How to Start a Small Business: The Legal Steps

Starting a small business legally comes down to a sequence you can walk through one step at a time: pick a structure, register the name, get an EIN, open a business bank account, line up the licenses and tax registrations your city and state require, and put insurance (and payroll, if you're hiring) in place before you open your doors. None of it has to happen at once, and you don't need a lawyer on retainer to get the basics right — but a few of these steps have real deadlines and real personal-liability consequences if you skip them, so it helps to see the whole checklist before you start crossing things off.

If you're nervous about all of this: you can start small. A huge number of one-person businesses begin as a sole proprietorship with no formation paperwork at all — you're already "in business" the moment you start doing work for money. The tradeoff is personal liability, which is exactly why the rest of this guide exists.

Step 1: Pick a business structure

Your structure affects two different things — who can sue you personally, and how the IRS taxes the income — and those two things don't move together the way people assume.

• Sole proprietorship. The default if you do nothing. Simple, but you and the business are legally the same person: business debts and lawsuits can reach your personal assets, and if you have a business partner without a written agreement, you may have formed a general partnership by conduct — where each partner can be held liable for the other's business acts.
• LLC (limited liability company). A state-law entity that separates your personal assets from business debts and lawsuits, with important limits (more below). Here's the part people get wrong: an LLC has no tax classification of its own. A single-member LLC is taxed as a sole proprietorship (Schedule C) by default; a multi-member LLC is taxed as a partnership by default. Either one can elect to be taxed as an S-corp or C-corp instead. Forming an LLC changes your liability exposure — it does not automatically change how you're taxed.
• Corporation (C-corp or S-corp). "S-corp" and "C-corp" are federal tax elections, not something you form directly — you form a corporation under state law, then choose (or don't choose) an S-election with the IRS. This structure can make sense once you're paying yourself a salary and taking distributions, but it comes with more paperwork and formalities than an LLC.
• Partnership. If two or more owners are running the business together without an LLC or corporation, you likely have a general partnership by default, and general partners have unlimited personal liability — including for the acts of their co-partners. If you're going into business with someone else, this is the single best reason to talk to a small-business attorney before you open, even briefly.

A word of caution on liability: forming an LLC or corporation is not a force field. It generally won't protect you from a personal guarantee you signed (common on small-business loans and commercial leases), your own negligence or fraud, unpaid payroll trust-fund taxes, or a court "piercing the corporate veil" because you commingled business and personal money or ignored basic formalities like separate bank accounts and records. Keeping the business's money and paperwork genuinely separate from your own is what makes the liability shield real.

Step 2: Choose and register your business name

You'll typically deal with two separate name questions:

• Your legal/formation name — filed with your state when you form an LLC or corporation (or, for a sole proprietor operating under a name other than your own legal name, a "doing business as" / fictitious-name / assumed-name filing, usually with the state or county).
• Trademark protection — if you want to stop others from using a confusingly similar name or logo for similar goods or services, that's a separate, optional step through the U.S. Patent and Trademark Office (USPTO), the federal agency that handles trademarks nationwide.

Name registration requirements, forms, and any associated fees vary by state and sometimes by county or city — check with your state's Secretary of State office (or equivalent business-filing agency) before you assume a name is available or a filing is required.

Step 3: Register the business with your state

If you're forming an LLC or corporation, you file formation documents (often called Articles of Organization or Articles of Incorporation) with your state's Secretary of State or equivalent agency. This is where the "it varies by state" warning matters most: formation fees, ongoing annual-report or franchise-tax obligations, registered-agent requirements, and filing deadlines are all set by the state you form in, and they differ from state to state and change over time. Don't rely on a number you saw somewhere else — go to your Secretary of State's website for the current fee and any annual filing deadline, and calendar it, since missing an annual report can lead to your entity being administratively dissolved.

Sole proprietors: you generally don't file formation paperwork with the state at all (aside from a possible DBA filing), which is part of why this structure is the easiest way to start small.

Step 4: Get an EIN

An Employer Identification Number (EIN) is a federal tax ID from the IRS — free to obtain directly at irs.gov, with no third-party service needed. You'll need one if you hire employees, form a corporation or multi-member LLC, or want to open a business bank account (most banks require one even for single-member LLCs and many sole proprietorships). A sole proprietor with no employees can sometimes use a Social Security number instead, but a separate EIN is worth getting anyway — it keeps your SSN off business paperwork.

Step 5: Open a business bank account

Do this even if you're a sole proprietor with no legal requirement to. Mixing personal and business funds is one of the fastest ways to lose an LLC's liability protection (a court can treat commingled accounts as evidence you and the business were never really separate), and it makes bookkeeping and tax time dramatically harder either way.

Step 6: Handle licenses, permits, and tax registrations

This is the step with the most local variation, and it's where people most often get tripped up because there's no single list — requirements stack from multiple levels of government at once:

• State and local business licenses — general licenses to operate, which vary by state, county, and city.
• Professional or occupational licenses — for regulated fields (contractors, cosmetologists, healthcare, food service, and many others), issued by state licensing boards, with requirements that differ significantly by state and profession.
• Zoning and local permits — especially relevant for a physical location or even a home-based business; check with your city or county.
• Sales-tax registration — if you sell taxable goods or services, most states require you to register with the state tax agency and collect sales tax, and if you sell online across state lines, you may trigger registration duties in other states too, depending on their economic-nexus rules. A handful of states have no general sales tax at all. This is genuinely state-specific — register with your state's department of revenue or taxation and confirm what's taxable before you make your first sale.

Bottom line for this whole step: there is no national licensing checklist. Start with your Secretary of State's business portal and your city or county clerk's office — many states now offer a combined "new business" checklist online — and don't assume a rule from a friend's state or business applies to yours.

Step 7: Line up insurance

General liability insurance is the common baseline for covering claims that you damaged property or hurt someone in the course of business. Depending on what you do, you may also want professional liability (errors & omissions) coverage, commercial property or auto coverage, or cyber coverage. If you have employees, workers' compensation insurance is typically mandatory once you hire — coverage rules and any owner exemptions vary by state, so check with your state's workers' comp agency.

Step 8: If you're hiring, get payroll and worker classification right

Two things trip up new employers more than anything else:

• Employee vs. independent contractor is a legal test, not a choice. You can't decide someone is a "1099 contractor" just by calling them one or having them sign an agreement. The IRS looks at behavioral and financial control (the common-law control test), the Department of Labor applies an economic-reality test under federal wage law, and many states apply an even stricter "ABC test." Misclassifying an employee as a contractor can trigger back taxes, unpaid overtime, and penalties — and the standard for who counts is set by the actual working relationship, not the paperwork. Because the federal wage-law test has been revised more than once in recent years, confirm the current standard at dol.gov before you rely on how it worked in a prior year.
• Form I-9 and payroll tax withholding. Every new employee must complete Form I-9 to verify identity and work authorization, within the window set by federal rule — confirm the current I-9 deadline and any E-Verify obligation in your state at uscis.gov, since a handful of states require E-Verify for some or all employers. Once you withhold payroll taxes from an employee's paycheck, that money is legally "trust fund" money that belongs to the government, not to you — even behind an LLC or corporation, the responsible owner can be held personally liable (the Trust Fund Recovery Penalty) for failing to remit it.

Several core federal employment protections only apply once you cross a certain employee count: Title VII (workplace discrimination based on race, sex, religion, and other protected traits) and the Americans with Disabilities Act generally apply at 15 or more employees, the Age Discrimination in Employment Act at 20 or more, and the Family and Medical Leave Act at 50 or more employees within a 75-mile radius. Many states layer on their own anti-discrimination and leave laws with lower thresholds, so check your state labor agency too. For the deeper mechanics of hiring, firing, wages, and workplace duties, that's covered in detail elsewhere on this site — this guide is about the formation and registration steps to get there.

Understand your own tax picture

If you're self-employed — as a sole proprietor, a partner, or an LLC member taxed as either — nobody withholds tax from your income the way an employer would from a paycheck. You generally owe self-employment tax, currently 15.3% (12.4% for Social Security, up to an annually adjusted wage base, plus 2.9% for Medicare), on top of ordinary income tax, and you typically need to pay estimated taxes on a quarterly schedule rather than in one lump sum in April. Exact quarterly due dates and any state-level estimated-tax rules can vary, so confirm the current schedule at irs.gov and with your state tax agency.

Many self-employed people and small pass-through business owners can also deduct up to 20% of their qualified business income under the federal Qualified Business Income deduction — the details of who qualifies and how the deduction phases out for certain income levels and service businesses are worth reviewing with a CPA, since they've changed with recent tax legislation.

Figures that change every year — the Social Security wage base, standard mileage rate, equipment expensing limits, the standard deduction, and the dollar threshold for issuing a 1099-NEC to a contractor — are not listed here with specific numbers on purpose, because they're indexed annually and a number frozen on this page would go stale. Confirm the current-year figures directly at irs.gov before you rely on them.

What to do: the sequence at a glance

1. Decide sole proprietorship, LLC, partnership, or corporation — talk to an attorney if you have a co-owner or meaningful liability exposure.
2. Choose a name; file a DBA if needed; consider a trademark search/filing with the USPTO if the brand matters to you.
3. File formation documents with your state (skip this if staying a sole proprietor).
4. Get a free EIN at irs.gov.
5. Open a dedicated business bank account.
6. Check state and local licensing, zoning, and sales-tax registration requirements.
7. Get liability insurance appropriate to your work; add workers' comp before you hire.
8. If hiring, set up payroll, complete I-9s correctly, and get worker classification right from day one.
9. Talk to a CPA about your quarterly estimated taxes and recordkeeping before your first tax deadline arrives.

If money gets tight later, business debt and owner liability for it — including what happens to a personal guarantee — is its own topic; if it comes to considering bankruptcy for the business, that's covered separately on this site rather than here.

Free, official help exists at every step: the U.S. Small Business Administration (sba.gov) and its network of free Small Business Development Centers and SCORE mentors can walk through your specific plan at no cost, and your state's Secretary of State and tax agency websites are the authoritative source for anything that varies by state.

Frequently asked questions

Do I need an LLC to freelance or run a small side business?

No. You can operate as a sole proprietor with no formation filing at all. The tradeoff is that your personal assets aren't legally separated from business debts and claims, so many freelancers form an LLC once the work involves real liability risk (client contracts, physical products, employees) or once they want the separation for their own peace of mind.

Does forming an LLC mean I pay less in taxes?

Not by itself. An LLC has no default tax classification of its own — a single-member LLC is taxed like a sole proprietorship and a multi-member LLC like a partnership, unless you file an election to be taxed as an S-corp or C-corp. Any tax benefit comes from that separate election and your specific numbers, not from the LLC filing itself. Talk to a CPA before assuming which setup saves you money.

How do I know if I need a business license?

There's no single national answer — it depends on your city, county, state, and industry. Start with your state's Secretary of State business portal and your city or county clerk's office, and check your state's licensing board if you work in a regulated profession.

Can I just pay a worker as a 1099 contractor to keep things simple?

Only if the working relationship actually meets the legal test for a contractor — it's based on how much control you exercise over the work, not on what you call the arrangement or what a contract says. Misclassifying an employee as a contractor to avoid payroll taxes can lead to back taxes, penalties, and wage claims later.

What's the very first thing I should do?

Decide your structure and, if you're forming an LLC or corporation, check your state's Secretary of State website for the current filing process and fee. If you're starting solo and small, you may already be a legal sole proprietor — the next real step is often just opening a separate business bank account and confirming what licenses your city, county, and state require for what you do.

This article provides general business and legal information, not legal, tax, or financial advice, and does not create an attorney-client or accountant-client relationship. For guidance on your specific situation, consult a licensed attorney or CPA in your state.