Starting a business can be incredibly rewarding…or incredibly risky if you set it up incorrectly.

Most new entrepreneurs are so eager to get going that they overlook the legal foundation. 

They skip steps, trust generic templates online, or worse—do everything in their personal name. 

That can lead to lawsuits, exorbitant tax bills, and business failure before they even gain momentum.

If you’re starting a business or launching any kind of venture, here are three legal steps you must follow to protect your assets, reduce taxes, and build something that lasts.

Prefer to watch? Check out the full video here: 3 Steps to Legally Start Your Business

What Is the First Step to Legally Starting a Small Business?

Step 1: Never do business in your own name—form an entity.

This is the single biggest mistake new entrepreneurs make.

Too many people operate as sole proprietorships—either in their own name or under a DBA (doing business as). While this may seem simple and fast, it’s one of the most dangerous ways to run a business.

Real-world example: A plumber operating under a DBA without proper liability protection had a job go wrong—water damage caused $1.5 million in destruction. Insurance wasn’t enough. The lawsuit targeted him directly, stripped him of everything, and forced him to make repayments for years.

Asset Protection for Small Business Owners: Why the Right Entity Matters

Asset protection for small business owners starts with one crucial step: forming a legal business entity. Whether you choose a Limited Liability Company (LLC), S-Corporation, or C-Corporation, these structures create a separate legal entity that shields your personal assets from business-related risks.

Without this separation, a lawsuit or unpaid business debt could expose your home, savings, and personal finances—a risk most entrepreneurs can’t afford to take.

The right business structure offers:

• Legal separation between personal and business assets
  
• Protection from lawsuits, collections, and liabilities
  
• Fewer personal guarantees on contracts and leases
  
• A strong foundation for business operations and tax planning
  

Think of it like a protective box—it contains your business’s risks while keeping your personal finances safe on the outside.

For many small business owners, an LLC taxed as an S-Corp offers the best mix of asset protection and tax advantages. If you’re planning to scale or bring on investors, a C-Corp may offer better long-term benefits.

Bottom line: Establishing the right legal entity is one of the smartest asset protection strategies you can implement from day one.

How Do You Pick the Right Business Structure and Tax Treatment?

Step 2: Choose your tax classification strategically.

Choosing the wrong tax treatment can cost you thousands of dollars—every single year.

Let’s break this down with an example:

Let’s say your business earns $100,000 in profit.

Entity Type	Estimated Taxes Owed
Sole Proprietorship	$15,300+ in self-employment taxes alone
S-Corporation	Could save $8,000–$9,000 in taxes

Why the difference?

• Sole proprietors pay 15.3% self-employment tax on all net profit
  
• S-Corp owners can split income into salary + distributions, paying employment tax only on the salary portion

What Are the Tax Benefits of Different Entity Types?

Each entity type has its own tax perks:

Entity Type	Common Uses	Key Tax Benefit
LLC	Freelancers, service businesses, partnerships	Flexible taxation; profits pass through to owners
S-Corp	Consultants, agencies, small active businesses	Lowers self-employment taxes on business income
C-Corp	Startups, tech companies, growth-focused businesses	Access to more deductions (e.g., healthcare) and lower corporate tax rates
501(c)(3)	Charities, nonprofit organizations	Exempt from federal income tax

Your tax classification affects:

• Your tax bracket
  
• Employment taxes
  
• Fringe benefits
  
• Loss deductions
  
• Audit risk
  

Bottom line: Always talk to a tax expert about the right combination of legal entity and tax treatment based on your income, losses, investors, and exit plans.

How Do I Keep My Business Legally Compliant?

Step 3: Stay compliant and keep your books clean.

Setting up an entity is only the beginning. If you don’t follow corporate formalities, courts can “pierce the veil”—treating your entity as if it doesn’t exist.

That’s bad news. It means:

• You can still be sued personally
  
• You lose the asset protection you thought you had

What Does Business Compliance Actually Involve?

You must:

• Keep bank accounts and assets separate
  
• Track business income and expenses separately
  
• Maintain proper books and records (P&L, balance sheet, receipts)
  
• File annual reports and pay state fees
  
• Hold required annual meetings (if structured as a corporation)
  
• Have operating agreements, bylaws, or partnership agreements in place
  

Failing to do this can result in personal responsibility for business debts—even if you’ve formed an entity. Courts call this “piercing the corporate veil,” and it can be financially devastating.

What to remember: If you don’t respect your business, the IRS and courts won’t either.

Also, don’t rely solely on your accountant. Many suggest sole proprietorships just to “keep it simple.” But simple doesn’t mean safe—and it doesn’t mean strategic.

What If I’m Confused About Where to Start?

You’re not alone. Whether starting your first business, launching a side hustle, or turning a passion into profit, the wrong first steps can lead to serious legal and tax problems down the road.

Instead of guessing, get guidance from strategists who have been setting up successful businesses for more than 25 years.

Click here to schedule a free 45-minute Strategy Session with a Senior Advisor at Anderson Advisors. We’ll help you:

• Choose the right entity and tax setup for your business
  
• Protect your personal assets from business risks
  
• Understand where and how to register your business
  
• Stay compliant, organized, and ready for growth

Frequently Asked Questions (FAQ)

Do I need a business license or permits to start a small business?

Yes. Most cities and counties require a business license to operate legally, even for home-based businesses, online sellers, or consultants. Check with your local government to verify zoning laws, registration requirements, and permit obligations.

What’s the best legal structure for a new small business?

For most entrepreneurs, an LLC is the best starting point. It offers liability protection, flexibility, and simple tax options. If you’re launching a scalable or investor-backed business, a C-Corporation may be a better fit. If you’re a solo operator, an LLC taxed as an S-Corp may reduce self-employment taxes.

Should I register my business in my home state or somewhere else?

Most small businesses should register in the state where they operate. A holding LLC can be used for further asset protection and can be useful for specific needs like anonymity, multiple investors, or national reach.

What taxes do small business owners need to pay?

It depends on your entity type, but most small businesses must pay:

• Federal and state income taxes
  
• Self-employment taxes (if operating as a sole prop or partnership)
  
• Payroll taxes (if you hire employees)
  
• Sales tax (if you sell taxable goods or services)

Working with a tax professional can help you minimize liability and plan ahead.

When should I create an LLC—before or after launching?

Always form your LLC before you start operations. Running your business before forming an entity exposes you to personal liability and can complicate taxes. If you’re already operating, form your entity as soon as possible to protect yourself moving forward.

Do I need a separate bank account for my business?

Yes. To stay compliant with IRS rules and maintain liability protection, you must keep your business and personal finances separate. Open a dedicated business bank account and credit card before making or receiving payments.

Can I run multiple businesses under one LLC?

You can, but it’s not always recommended. A lawsuit against one business can put all assets under the same LLC at risk. A safer strategy is to create separate LLCs or use a holding company structure, especially if the businesses are unrelated.

What is the difference between an LLC and an S-Corp?

An LLC is a legal structure, while an S-Corporation is a tax election. You form an LLC and elect S-Corp taxation to reduce self-employment taxes. This setup works well for service providers, freelancers, and consultants making at least $50,000/year.

Should I do market research before starting?

Absolutely. Whether you’re launching a product or service, market research helps you understand demand, pricing, competitors, and customer needs. It’s a key part of building a business that lasts.

Do I need a business plan to start a small business?

Yes, creating a business plan is one of the smartest things you can do before launching your business.

A business plan helps you:

• Clarify your goals and vision
  
• Understand your target market and competition
  
• Plan your pricing, marketing, and operations
  
• Forecast startup costs, revenue, and profitability
  
• Attract investors, lenders, or business partners
  

You don’t need a 50-page document—a simple one-page plan that outlines your business model, funding needs, and growth strategy can help you stay focused and make better decisions from day one.

Whether you’re starting a service business, e-commerce store, or rental property operation, a business plan is your blueprint for success.

Final Thoughts: Start Smart, Start Legal

Launching a small business is exciting—but skipping the legal setup can cost you in the long run.

Here’s your checklist to legally start your business:

1. Form an entity. LLC, S-Corp, C-Corp—never operate in your own name.
   
2. Pick the right tax status. Save thousands with smart classification.
   
3. Stay compliant. Maintain books, file reports, and separate finances.
   

“You won’t know when you’ll step on a landmine—but if you set it up correctly from day one, you’ll never have to worry.”