Small Business Requirements, Employee Rights, Tax & Insurance – By State

More and more people have started their own businesses in the United States over the past decade, thanks to the high rating of 91.6 (out of 100) by the World Bank for ease of starting a business.

In this article, we will outline the main requirements for establishing and operating a small business and the necessary processes for guaranteeing employee rights, conforming to tax laws, and insuring against risks.

There are many differences between the States, and the following table will guide you in locating the relevant information for where you are located.

What are the most active small business categories?

In the year ending March 2020, there was a small net increase in the total number of businesses in the U.S. – one million new business establishments opened and 993,809 closed. In terms of the total number of new businesses, small businesses (under 500 employees) accounted for 91% of the openings and 93% of closures. The number of employees actually fell by 100,000 over this period.

According to the US Small Business Administration, the total number of small businesses in the country, segregated by the number of employees, breaks down to the following picture, based on the type of activity:

It is most interesting to note that businesses with a single employee by far outnumber all the other categories other than Accommodation and Food Services.

The beginning of 2020 saw a lower demand to start new businesses, with a total of 841,180 applications representing a 4% year-over-year fall. This can largely be attributed to the economic outcomes of the coronavirus pandemic.

But by the second quarter of 2022, the numbers rebounded with 906,876 new business applications, a 7.8% rise from the first quarter and a 4.4 % increase over 2021.

This strong trend increased in Q3, with new business applications hitting a record of 1.47 million new applications – a 63% percent increase over the second quarter and a 70% jump over the previous year.

Some of the recent increases are attributed to the switch by people who lost their jobs during the pandemic to running their own businesses as a way to replace the lost income.

Some are also taking advantage of changing consumer demands.

Understanding the requirements for new businesses

Small business rules and regulations are set both by federal laws, and the legislation of the individual state in which the small business is conducting its operations. Federal law constitutes the “supreme Law of the Land“.

It takes priority over any conflicting state laws, especially with regard to inter-state commerce, labor, security, citizenship, foreign affairs and similar national issues. However, every state has its own body of laws and regulations. Therefore, if you are setting up or conducting a business, it is essential to be fully aware of the relevant federal and state laws.

Under federal law, a small business can have up to 499 employees in order to qualify for the specific benefits that are available.

These benefits relate primarily to the availability of small business loans from the federal agency, and a wide range of tax deductions, such as Energy Tax Incentives and State Sales Tax Holidays.

Examples of small business incentives

Federal and many state governments offer incentives to small businesses to start up or relocate. Some examples are:

Employee rights

The Wage and Hour Division of the U.S. Department of Labor (DOL) enforces and administers the most comprehensive federal labor laws. These laws cover most private, state, and local government employment throughout the United States and its territories. 

As a business owner, you have these responsibilities:

• To pay employees correctly
• To maintain records
• If you employ minors, there are added responsibilities
• To provide unpaid family or medical leave to eligible workers.

You are also obliged to notify employees of their workplace rights.

All states other than Texas have enacted some form of workers’ compensation for almost all employers. Businesses may purchase insurance voluntarily depending on the business’ size.

Smaller organizations must purchase a workers’ compensation insurance policy to cover obligations for work-related injuries to employees. Large entities may obtain permission from the  Department Of Labor to “self-insure,” which means they will pay any claims themselves.

The main differences between states are the cut-off point of the number of employees beyond which insurance becomes mandatory, and whether the choice of the insurance company is optional. Four U.S. states (North Dakota, Ohio, Washington and Wyoming) have opted to own their own  Monopolistic State Funds, and employers can only buy their insurance from these funds.

In other states, an employer that doesn’t qualify as a self-insurer must take out workers’ compensation insurance from a compulsory state fund.

The U.S. Department of Labor has decreed that individual states can legislate labor laws that afford workers additional rights and protections. Employers must comply with both federal and state laws.

These are different for each state, so you must refer to the relevant websites for every state where you conduct your business activities. The state’s contact details are here .

The main categories of state labor laws are :

1. Minimum Wage Laws
   • Minimum Wage Laws in the States
   • Minimum Wages for Tipped Employees
2. State Child Labor Laws
   • Employment/Age Certification
3. Non-farm Employment
   • Agricultural Employment
   • Entertainment
   • Door-to-Door Sales
4. Other State Labor Laws
5. Minimum Paid Rest Periods
6. Minimum Meal Periods
7. Prevailing Wages
8. Payday Requirements

The general information about particular laws administered by WHD and DOL are on their web page along with other guides for new and small businesses.

Tax

The federal government levies taxes on business people based on net income, and on companies on profits. States can also levy taxes on income, as well as on sales. There is a wide range of different schemes between the states. For example, Nevada, South Dakota, and Wyoming do not tax corporate or individual income.

Nevada imposes sales tax. Alaska has no individual income or state-level sales tax, whereas Florida has sales tax but no individual income tax. New Hampshire and Montana have income tax but no sales tax.

The Tax Foundation publishes a comparison of the relative pictures of the states with regard to taxation. This shows how well each state structures its tax system.

The most recent survey produced the following ranking of the 20 ‘best’ states:

• Wyoming
• South Dakota
• Alaska
• Florida
• Montana
• New Hampshire
• Nevada
• Utah
• Indiana
• North Carolina

Business Insurance

Business insurance is a deductible expense. Suppose you are using part of your home as an office, or some area on your property such as an outbuilding or a field, to run your business.

In that case, you can deduct your insurance costs as part of your tax write-offs.

Similarly, suppose you are renting some space from a landlord. In that case, any cost of insuring the property that is additional to the lease (which is already a full tax deduction), can be claimed against income.

For example, insuring any inventory, equipment or materials stored in the building is not included in the commercial property insurance cover of the building, so it’s your responsibility to get this cover. The full cost of the insurance is deductible in calculating taxable income.

Many other insurances are recommended for small and startup businesses. The main categories are:

• Liability insurance
• Asset Insurance
• Mandatory insurance

Liability insurance

Just by being in business engaged in commercial activity, you have taken upon yourself several liabilities that a court can enforce. The main ones are:

• General liability to compensate for losses or injuries to third parties. The claim can come from an accident or injury that can be attributed to negligence on your part, and a court can award an unlimited amount of compensation
• Professional liability to deliver your services in a proper and professional way. It’s also known as Errors & Omissions insurance. When you accept to perform some service for a customer, you are issuing an implicit guarantee that the service provided will meet the proper standards, will satisfy any warranties that you made.
• Product liability insurance guarantees that any physical product, part or item you sell or supply will be appropriate for its job, and will perform its intended function.

Asset Insurance

When you have invested cash in the physical assets of a business, it is in your interests to protect the investment against unforeseen events. The most common types of asset insurance are:

• Commercial property insurance for buildings and improvements (whether owned or rented). The cover should protect in case of storms, earthquakes, hurricanes and other such natural disasters, as well as man-made events like vandalism and fire
• Inventory. The cover should protect the value of all stored goods against water damage, fire, theft and other such risks
• Equipment. The cover should protect the value of all tools, equipment and other work-related assets, especially if they are moved around between worksites where they are unprotected. The cover should be against risks such as fire, theft, water damage and similar possibilities.
• Data. Business today is highly dependent on the information stored in a computer network. There are risks of cyber attacks, theft and blocking. Cyber insurance will cover these risks.
• Auto insurance protects the value of a vehicle in case of theft, vandalism or accidental damage while it was used in work-related activity. It’s not the same as third-party accident insurance, although most insurance companies bundle auto insurance and third-party accident cover into one policy.
• Income protection provides coverage for income lost in case activity was suspended because of sickness or personal injury to you or a key worker, until the time business resumes.

Mandatory insurance

As well as the optional insurances listed above, there are two forms of insurance for which there may be federal or state laws. Be sure to check their requirements in your location:

Workers’ compensation cover relates to federal legislation that employees who are injured on the job must receive medical care responsive to the workplace injury, as well as payment to compensate for any resulting disabilities

Vehicle third-party accident cover – not to be confused with auto insurance. It covers any claims resulting from an accident involving the vehicle in which someone other than the driver was injured.

FAQ

How to create a startup business

There are several categories of activities that a new business has to carry out in order to comply with federal and state laws and regulations. These are:

• Procedures
  • Dealing with Construction Permits
  • Getting Electricity
  • Registering Property
  • Obtaining licenses
• Getting Credit 
  • Legal rights
  • Credit information 
  • Credit registry
  • Credit bureau
  • Minority Investors
• Director liability
  • Shareholder rights
  • Ownership and control
  • Corporate transparency
• Paying taxes
  • Total tax and contribution rate
  • Post Filing
• Trading across state borders
  • Border compliance
  • Cost to export
  • Documentary compliance
• Enforcing Contracts
  • Judicial processes
  • Resolving Insolvency