When you own a business, you want to focus as much of your time and attention as possible on leading your team, establishing your brand, and serving your customers. Any type of legal friction can disrupt that, and potentially leave your business in a state of paralysis. Naturally, then, it’s prudent for any business owner to be aware of the broader regulatory environment.

In some ways, this is easier said than done: There are a number of legal and financial regulations to be mindful of, and they can vary both by state and by industry. What follows are some big-picture points about the regulatory environment for small business owners.

Legal Requirements According to Business Structures

One of the most important decisions you’ll ever make about the life of your business is the type of legal structure you’ll choose. Your legal structure not only affects things like taxation and payroll administration, but it can also have a direct impact on the kinds of compliance expected of you.

Compliance for Sole Proprietorships and Partnerships

When you start generating income based on self-employed activity, the government automatically classifies you as a Sole Proprietor. In a Sole Proprietorship, there’s just one person (the business owner) who makes all the decisions, claims all business revenues, and is on the hook for any business liabilities.

The Sole Proprietorship model has some significant downsides, including the complete lack of legal liability protections. However, one upside is that there’s virtually nothing in terms of legal or financial regulation. It’s still wise for Sole Proprietors to keep careful documentation of business transactions and financial histories, but overall, this structure is known for being the least onerous.

A Partnership works in much the same way, only it allows the business owner to share duties, profits, and liabilities with one or more business partners. Here again, there are few, if any, regulatory requirements to worry about.

Limited Liability Companies 

Registering an LLC establishes your business as its own distinct legal entity. This provides business owners with some important safeguards, but needless to say, creating a whole new entity also comes with an increase in regulatory compliance.

One of the main responsibilities for keeping your LLC compliant is maintaining an up-to-date operating agreement, which formalizes the relationship between you and your business partners. It’s also wise to maintain records of any ownership sales or transfers between different LLC partners.

In some states, an LLC may be required to provide some basic financial disclosures each year, though reporting requirements are usually very minimal.

Also note that every LLC is required to have a Registered Agent, which can be either an individual or an organization based in the same state. For example, when starting an LLC in Texas, it’s mandatory to have a Registered Agent with a Texas mailing address. The job of the Registered Agent is to receive and organize any legal or tax documents that your LLC receives.

Corporations

If you ever wish to go public with your company, or to sell ownership shares as a way of bringing on investors, you’ll likely want to establish your business as a Corporation. 

Corporations are governed by a Board of Directors, and they determine ownership in the company through the sale of shares. Corporations also have the strictest regulatory requirements by far. For example:

  • Corporations are required to hold initial and annual shareholder meetings.
  • Corporations must record meeting minutes and draft binding bylaws.
  • Corporations must document all stock transfers.
  • Corporations are also expected to provide annual financial disclosures to the public.

State Filing Requirements: General Guidelines

Annual filing requirements are based on the state you’re in as well as your business structure, which means there can be some variation. With that said, general filing requirements include:

  • Most states desire either an annual report or biennial statement, usually based on the anniversary date of your business formation.
  • Filing your statement will usually require you to pay a filing fee, as well. Depending on the state, this may be anywhere from $20 to $300.
  • Some states charge franchise taxes for any franchise-based businesses that operate within their borders.
  • California is the lone state to levy a special tax against LLCs.

What About Federal Filing Requirements?

For most businesses, federal filing requirements are quite minimal. With that said, there are a few federal filing expectations for businesses to be aware of.

  • Needless to say, federal taxes are a thing. Note that Sole Proprietorships, Partnerships, and LLCs all pay on a pass-through basis. This means the business owners/partners declare their share of the profits on their personal tax return. There is no need to file a separate return for the business itself.
  • Companies with 50 or more employees must demonstrate proof to the federal government that they provide their employees with health coverage, under the terms of the Affordable Care Act.
  • In select industries, there may be federal permits or licenses that must be kept up to date.

Finally, note that there are many business activities that are regulated, but do not require any filings. For example, businesses are subject to federal compliance with their advertising and marketing endeavors; their use of consumer data; workplace poster laws; and the Americans with Disabilities Act, or ADA. With questions about any of these specifics, it’s worth chatting with a business attorney who is based in your state and who knows your industry well.

Keep Up to Date with the Regulatory Environment

The regulatory landscape is ever changing, and it’s important to stay abreast of any changing expectations within your state or specific to your business structure. Maintaining regulatory compliance is one of the most important things a business can do to avoid friction and disruption.