When starting a new business, it’s easy to get so caught up with building your product and finding clients that the never-ending list of legal formalities comes last.
To prevent that problem, here are eight straightforward legal items that are important for every small business to do on day one. They’ll save you the cost and headache of cleaning up a mess later.
1. Create a co-founder or partnership agreement
Even if you have zero product, revenue, and funding, you need a written agreement with your co-founders, if you have any. This agreement should include:
Who will contribute what money and labor
Who gets paid how much
Equity split details, ie., who owns how much of the company
Outlining all of this up front will reduce misunderstandings and make it much less likely you’ll all sue each other if it fails (or if it succeeds).
2. Decide on a business entity (at least to start)
If you’re a one-person business with no employees and minimal revenue, it can make sense to just stay a sole proprietorship. But if your business has multiple owners and/or workers, you need to decide on a legal structure or business entity to protect you from being personally liable for anyone else’s mistakes, and to set your company up for the future.
Whether you need to be a Corporation or a Limited Liability Company (LLC) depends upon your income tax situation, the state where you’re incorporating, and your future plans (such as whether you need to offer multiple classes of stock to investors). Make sure to review the options with your tax advisor as well as your legal advisor. Once you’ve made a decision, be sure to draft an operating agreement, partnership agreement, or shareholder agreement, depending on what you choose.
3. Get an Employer Identification Number (EIN)
Every business that hires employees or that isn't a sole proprietor needs a federal Employer Identification Number from the IRS. Getting one is free, takes minutes online, and is mandatory before you can open a business bank account, hire anyone, or file most licenses.
4. Vet your business/domain/product name
Maybe you don’t have the cash to register a trademark yet. But, you need to make sure you’re not violating someone else’s trademark or copyrights. At the minimum, use the U.S. Patent & Trademark Office (USPTO) trademark search, and search online for common law trademarks and common usage of the name. If you're operating under a name different from your legal entity name, you'll need to file a “Doing Business As” (DBA)/fictitious business name statement with your state or county.
5. Get your business licenses and permits (even if you’re a virtual business)
It’s easy to forget that even if you are a virtual company, with everyone working at home and selling products online, you’re still humans in a physical location. If your state, county, or city requires a business license or industry-specific or zoning permits, when they sync their records with tax or business registration databases, they will send you a bill for back fees, interest, and penalties.
6. Set up separate business finances and payroll
Regardless of the size of your startup, you need to set up some basic business financial systems to track your income and expenses for taxes and your own planning. All businesses (even sole proprietors) need a separate business bank account and a bookkeeping system, to avoid commingling personal and business money. If you accept payments, you need a merchant account such as Square or business PayPal (don’t use your personal PayPal account!).
If you have employees—if your business is an S-Corporation, this includes the owner/officer—you need a payroll system such as Gusto to make sure you’re making correct calculations and filing the right forms. As a business owner, you are personally liable for payroll errors and unpaid payroll taxes even if your business is incorporated. This is one area where you don’t want to do it yourself (and if you do, be prepared to receive random bills with penalty/interest from the IRS).
7. Create your website privacy policy
If you have a website, you need a privacy policy to disclose what information you obtain from your web visitors or users, even if you're just collecting emails for a mailing list or cookies for your analytics software. Your privacy policy needs to comply with California's privacy law—the California Consumer Privacy Act as amended by the California Privacy Rights Act (CCPA/CPRA). This act applies if you have California visitors or customers, which most online businesses do. You'll also need to comply with the privacy laws of any other state or country where you have a significant following or presence.
8. Create written agreements with clients, customers and contractors
You need written contracts with all the people with whom you’re doing business, whether they are working for you, or you are working for them. With your vendors and independent contractors, the agreement needs to maintain their contractor status, manage who owns the intellectual property, create a Non-Disclosure Agreement, and set forth the general understanding of your arrangement.
With clients and customers, you need to have a contract for the same reasons as you need a contract with your co-founders—to minimize misunderstandings by writing down your assumptions, for everyone to read and sign. This is not just so you can enforce your fee agreement and protect yourself in case of a lawsuit—but also so you can have happy long-term clients and many referrals.
Plus, a few more odds and ends
Register for sales tax if you sell taxable products or services. If you sell into multiple states, check each state's economic nexus threshold, since selling remotely into a state can create a tax obligation there even without a physical presence.
Get business insurance once you have employees. Most states require workers' compensation, and it's worth getting general liability insurance even before that, to cover claims from clients or the public. If your business provides services or advice (consulting, design, accounting, etc.), professional liability insurance protects you against claims of negligence or mistakes in the work itself.
Post required labor law notices and build a basic employee handbook if you're hiring. Federal and state law require posting things like minimum wage and OSHA rights notices, and a growing number of states require written policies on pay transparency and other workplace practices.
Make your website accessible. ADA-related lawsuits over inaccessible websites have kept climbing. It's not a single bright-line requirement, but it's real legal exposure for any business with a public-facing site.
Remember, just as it takes a few years to get a business off the ground, it will take you a few months or years to get your entire small business legal to-do list completed. The best strategy is to start with the most important items, and grow your legal foundation as you grow your new company.
FAQs
What legal steps do I need to take to start a small business?
The essentials are a written co-founder agreement, a chosen business entity (LLC, corporation, or sole proprietorship), an Employer Identification Number, a vetted business name, required licenses and permits, separate business banking and payroll, a website privacy policy, and written contracts with clients and contractors. Business insurance and sales tax registration round out the list as you hire and grow.
What's the difference between an operating agreement and a partnership agreement?
An operating agreement governs an Limited Liability Company (LLC), while a partnership agreement governs a general partnership or Limited Liability Partnership (LLP) — both cover ownership splits, decision-making, and exit terms, but each applies to a different legal structure. Corporations use a similar document called a shareholders' agreement instead. You typically draft the specific one once you've chosen your business entity.
Do sole proprietors need an EIN?
A sole proprietor with no employees generally isn't required to get an Employer Identification Number and can use a Social Security number for tax purposes instead. An EIN still makes sense once you hire employees, open a business bank account, or want to keep your SSN off business paperwork—it's free and takes about five minutes to get from the IRS.
What happens if I don't get the right business licenses and permits?
Operating without required business licenses or permits can trigger retroactive fines once local, state, or tax agencies cross-check their records—even for a fully virtual company. You may owe back fees, interest, and penalties for the entire unlicensed period, not just going forward, so it's worth confirming requirements in every city, county, and state where you operate.
Do I need business insurance before I hire employees?
Yes. General liability insurance is worth getting even before your first hire, since it covers claims from clients or the public regardless of employee count. Workers' compensation typically becomes mandatory once you have employees, and service-based businesses should also consider professional liability (errors and omissions) coverage against negligence claims.
Quick note: This is not to be taken as legal or HR advice. Since employment laws change over time and can vary by location and industry, consult a business law attorney or HR expert for specific guidance. Learn about Gusto's HR services
