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Legal Considerations

In any state or city there will be legal requirements and rules for starting and running a business. Some are important, others may be ignored. In some cases, cooperation with the government assures a smooth running business, while in others, it only assures continuing government interference.

Legal Status. There are three main forms of business organization in the United States: sole proprietorship, partnership and corporation. A corporation is a fictional legal person chartered by the state. Corporations are subject to income and other taxes. They then pay dividends to their stockholders who are taxed a second time on their profits. You’ll probably need a lawyer’s help to form a corporation. Unless you absolutely need to operate in the corporate form for tax or other legal reasons, it pays to save the expense of forming the corporation and put the money into the business instead.

A partnership consists of two or more people operating as one legal entity. While the partners are only taxed on their income once, they have to complete considerable tax paperwork. Often partners can have legal disputes or complicated family problems that affect the other partners.

With a sole proprietorship, you are the business. If you run the business under a name other than your own, such as “ABC Retail Store,” the state or local government will require you to file a “fictitious name certificate,” also called a D/B/A (“doing business as”) certificate. This is fairly simple. You won’t risk large penalties by not filing such a certificate, but most banks insist you show the certificate if you want to start a bank account in the business name.

Paperwork. Once you start hiring employees, unless you pay them “off the books,” the paperwork will increase markedly. You will be required to withhold tax, unemployment insurance and social security payments from your employees’ paychecks, file tax returns and pay that money over to the tax authorities. The Internal Revenue Service (IRS) will require you to obtain a federal taxpayer identification number for this purpose.

Many other laws and regulations will potentially apply to you, depending on what business you are in. Most states have sales taxes. If you have a retail business, you will be required to apply for a special sales tax number from the state, collect sales taxes from your customers then pay the money to the state. Health and safety regulations may also affect you. Restaurants and food stores in particular are highly regulated.

There is Always Opportunity. Despite all these laws, taxes, regulations and paperwork requirements, many businesspeople become quite prosperous, either by choosing to go into businesses that are not heavily regulated, by ignoring taxes and regulations or operating “off the books,” or by following all the rules without complaining and concentrating on success.

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