Legal Compliance for Small Business Owners

Federal, state, and local regulations mandate small business owners remain in compliance to continue operating legally. Maintaining legal compliance requires the prompt filing of certain reports with the government, as well as staying current on any licenses or permits used by your business. 

Failure to maintain legal compliance can put your business in bad standing, leaving you susceptible to fines, lawsuits, or having your business entity administratively dissolved by the state.

How can I stay legally compliant?

Compliance requirements differ depending on the type of business entity you operate, the state where you operate your business, and the industry your business operates in. Compliance requirements often include:

• Filing an annual or biennial report (this varies by state)
• Paying a yearly franchise tax
• Paying any necessary filing fees

Depending on the type of business entity you operate and the state where you do business, additional information may be required. This guide provides a brief overview of the most common requirements for maintaining legal compliance for small business owners.

Keeping track of business documents and compliance timelines can be an unnecessary concern for small business owners trying to manage and grow their businesses. With our Worry-Free Compliance service, you no longer have to worry about it.

We’ll send you alerts and notifications for upcoming filing deadlines to help ensure your business remains in good standing. In the event you miss the deadline or forget to file the annual/biennial report, we’ll help you navigate the process of regaining your good standing. If you do fall into bad standing, we can provide a detailed action plan and explain the costs necessary to regain your good standing and legal protections provided by the state. 

License and Permit Compliance Requirements

Depending on the industry in which your business operates, certain permits and licenses must be obtained and kept active.

Federal Requirements

Federal licenses and permits are required if your business’s activities are regulated by a federal agency. Additionally, businesses pay taxes to the federal government just like individuals.

Employer identification number (EIN)

An employer identification number (EIN), also referred to as a tax ID number, is a nine-digit code issued to businesses by the IRS. The EIN operates similar to a Social Security number for your business, enabling the IRS to readily identify your business by its specific code. An EIN is required for businesses that:

• Have employees;
• File tax returns for employment, excise, or alcohol, tobacco, and firearms;
• Withhold taxes on income, other than wages, paid to a non-resident of the U.S.;
• Operate as a corporation, partnership, or multiple-member LLC; or
• Have a Keogh (self-employment retirement) plan.

Additionally, EINs are required for businesses that are involved with certain types of organizations, including:

• Trusts (except grantor-owned revocable trusts), IRAs, Exempt Organization Business Income Tax Returns;
• Estates;
• Real estate mortgage investment conduits;
• Non-profit organizations;
• Farmers’ cooperatives; and
• Plan administrators.

Our EIN service eliminates the stress of applying for the identification number on your own by doing it on your behalf. With an EIN number from the IRS, you can open a bank account for your business, hire employees, and further shield your personal assets from liability. 

Other federal licenses and permits

Certain industries are regulated entirely by federal agencies, and a business must seek approval before operating in such an industry. 

• The U.S. Department of Agriculture regulates the agriculture industry in the United States. Agricultural business owners require permits for the import, transit, and release of regulated animals, animal products, veterinary biologics, plants, pests, organisms, soil, and genetically engineered organisms.
• The Federal Aviation Administration regulates businesses involving the operation of aircraft, transportation of goods or people via air, or aircraft maintenance. 
• The Bureau of Alcohol, Tobacco, Firearms, and Explosives regulates businesses that manufacture, deal, or import firearms, ammunition, and explosives. 
• The Federal Maritime Commission regulates businesses that provide transportation to or facilitate the shipment of cargo by sea. 
• The Bureau of Safety and Environmental Enforcement regulates businesses involved in drilling for natural gas, oil, or other mineral resources on federal lands.
• The Federal Communications Commission regulates businesses that broadcast information by radio, television, wire, satellite, or cable. 
• The U.S. Department of Transportation regulates businesses that provide transportation of goods or people via ground. 
• The Securities and Exchange Commission (SEC) regulates the sale of securities within the United States and is responsible for making sure that businesses comply.

This is a non-exhaustive list of the industries regulated by federal agencies. 

State Requirements

Each state implements different regulatory requirements for small business owners. For guidance on what permits and licenses you need, check with the state you operate your business in or rely on us to do the research for you.

Many states require some form of business license to conduct business within that state. The type of licenses required depends on what entity your business is and what activities your business conducts. Some industries are more likely to be regulated than others, such as:

• Childcare services
• Transportation for hire
• Pest control
• Telemarketing
• Massage services

It’s important to stay compliant with any licensing and permitting requirements your state imposes.

Local Requirements

States leave regulation of some business activities to local governments, meaning that each county or city is responsible for issuing the necessary licenses or permits. Activities commonly regulated at the local level include:

• Auction services
• Dry cleaning services
• Restaurants
• Retail stores
• Street vendors

Some permits and licenses expire after a set period, while others continue indefinitely. Check with your local jurisdiction to determine licensure requirements for your small business.

Professional or Occupational Licenses

Certain types of businesses and businesses providing certain services require their employees to have professional or occupational licenses. For example, attorneys must be licensed by their state’s bar association to legally practice in a courtroom. Many professional licenses mandate continued specialized education courses or submitting a mandatory number of volunteer hours to keep the license active. Licensure requirements vary from state to state. If you are a business owner with a professional license, you must be proactive in ensuring you are compliant with licensure requirements of your state. 

Taxes, Finances, and Reports

The IRS requires all for-profit businesses to pay federal taxes. The structure of your business influences the way you will pay taxes. 

Keeping detailed transaction records is a critical step in your business organization. No matter how big or small your business is, hiring a bookkeeper or accountant to manage your important business documents and keep them organized and current is always a good strategy.

The IRS sets a deadline for paying taxes for the year. Always pay these taxes on time instead of incurring a late fee. 

Failure to file your yearly tax returns can result in state or IRS audits and significant penalties.

Every state has different reporting requirements and deadlines for submitting reports and tax returns. Know the requirements for your state and ensure you are staying current. 

Employment and Labor Laws

There are numerous federal and state labor laws that businesses must comply with. Failure to comply can result in significant fines and costly lawsuits.

Properly classify workers

Classifying your workers as employees or independent contractors influences the obligations your business has to provide certain benefits.

The Equal Employment Opportunity Commission (EEOC) provides a list of factors indicative of an employer-employee relationship, including:

• The employer has the right to control when, where, and how the worker performs the job
• The employer furnishes the tools, materials, and equipment
• There is a continuing relationship between the employer and the worker
• The employer sets a work schedule for the worker
• The employee is paid on a periodic basis rather than after completion of an agreed-upon project
• The worker is not engaged in his or her own distinct occupation or business

An independent contractor operates under a separate business entity from your company and charges you for work completed. 

Some states, such as California, employ stricter standards for determining whether a worker is an employee or an independent contractor. It’s important to understand the rules in your state so that you don’t accidentally misclassify an employee.

Follow federal and state labor laws

Federal and state laws require businesses to provide certain benefits to their employees. Businesses need to ensure that they:

• Pay Social Security taxes at the same rate as employees
• Carry workers’ compensation insurance
• Provide disability pay in certain states
• Comply with the Family and Medical Leave Act (FMLA)
• Comply with reporting and coverage requirements under the Affordable Care Act
• Follow the Fair Labor Standards Act’s (FLSA) rules regarding things like minimum wage, recordkeeping, overtime pay, and child labor standards

This is just a sample of the numerous state and federal employment laws businesses need to be aware of.

Avoid discrimination and harassment

It’s essential for businesses to take proactive steps to avoid discrimination and harassment in the workplace. Businesses need to clearly communicate and articulate any anti-discrimination policies and implement a process for investigating instances of possible discrimination or harassment. 

Businesses need to understand the various federal and state laws that protect workers. For example, the Civil Rights Act of 1964 prohibits sexual harassment as well as discrimination in employment based on a person’s membership in a protected class. Additionally, the Department of Labor Office of Federal Contract Compliance Programs (OFCCP) enforces the non-discrimination and affirmative action obligations for contractors and subcontractors to the federal government.

Other Compliance Areas

Advertising and Marketing

Businesses also need to be aware of laws governing their marketing activities. The Federal Trade Commission (FTC) regulates business advertisements and requires that advertisements:

• Are truthful and non-deceptive
• Are backed by evidence
• Aren’t unfair

An advertisement containing or omitting information that is likely to mislead a consumer is considered deceptive. The FTC considers an advertisement that is likely to cause substantial consumer injury to be “unfair” if the ad does not provide a benefit to consumers that outweighs such injury. 

Refusal to comply with FTC regulations surrounding advertisements can result in cease and desist orders and significant monetary penalties.

See also: Differences Between The Trade Agreements Act And The Buy American Act

Privacy Laws

Privacy and data security affects every small business, whether you realize it or not. Data privacy refers to the proper and responsible collection, creation, use, sharing, retention, and disposal of personal information about customers or third parties that you do business with. Data privacy also includes making decisions about whether and when to share such information. 

The FTC monitors data privacy violations through enforcement actions against small businesses that fail to comply with the obligation of protecting the personal information of its clients and require the businesses to take steps to remediate the unlawful behavior. In 2019 alone, the FTC brought 80 general privacy lawsuits addressing a wide range of privacy issues in a variety of industries and brought over 70 cases against companies accused of inadequately protecting consumers’ personal data. 

Workplace Safety

The Occupational Safety and Health Act requires certain health and safety standards to be complied with by business owners regulated by the Occupational Safety and Health Administration (OSHA). Employers regulated by OSHA have a general duty to provide their employees with work and a workplace free from serious, recognized hazards. OSHA enforces its regulations through workplace inspections and investigations.