Key Takeaways
- States regulate small businesses through their laws and administrative rules
- Small business owners need to be aware of these regulations
- Typical regulations involve business taxes, labor relations, environmental protections, business licensing, and business entity costs
All states regulate small businesses. They do so through statutes and administrative rules. Some states, of course, have more regulations than others.
If the state where your small business is located is one of the states with more regulations than others it doesn’t necessarily mean it’s a bad state in which to do business. Remember, most regulations are imposed to try to prevent some harm to the states’ residents or to fund programs to help its residents. And small business owners benefit from those regulations. One small business owner’s “bad” may be another’s “good”. For example, some states require businesses to provide more employee benefits than others. While that can drive up costs, it can also result in a happy workforce and a state that attracts the best and brightest workers.
Importance of understanding state regulations
Regardless of the state where you’re doing business, or thinking about doing business, it’s important that you’re aware of the state’s regulations because they affect the cost of doing business and will require you, as the business’ owner, to take, or refrain from taking, various actions.
Different types of state regulations
Most states have regulations involving the following areas (among others): business taxes, labor and employee relations, environmental regulations, business licensing, and business entity start up and annual fees. The specific details of those regulations vary widely from state to state, as we’ll see as we take a closer look at these areas of regulation
State business taxes
Small businesses and their owners are subject to a variety of taxes. The kind of taxes, and the rates imposed, vary from state to state although three common taxes are income taxes, sales taxes, and payroll taxes.
Income tax - Most states impose a personal income tax. Small business owners operating as a sole proprietorship, partnership, S corporation, or LLC (except an LLC being taxed as a C corporation) will report their business’ earnings on their personal income tax return so they should be aware of the rates. Small businesses that are C corporations are also subject to a corporate income tax in many states. Some states also impose a tax on S corporations, which is something to be aware of if you have a corporation or an LLC that has elected to be taxed as a S corporation.
Sales tax – There are 45 states (and the District of Columbia) that impose a sales tax. They require businesses selling taxable goods or services in the state to get a sales tax license from the state and collect the taxes and remit the amount collected to the state.
Payroll taxes – Businesses with employees need to be aware of the state’s payroll taxes. State payroll taxes are in addition to federal payroll taxes. Employers have to register with their state’s tax department and withhold income from their employees’ paychecks. Payroll taxes fund programs like Medicare, Social Security, and Unemployment Insurance.
Labor and employee relations
If your small business has employees you need to know about labor laws. There are federal labor laws that protect employee rights. However, some states have their own regulations that go beyond the minimum levels of protection provided by federal law. For example, some states provide protections from discrimination for groups not protected by federal law. Others require more generous family and medical leave time. Some states require a higher minimum wage than the federal rate or have stricter requirements regarding overtime pay.
Workers are also entitled to a safe workplace and many states have regulations designed to protect worker safety. For example, they may have regulations that require breaks for certain workers. States can also differ widely regarding discrimination in the workplace. Some states have strict restrictions on what can be asked of job applicants. Some require diversity training for employees while others strictly prohibit diversity training. Some states restrict the use of artificial intelligence in employee related decisions. And these are just some of the differences in the way various states regulate employer-employee relations.
Environmental regulations
All states impose regulations that businesses have to follow to protect the environment. These may address, for example, how they dispose of waste or handle hazardous materials. They may promote clean energy and require processes that reduce energy consumption or greenhouse gas emissions. The states vary on how comprehensive their environmental regulations are, as climate change is a bigger concern for some states than others.
Business licenses
Nearly all small businesses will require at least one state business license. Depending on the state and the type of business, several licenses may be required. The business’ owners and employees may need to be licensed too. It’s important to be aware of the licensing requirements before conducting business because of the penalties for doing business without a license.
Business entity start up and annual fees
Small business owners who decide to form a limited liability company (LLC) or corporation will have to pay initial fees to form the LLC or corporation and then, in most states, annual fees to keep their LLC or corporation in good standing. These fees can vary significantly depending on the state. Some states have additional requirements for forming the company such as the need to publish a notice of formation. Most states also require the filing of annual report or biennial report. It is very important to be aware of this requirement because a failure to file this report can have serious consequences, including the administrative dissolution of your company.
Conclusion
Owning and operating a small business has many challenges. Complying with state regulations (as well as federal and local regulations) is just one of them. Most states have programs to assist small business owners and there are many successful small businesses in states that are considered to have the strictest regulatory environment.
