What This Guide Covers
Starting a small business means making a series of legal decisions before you ever open your doors: which entity type to register, what should be in your contracts, and which mistakes most often trip up new owners. This guide walks through all three in plain language, points you to official sources for details, and flags where you need a licensed attorney or accountant rather than a search engine.
This article provides general legal information only. It is not legal advice and does not create an attorney-client relationship. Business laws vary by state, county, and city, and they change over time.
Choosing a Business Structure
Your entity type affects your taxes, your personal liability, and how much paperwork you’ll file every year. According to the U.S. Small Business Administration, your business structure affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability. You’ll typically need to settle on a structure before you register with your state.
- Sole proprietorship: This is easy to form and gives you complete control of your business, and you’re automatically considered a sole proprietorship if you do business activities without registering as anything else. The tradeoff is that your business assets and liabilities are not separate from your personal assets and liabilities, so you can be held personally liable for business debts.
- Partnership: The simplest structure for two or more people to own a business together, commonly formed as a limited partnership (LP) or limited liability partnership (LLP). In an LP, only the general partner carries unlimited liability, while other partners have limited liability and typically less control. An LLP gives every owner limited liability and protects each partner from the actions of the others.
- Limited liability company (LLC): An LLC combines features of a corporation and a partnership, generally protecting your personal assets — like your vehicle, house, and savings — from business debts or lawsuits. Owners are considered self-employed and still owe self-employment tax on their share of profits.
- C corporation: A legal entity separate from its owners that offers the strongest personal liability protection but costs more to form and requires more recordkeeping. C corp profits can be taxed twice — once at the corporate level and again when dividends are distributed to shareholders.
- S corporation: A tax election, not a separate structure, designed to avoid the double taxation of a C corp by passing profits through to owners’ personal returns. S corps have strict IRS eligibility rules on ownership, generally capped at 100 eligible shareholders.
- Nonprofit corporation: Organized for charitable, educational, religious, literary, or scientific work, and eligible for tax-exempt status once approved by the IRS — a separate process from state registration.
No structure is universally “best.” The SBA advises striking the right balance between legal protections and benefits for your specific situation, and notes that converting to a different structure later can have tax consequences or even result in unintended dissolution, so it pays to get advice up front rather than switch later.
Entity Comparison Checklist
- Sole proprietorship: one owner, no state filing to form it, unlimited personal liability, income taxed on your personal return.
- Partnership (LP/LLP): two or more owners, liability depends on partner type, profits generally pass through to personal returns.
- LLC: one or more owners, owners generally shielded from personal liability, can be taxed as pass-through or as a corporation.
- C corp: one or more owners, strong liability protection, taxed at the corporate level (and again on dividends).
- S corp: up to 100 eligible shareholders, liability protection similar to a C corp, profits pass through to personal returns.
Ownership rules, liability protections, and tax treatment for each structure can vary by state, so confirm the current rules with your state’s business filing agency before you commit.
Contract Basics Every Small Business Should Know
A contract doesn’t need to be long to be enforceable, but it does need certain elements to hold up if a dispute arises. At a basic level, most legally binding contracts include:
- Offer and acceptance: one party proposes specific terms, and the other clearly agrees to them.
- Consideration: something of value exchanged by each side — money, goods, services, or a promise to act.
- Defined terms: who is bound, what each party must do, when, and for how much.
- Capacity and legality: both parties must be legally capable of entering into the agreement, and the purpose of the contract must be lawful.
- Signatures and dates: written contracts should be signed and dated by everyone bound by them.
Small businesses typically rely on a handful of recurring contract types: client or service agreements, independent contractor agreements, vendor and supplier contracts, nondisclosure agreements, and — for multi-owner LLCs — an operating agreement that spells out how the business is run and how disputes get resolved. Every contract you sign should be read in full before you sign it, not just skimmed for the price and the deadline.
Common Legal Mistakes Small Business Owners Make
- Mixing personal and business finances. Running everything through one bank account can undercut the liability protection an LLC or corporation is supposed to provide.
- Operating without a written agreement. Verbal understandings with partners, clients, or contractors are hard to enforce and easy to misremember.
- Missing state filing deadlines. Annual reports and franchise tax filings are time-sensitive; missing them can lead to administrative dissolution of your entity.
- Skipping a written operating or partnership agreement. Without one, the state’s default rules govern how the business is run and how it is split if a partner leaves.
- Assuming one state’s rules apply everywhere. If you operate or hire across state lines, you may owe separate registration, tax, or employment-law obligations in each state.
- Signing contracts drafted entirely by the other party. One-sided terms — unclear payment timing, vague scope, no exit clause — are easier to fix before signing than after.
Where the Evidence Is Limited
This guide summarizes general federal information and widely applicable contract concepts. It cannot tell you which entity type or contract terms are right for your specific business, your state’s exact filing requirements and fees, or how a court in your jurisdiction would interpret a particular clause. Rules on liability shields, self-employment tax, and default partnership terms vary by state and change over time, so treat anything here as a starting point, not a final answer.
Extra Caution: When to Involve a Licensed Attorney
- Before signing a contract with terms you don’t fully understand.
- Before bringing on a business partner or co-owner.
- If you’re combining structures — for example, an LLC electing S corp tax status.
- If you’ve received a legal notice, demand letter, or lawsuit.
- If you’re unsure whether a “too good to be true” business formation service is legitimate.
For free or low-cost legal help and self-help resources by state, LawHelp.org maintains a state-by-state directory of legal aid organizations.
How to Verify Current Rules in Your State
- Check your state’s Secretary of State or business filing agency website for current entity registration requirements and fees.
- Confirm your entity’s ongoing obligations, such as annual reports or franchise taxes, and note the exact deadlines.
- Review IRS.gov for current federal tax treatment of your entity type, including S corp eligibility rules.
- Before signing any contract, read every clause and ask what happens if either side can’t meet the terms.
- When in doubt, consult a licensed business attorney or accountant in your state rather than relying on general guides.
For more on navigating court procedures and government agency resources related to business filings, see our Court and Agency Resources section. For guidance on identifying fraudulent business-formation or “expedited filing” services, see our Legal Scam Awareness section.
Doing it yourself or getting help
You can handle many of these steps yourself, and some cost nothing. The IRS issues an employer identification number (EIN) for free, and the SBA says that if you run the business as yourself under your legal name, you won’t need to register anywhere. A licensed lawyer is worth the fee when a contract, a business partner, a trademark conflict or a legal notice is involved. Online services sit in between, so check who actually reviews your filing before you pay.
What the free government route covers
The IRS says its IRS EIN application page is free, and that you never have to pay a fee for an EIN. The IRS also warns you to beware of websites that charge for one. The online tool must be finished in one session and expires after 15 minutes of inactivity, so have your details ready. If you are creating a corporation or LLC, the IRS says to form the entity through your secretary of state before you apply.
For most small businesses, the SBA business registration guide says registering is as simple as registering your business name with state and local governments. It also warns that if you don’t register, you could miss out on personal liability protection, legal benefits and tax benefits. Requirements vary by business structure as well as by state, county, and municipality, so check with your local government offices.
FinCEN’s FinCEN beneficial ownership page says its August 11, 2026 final rule exempts U.S. companies from beneficial ownership (BOI) reporting. It also says there is no fee to file BOI directly with FinCEN, and that FinCEN does not send correspondence requesting payment.
Federal trademark fees are the same whether you file yourself or hire help. The USPTO trademark cost page lists these fees:
| Government step | Cost |
|---|---|
| EIN from the IRS | Free |
| Trademark application, base fee per class of goods or services | $350 |
| Trademark maintenance at 10 years, per class ($325 declaration of use plus $325 renewal) | $650 |
If cost is the concern, the USPTO lists free or reduced-fee options for trademarks. These include the Law School Clinic Certification Program, where law students practice intellectual property law before the USPTO under faculty supervision, the American Bar Association’s list of Pro Bono IPL Resources, and the INTA trademark pro bono clearinghouse pilot program.
What an online legal service adds
An online filing service can prepare and file paperwork for you, but it does not replace a law firm. The USPTO says trademark filing companies are not the same as law firms, and if you use one, you pay its separate service fees as well as the USPTO’s fees. The USPTO says some of these companies offer legitimate services and others do not. Its USPTO guidance on filing companies adds that such services may be legitimate when they are provided under the supervision of a licensed U.S. attorney, and that many companies are not affiliated with licensed attorneys.
Before you pay anyone, look for a qualified U.S.-licensed attorney on staff. Only an attorney who is an active member in good standing of the bar of a U.S. state or territory can represent you in a trademark matter before the USPTO. Never share your USPTO.gov password, and treat anyone who says they must file through your account as a likely scammer, according to the USPTO scam warnings.
If you are comparing formation and filing services, read our guide to compare online legal services first. Each service sells something different, so check what is included before you buy.
If you use a registered agent, Delaware publishes a Delaware registered agents list. Delaware says it makes no representations about the agents on the list, and that registered agents are not regulated by the State of Delaware.
Our LegalZoom review covers what that service costs and what to check before you buy. Our ZenBusiness review covers LLC pricing and whether the service is legitimate. Our Northwest Registered Agent review covers its price and privacy terms.
When a licensed lawyer is worth it
The USPTO says you are not required to hire a U.S.-licensed attorney for a trademark if you are domiciled in the United States. It also says it strongly encourages you to hire one who specializes in trademark law. You must have one if you are domiciled outside the United States. The USPTO attorney guidance lists what a lawyer can do for you:
- Run a trademark clearance search before you file, since a similar mark registered first could block yours.
- Prepare the application accurately and respond to USPTO correspondence.
- Enforce and maintain your trademark rights, and defend against challenges from others.
- Represent you at the Trademark Trial and Appeal Board, where proceedings have specific procedures and strict deadlines.
Your application fees stay the same with a lawyer, but your total cost is higher. The USPTO also says that in the long run, hiring an attorney may save you money.
A practical plan is to handle the do-it-yourself steps, such as the EIN and state registration. Then bring in a lawyer for the part with the most risk, like a trademark dispute or a contract you don’t fully understand. Ask any lawyer or filing service for a written fee quote before you hire.
Frequently Asked Questions
Do I need an LLC to start a small business?
No. Many people start as sole proprietors and form an LLC later as the business grows and personal liability becomes more of a concern. The right timing depends on your risk level and finances.
Is a verbal agreement a legal contract?
Verbal agreements can sometimes be enforceable, but they’re much harder to prove and enforce than a written, signed contract. Put important business terms in writing whenever possible.
Can I change my business structure later?
Yes, but conversions can face state-specific restrictions and may trigger tax consequences or unintended dissolution, so it’s worth getting professional advice before you convert.
Where can I find free legal help for my small business?
LawHelp.org maintains a directory of nonprofit legal aid organizations by state, and SBA.gov offers free business counseling through its local resource partners.
Educational Disclaimer
This article is provided for general educational purposes only and reflects publicly available information as of the publish date. It is not legal, tax, or financial advice, and reading it does not create an attorney-client relationship. Laws governing business entities and contracts vary by state and change over time. Consult a licensed attorney or accountant in your state before making decisions about your business structure or signing a contract. For more on how we research and verify our content, see our Consumer Legal Information section.