Business Basics: Startup Government Regulations

By: Amalya Teitelbaum  |  November 17, 2021

By Amalya Teitelbaum, Business Editor & Manager

To the average person, creating a startup might not seem all too difficult. Many saw the uptick in so-called startups during COVID-19 on social media apps like Instagram and Tiktok. From jewelry to clothing to customized items, establishing a company seems as simple as creating an item and posting it on social media: someone buys the item and now you are an entrepreneur. However, it is not as simple as it seems. 

Startups refer to companies in the first stages of operations. Startups are founded by one or more entrepreneurs who want to develop a product or service for which they believe there is demand. There are several types of startups: sole proprietorships, partnerships, and limited liability companies (LLC). A sole proprietorship also referred to as a sole trader or a proprietorship, is an unincorporated business that has just one owner who pays personal income tax on profits earned from the business. In a sole proprietorship, there is no legal distinction between the company and the owner because the company is not registered. In a partnership business, however, all partners share liabilities and profits equally, while in others, partners may have limited liability. Partners are held liable for any business debts which result from the partnership, which means that creditors can go after the partners’ personal assets. A limited liability company (LLC) is a business structure in the U.S. that protects its owners from personal responsibility for its business debts or liabilities. LLCs are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship.

For all startups, there are government regulations that the owner/owners must abide by. A business owner must take into consideration his or her business structure when understanding the company’s legal requirements. After that distinction is made, the owner must register under an unused business name. Depending on the business structure, there are four ways to register the business’s name. The business can register with an entity name, which legally protects the business at a state level or it can register with a trademark, which legally protects the business at a federal level. A business can also register with a DBA (Doing Business As) which doesn’t offer legal protection but may be required, depending on the business’s location and structure. Another option for a business is to register with a domain name which claims your business’s web address.

Then one must apply for a Federal Tax ID number. A Federal Tax ID Number is also known as an Employer Identification Number (EIN) and is used to identify a business entity. It allows owners to legally hire and pay employees, pay federal taxes, apply for business licenses, and open a business bank account. After determining the business EIN determine whether or not a State Tax ID number is required. This requirement depends on the local tax and employment laws in the state.

Then one must obtain the necessary business permits and licenses. There are several levels of licenses, federal level, state level, business location level, and industry level.  The Small Business Administration (SBA), has a list outlining common federal business licenses for operating a standard business. 

Next, one should choose business insurance. Business insurance can protect personal assets and business assets. Some types of insurance are required by law, such as unemployment and disability insurance. Other insurance types are just tactical to have. Common insurances include general liability insurance, product liability insurance, and commercial property insurance.

The next step is to open a business bank account in order to separate personal and business finances before you start collecting payments from clients. Some banks offer lower fees for businesses, so research the local and convenient banks for your business before opening an account. 

Finally, it would be wise to sit down with a lawyer and an accountant to make sure a newly created business is covered from a legal and financial standpoint. While starting a business may not be as simple as selling a handmade necklace on social media, with the right guidance the outcome of a new business may be incredible.