comply with any of the numerous local, state and federal regulations, but in all likelihood it will. Avoid the temptation to ignore regulatory details. Doing so may avert some red tape in the short term, but could be an obstacle as your business grows. Taking the time to research the applicable regulations is as important as knowing your market.
Below is a checklist of the most common requirements that affect small businesses, but it is by no means exhaustive. Bear in mind that regulations vary by industry. If you're in the food service business, for example, you will have to deal with the health department. If you use chemical solvents, you will have environmental compliance to meet. Carefully investigate the regulations that affect your industry. Being out of compliance could leave you unprotected legally, lead to expensive penalties, and jeopardize your business.
Federal Employer Tax I.D. Number (EIN)
A new business will not need a federal tax number if it has no employees and is organized as a proprietorship. In this case, a social security number is sufficient. (The one exception is independent contractors who must have an EIN). If the business becomes a partnership, incorporates, or hires an employee, then a federal tax number will be required. Applications (Form SS-4) are available locally where other IRS forms are distributed (the Post Office). The IRS website is. www.irs.gov
Certificate of Occupancy
If you are planning on occupying a new or used building for a new business, you may have to apply for a Certificate of Occupancy from a city or county zoning department. For more information contact the county or city office in your area.
Fire Department Inspection
Businesses having regular entry and use of the facilities by the public, as well as housing flammable materials, will generally need a fire department inspection. Consult the local fire department.
There are many forms of legal structure you may choose for your business. The most common structures are Sole Proprietorships, General and Limited Partnerships, C and S Corporations and Limited Liability Companies. Each legal structure offers organizational options which are appropriate for different personal situations and which affect tax and liability issues. We suggest you research each legal structure thoroughly and consult a tax accountant and/or attorney prior to making your decision.
A. Proprietorship - A proprietorship consists of one owner (business and individual are one entity). All personal assets are subject to satisfying business debts. Personal income and business income are taxed as one entity.
B. Partnership - A partnership is a relationship between two or more persons who join together to carry on a trade or business. Each person contributes money, property, labor, or skills, and each shares in the profits and losses of the business. Any number of persons may join in a partnership. All owners are personally liable for total business debt, even if they did not take the action causing the debt. Business tax numbers are required. A written partnership agreement is highly recommended.
C. Corporation - A corporation is treated by law as a legal entity. It has a life separate from its owners and has rights and duties of its own. The owners of a corporation are the stockholders. The managers of a corporation may or may not be stockholders.
1) S Corporation - An S Corporation is a small business corporation that elects to have its income taxed in a manner similar to a partnership. In general, an S Corporation does not pay tax on its income. Instead, the income and expenses of the corporation are divided among its shareholders, who then report them on their own income tax returns.
2) Limited Liability Company - An LLC has the corporate characteristics of limited liability (like S Corporation) and is treated, for income tax purposes, either as a partnership or corporation as determined by the federal government. An LLC allows an unlimited number of shareholders and can own up to 100% of another corporation.
For more information and handouts, phone (800) 827-5722 or try www.sba.gov
Fictitious Business Name
Businesses that use a name other than the owner's must register the fictitious name with the county as required by the Trade Name Registration Act. This does not apply to corporations doing business under their corporate name or to those practicing any profession under a partnership name. For more information contact your state or local government.
You may also try going to your state Home Page, locating their "SEARCH" feature and typing in "trade name registration" or "county information".
Business owners are required by law to withhold the following from the wages paid to employees: federal income taxes, state income taxes and FICA (Social Security) Insurance.
Income taxes will also be levied by the federal and state governments on earnings of any business. Therefore, each business must file an income tax return with both agencies. Businesses may be required to file estimated tax returns and pay estimated taxes on a quarterly basis.
For federal tax information, contact: U.S. Internal Revenue Service (IRS)
You can go to IRS's website area for business taxes or call your local IRS office to receive a number of publications that are available upon request to small businesses. One of the most helpful is Your Business Tax Kit, which includes data and forms for a Federal Employer Identification Number and a tax guide for small businesses that can be ordered by calling Forms and Publications at (800) 829-3676 or through a visit to your local IRS office.
You may want to contact your local Social Security Administration Office for (FICA) Insurance information or visit one of these helpful SSA web sites:state web sites for tax information call your state government or visit your official state Web site.
Federal Self-Employment Tax
Everyone must pay Social Security Tax. If you are self-employed, your Social Security contribution is made through the self-employment tax. You will need to calculate how best to report earnings and pay your business taxes.
Contact the IRS, visit your local IRS office, go to the Official IRS Web site for more information. The IRS may seem like a complicated maze, but there are publications, counselors and workshops available to help you sort it out.
Like home insurance, business insurance protects the contents of your business against fire, theft and other losses. Contact your insurance agent or broker. It is prudent for any business to purchase a number of basic types of insurance. Some types of coverage are required by law, other simply make good business sense. The types of insurance listed below are among the most commonly used and are merely a starting point for evaluating the needs of your business.
Liability Insurance -- Businesses may incur various forms of liability in conducting their normal activities. One of the most common types is product liability, which may be incurred when a customer suffers harm from using the business product. There are many other types of liability, which are frequently related to specific industries. Liability law is constantly changing. An analysis of your liability insurance needs by a competent professional is vital in determining an adequate and appropriate level of protection for your business.
Property -- There are many different types of property insurance and levels of coverage available. It is important to determine the property you need to insure for the continuation of your business and the level of insurance you need to replace or rebuild. You must also understand the terms of the insurance, including any limitations or waivers of coverage.
Business Interruption -- While property insurance may pay enough to replace damaged or destroyed equipment or buildings, how will you pay costs such as taxes, utilities and other continuing expenses during the period between when the damage occurs and when the property is replaced? Business Interruption (or "business income") insurance can provide sufficient funds to pay your fixed expenses during a period of time when your business is not operational.
"Key Man" -- If you (and/or any other individual) are so critical to the operation of your business that it cannot continue in the event of your illness or death, you should consider "key man" insurance. This type of policy is frequently required by banks or government loan programs. It also can be used to provide continuity in operations during a period of ownership transition caused by the death or incapacitation of an owner or other "key" employee.
Automobile -- It is obvious that a vehicle owned by your business should be insured for both liability and replacement purposes. What is less obvious is that you may need special insurance (called "non-owned automobile coverage") if you use your personal vehicle on company business. This policy covers the business' liability for any damage which may result for such usage.
Office and Director -- Under some circumstances, officers and directors of a corporation may become personally liable for their actions on behalf of the company. This type of policy covers this liability.
Home Office -- If you are establishing an office in your home, it is a good idea to contact your homeowners' insurance company to update your policy to include coverage for office equipment. This coverage is not automatically included in a standard homeowner's policy.
Sales Tax Number
In your state there is a percent sales and use tax which applies to the retail purchase, retail site, rental, storage, use or consumption of tangible personal property and certain services. In other words, sales tax must be collected on just about every tangible item sold.
A sales tax number is required for each business before opening. The number, plus instructions for collection, reporting and remitting the money to the state on a monthly basis, can be obtained from your state government.
All businesses with employees are required to comply with state and federal regulations regarding the protection of employees. For information on state labor laws, work force availability, prevailing wages, unemployment insurance, unionization, benefits packages and employment services contact your state government.
Federal information may be obtained by contacting the: U.S. Department of Labor
Unemployment Insurance Tax
Businesses are required by the state to pay unemployment insurance tax if the company has one or more employees for 20 weeks in a calendar year, or it has paid gross wages of $1,500 or more in a calendar year. The taxes are payable at a rate of 2.7 percent on the first $8,500 in annual wages of an employee. Go to your state home page to check the figures for your state.
Unemployment insurance must be reported and returns made to the state.
The Federal Immigration Reform and Control Act of 1986 requires all employers to verify the employment eligibility of new employees. The law obligates an employer to process Employment Eligibility Verification Form I-9. The Immigration and Naturalization Service Office of Business Liaison offers a selection of information bulletins and live assistance for this process through the Employer Hotline. In addition, INS forms and the Employer Handbook can be obtained by calling the Forms Hotline.
Health and Safety
The Federal Occupational Safety and Health Administration (OSHA) outlines specific health and safety standards employers must provide for the protection of employees. Many states have similar standards. For state information contact your local OSHA office.
If a business employs three or more people, workers' compensation insurance must be carried to provide protection to those injured in on-the-job accidents. The State Board of Workers' Compensation aids people who need claim assistance.
For more information contact your state government.
Virtually all business entities are subject to the federal minimum wage, overtime and child labor laws. Information on these laws and other federal laws, may be obtained from:
U.S. Department of Labor Wage and Hour Division
Information obtained from the SBA small business guide