On top of their numerous day-to-day responsibilities, business owners must consistently make sure to remain in compliance with federal, state and local regulations. These legal requirements affect all businesses and can easily become one of the most stressful aspects of entrepreneurship. But you cannot open or continue running your business without fulfilling the necessary regulations, which include the tax code, licenses and permits, employment laws, and many more.
Some businesses have to follow a myriad of regulations, while others only have a few to worry about. Members of both groups unknowingly fall out of compliance all the time, largely because it’s up to you to find out which regulations apply to your industry. You just have to know where to look and what kind of regulations to look for when consulting government resources. Many entrepreneurs don’t bother thinking about their business model or general strategy until they’ve sorted out all regulatory requirements.
This process becomes infinitely easier, however, when you go through the major types of regulations one by one. Even if multiple categories impact your business, you’ll probably have to devote significant time to two or three at most. It might help to think of fulfilling regulations as the first true test of your patience as an entrepreneur. In this guide, we’ll explain the basic regulations, the kind of businesses they affect, and which resources to consult for more information.
11 Major Government Regulations on Small Businesses
Government regulations for businesses fall into eleven categories, all of which deserve the same degree of attention. When it comes to any legal matters, it’s always best to take the “better safe than sorry” approach. Your business lawyer will ultimately tell you which specific regulations to follow and why you must follow them. But it’s less confusing to complete the required tasks when you know this information as well.
1. Tax code
This regulation gets the number one spot because it will almost certainly require the most work on your part. You might as well get it out of the way before looking at any other regulations.
Once you register your company in the United States, you assume responsibility for paying federal taxes. Most states also require state taxes. Failing to pay federal or state taxes (or pay them on time) can result in severe penalties, fines, and even jail time.
Your accountant will explain which business taxes you have to pay and when to pay them. Answering both questions will allow you to structure your business to account for upcoming tax payments. Any experienced business owner will agree that no matter how much you owe, knowing that amount ahead of time greatly lessens the blow to your bank account.
The types of taxes you owe depends on various factors, most notably your business entity (sole proprietorship, limited liability company, corporation, etc.). But regardless of your entity, industry, size and location, all business owners should understand the following general terms:
All businesses must pay tax on their income. All 50 states charge federal income tax, with 43 charging an additional state income tax. Most businesses either pay taxes as they receive income throughout the year, make estimated quarterly payments (more on that soon) or make one, gigantic payment during tax season. Either way, you have to file an annual income tax return. Owners of sole proprietorships, general partnerships, LLCs, and S-corporations only have to pay taxes on their personal income from their businesses. After determining their annual income, they can simply look at their individual tax rate and pay what they owe.
Making estimated income tax payments throughout the year prevents you from having to continuously pay income taxes as you earn revenue. Owners of sole proprietorships, general partnerships and S-corps must make estimated payments if they expect to owe at least $1,000 come tax season. Corporation (C-corp) shareholders must make estimated payments if they expect to earn more than $500 in personal income.
Most companies with employees must pay employment taxes, a.k.a. payroll taxes. This consists of federal and state income tax withholding, social security taxes, Medicare taxes, state and local payroll taxes, and federal and state unemployment taxes. Some of these taxes are deducted from employee paychecks while others are paid directly by the employer. Check the IRS page on Employment Taxes for Small Businesses for more information.
Excise taxes are only paid by businesses that purchase specific goods like cigarettes, liquor or gasoline. The tax is included in the price of the item, but the business must set aside income to pay excise tax and send it to the IRS. Excise taxes must also be paid by businesses that use certain types of equipment or perform certain types of services. You can find more information on the IRS guide on Excise Taxes.
Unless your business only sells to customers or has business partners in Alaska, Delaware, Montana, New Hampshire or Oregon, you must collect and pay sales taxes as well.
This one deserves its own section, so we’ll get to that later on.
2. Employment and labor laws
Federal and state labor laws apply to most businesses that employ traditional workers or independent contractors. To understand which federal employment laws apply to your business, new business owners should consult the Department of Labor’s FirstStep Employment Law Advisor. This will also show you everything you need in terms of record keeping, reporting, on-site posters and more.
The most common labor laws include:
Wages and hours
The standards for wages and overtime pay are governed by the Fair Labor Standards Act (FLSA). In addition to minimum wage, this requires businesses to pay employees one-and-one-half-times their usual wage rate for overtime work.
Workplace safety and health
Under the Occupational Safety and Health Administration Act ( OSH Act), businesses must provide workplaces that are “free from recognized, serious hazards.” Periodic inspections and investigations ensure that all registered workplaces are not violating this act.
Most businesses with at least 15 employees must comply with the regulations enforced by the Equal Employment Opportunity Commission (EEOC). According to the EEOC, businesses cannot discriminate based on gender, race, religion, age, and disability when making hiring decisions.
Non-US citizen workers
Anyone who has applied for a job knows that all businesses must verify that their employees are legally permitted to work in the US.
Employee benefit security
Businesses that provide pension or welfare benefit plans may have to comply with several fiduciary, disclosure and reporting requirements. You can determine if these regulations apply to your business by researching the Employee Retirement Income Security Act.
Businesses with union employees may have to file certain reports and take special care of the way they treat union members. You can find more information on the Office of Labor Management Standards’ website.
Family and medical leave
According to the Family and Medical Leave Act (FMLA), businesses with at least 50 employees must provide 12 weeks of unpaid leave following the birth or adoption of a child as well as the serious illness of an employee’s spouse, child, or parent.
Businesses with at least 50 employees are legally required to provide health insurance.
In some states, certain types of businesses must place visible notices within the workplace, like health warnings or reminders for employees to wash their hands. To determine which posters you need and print free copies, visit the elaws Poster Advisor.
3. Antitrust laws
Antitrust laws prevent businesses from conspiring with competitors or partners/vendors. Issues addressed by these laws include:
- Conspiring to fix market prices: Teaming up with competitors to control market prices for the rest of the industry.
- Price discrimination: Receiving prices from buyers that are lower than what other companies get.
- Conspiring to boycott: Speaking with other businesses about potentially boycotting a competitor or vendor.
- Conspiring to allocate markets or customers: Making agreements with competitors about dividing up customers, territories or markets.
- Monopolization: Creating a monopoly by acquiring competitors, excluding competitors from the market, or taking complete control of market prices.
Advertising laws prevent businesses from creating ads with fallacious, deceptive or malicious content. The way you present your products also cannot mislead customers. For example, labeling laws require businesses to list all ingredients within their products, and only allow certain products to be advertised as “organic” or “all-natural.”
If a competitor believes your content has violated advertising laws, they can sue you. For this reason, you may consider purchasing general liability insurance to protect against claims of libel and slander.
Ads featuring customer testimonials have their own rules, too. The customer must make clear that he or she is being paid to promote your business, even if that means simply adding #ad to a social media post.
5. Email marketing
The rise of email marketing led to the creation of the CAN-SPAM Act, which prevents businesses from using deceptive or untruthful headlines/subject lines. The act also requires businesses to clearly indicate that the message is indeed an advertisement and show their name and address in the message. Your messages must additionally show the recipient how to opt out of the emails, and if the customer chooses to opt out, you must honor their request.
Violating email marketing regulations can result in steep fines. So, before starting your business’s email marketing campaign, make sure the messages fulfill the aforementioned requirements.
6. Environmental regulations
If you want to rightfully claim that you sell “all-natural,” “organic,” or “environmentally-friendly” products, you should probably familiarize yourself with the EPA’s environmental protection laws. Such products could include cleaning solutions, food, or cosmetics.
A look at the EPA Small Business Gateway will reveal dozens of federal regulations that could very well apply to your small business. You may also, however, need to contact your state government to see about their regulations for different industries.
Job applications, health insurance forms, and other employee documents typically ask for sensitive information, like your social security number or bank account number. Federal privacy laws exist to keep this information secure.
According to these regulations, businesses cannot share this information without your consent and employees can sue their employers for violating this rule. But while employees do have certain rights to their privacy, employers also have certain rights to monitor their employees’ progress. It’s your job to understand the limits of your rights to monitor employees and inform your employees about how you intend to monitor operations in general.
8. Licensing and permits
Federal business licenses only apply to federally regulated industries, like agriculture, alcohol, radio and television, etc. Unless you work in one of these industries, your required licenses and permits will depend on your city and state.
First, you have your local business operating license, which allows you to legally operate in your city’s limits. If your business is open to the general public, you’ll need a fire department permit. Businesses that directly impact the customer’s health, like restaurants or fitness centers, must also obtain health licenses and permits and undergo the required inspection.
Professions that require occupational licenses in most states include:
- Real estate brokers
- Private security guards
- Private investigators
Home-based businesses need licenses and permits as well. This includes some of the same documentation required by traditional businesses, such as the local business operating business. If your home-based business revolves around consulting or freelance work, the only other permit you might need is a home occupation permit. This denotes that your business will not bring excessive traffic, noise, or environmental hazards to your neighborhood.
Businesses that are discovered to be operating without the required licenses or permits could face steep fines or even be stripped of their operating licenses.
9. Business insurance
Most states require all businesses with employees to purchase workers compensation insurance and unemployment insurance. Workers comp covers medical expenses for employees who suffer work-related injuries, which can include back pain from sitting at a desk for years on end. Unemployment insurance goes towards the benefits received by employees who lose their jobs for reasons unrelated to personal performance.
Some states require disability insurance as well.
Your other insurance needs will depend on your industry and location. For example, most construction and landscaping companies have general liability insurance due to the high risk of on-site injury. Commercial property insurance protects your business’s inventory, equipment, and physical property from loss or damage following incidents like theft, fires, or vandalism.
Anyone who provides professional services or advice (doctors, lawyers, accountants, etc.) should purchase professional liability insurance, a.k.a. malpractice insurance. This covers financial losses due to your business’s negligence or malpractice.
You might also have to purchase certain types of insurance in order to access business loans backed by the Small Business Administration. To decide which insurance plans make the most sense for you, talk to your competitors and your business lawyer.
10. Reporting pay data
Businesses with more than 100 employees must report how much they pay each employee, and include each employee’s race, position, and gender in the report. This information gets reported to the Equal Opportunity Commission each year.
Reporting pay data proves that your business does not pay employees differently based on their race or gender. Federal nondiscrimination laws prohibit businesses from paying significantly different salaries to two different types of people (i.e. a man and a woman) with the same exact
position and responsibilities. You must submit this report, a.k.a. the EEO-1 form, by the end of May.
11. Sales tax
Step one for collecting sales tax is determining whether or not your products or services are taxable in your home state. Items that are often exempt from sales taxes include prescription drugs, raw materials and groceries.
Then, you must collect sales tax in any state that is categorized as a tax “nexus” for your business. This term refers to states that are connected to your business due to the location of your physical property, your products, and your customers. Are your products shipped from another state? Do you have customers in other states? If you have an Ecommerce business, you might have to collect a different sales tax rate for each customer in a different state.
After establishing your nexus states, you must register for sales tax permits in those states by visiting the website for their department of revenue. As if this wasn’t already complicated enough, you also have to figure out if your nexus states are “origin-based” or “destination-based.”
If you sell to someone in a destination-based state, the tax rate is determined by the location of the customer. With origin-based sales taxes, the tax rate is determined by the location of the seller.
As you can see, sales taxes can get pretty complicated for multiple types of businesses. Thus, it’s crucial to make sure you collect, report, and pay sales tax correctly. Millions of small businesses run into sales tax issues every year, especially new entrepreneurs. You can avoid becoming part of this statistic by enlisting the help of a SALT (sales and local tax) professional, since your accountant can probably offer basic knowledge of sales taxes at best.
Government Regulations: Staying Up To Date
It’s easy to see why so many US-based business owners believe that government regulations make their jobs unnecessarily difficult. Still, it’s your responsibility to stay up to date with small business regulations, which can change at any time. This could include changes in tax rates, health insurance laws, or industry-specific regulations. In the marketing industry, for example, the rules for advertising content and the use of certain marketing tools are constantly changing to keep up with new technological developments. Sellers of cigarettes and alcohol must frequently adapt to new regulations as well due to increasing concerns for health.
Thankfully, you can essentially outsource the task of staying on top of government regulations to your business lawyer. You won’t have to worry about unknowingly breaking the law as long as you’re receiving guidance from someone you can trust. For this reason, you could even say that the main point of knowing all these regulations is simply determining if you can handle them on your own. It might be in your best interest to speak to your competitors about this decision. If they don’t need outside help complying with regulations, you probably don’t need it, either.