Toolkit · Business

The Small Business Formation and Compliance Toolkit

26 U.S.C. § 7701

Type
Toolkit
Jurisdiction
National
Date
2025-06-25
Topic
Business

This toolkit assembles the working materials for forming and running a small business into modules that can be lifted and used. It supplies an entity decision matrix that separates form from tax classification, a name clearance worksheet, an operating agreement term sheet, a formalities card that keeps the liability shield real, a registration and license tracker, an insurance schedule, a contract clause library, a worker classification worksheet, a compliance calendar, and a personal guarantee register. Reference tables cover the authorities, the launch sequence, and the vocabulary. Every authority cited is linked to its text on uplaw.us.

The Small Business Formation and Compliance Toolkit

Business > Small Business | Published 25 June 2025 - Updated 8 August 2026 | UpLaw - uplaw.us

Module 4 is an index card. Tape it inside the filing cabinet. It is the difference between an entity that shields the owner and one that only appears to.

Keywords: entity matrix, clearance, operating agreement, formalities, registrations, contracts, calendar

Module 1 — Entity decision matrix

Two separate questions. Answer them in this order.

Question 1: entity form

Sole proprietor General partnership LLC Corporation
Formation None None — arises by default State filing State filing
Liability shield None None Yes, if maintained Yes, if maintained
Governing document — Partnership agreement Operating agreement Bylaws + shareholders' agreement
Formalities None None Moderate Highest
Outside investment Impractical Difficult Workable Best
Annual cost None None Report + franchise tax Report + franchise tax

Question 2: tax classification — separate from the above

Under 26 U.S.C. § 7701, an LLC may be taxed as:

☐ Disregarded entity (single member) — simplest; self-employment tax on all profit ☐ Partnership (multi-member) — pass-through with flexible allocations ☐ S corporation under 26 U.S.C. § 1361 — can reduce self-employment tax on distributions, requires reasonable owner compensation, and has eligibility limits ☐ C corporation — entity-level tax; best for retained earnings and outside investment

Owner's expected annual profit: $______ Reasonable compensation for the owner's role: $______ Self-employment tax under each option: ______ State franchise tax under each option: ______ Decision: ______ Election deadline: ______

"LLC or S corp" is a category error. An LLC can elect S corporation treatment. Answer both questions.

Module 2 — Name clearance worksheet

Complete before the formation filing. Not after.

Proposed name: ______

☐ State entity database — available in the formation state? ______ ☐ Every state of operation — available? ______ ☐ Federal trademark register — conflicts in the relevant classes? ______ ☐ Common law use — web, industry directories, social media? ______ ☐ Domain available, plus reasonable variants? ______ ☐ Social handles available? ______ ☐ Professional clearance search obtained? ☐ Yes ☐ No — obtain one where the brand will carry real investment ☐ Trademark application filed under 15 U.S.C. § 1051? ______

Registered in the BUSINESS's name (not an individual's): ☐ domain ☐ social accounts ☐ registrar credentials stored where the owner can reach them

The point of the module. A name available with the secretary of state is not a trademark clearance — the systems are unrelated. Registration unlocks the remedies at 15 U.S.C. § 1114 and 15 U.S.C. § 1125.

And the cost asymmetry: an afternoon now, versus signage, vehicles, packaging, a website, and accumulated goodwill later.

Module 3 — Operating agreement term sheet

Decide each of these before drafting. These are the disputes that actually happen.

1. Ownership. Percentages: ______ · Classes of interest: ______ 2. Capital contributions. Who contributes what — cash, property, services: ______ · Consequence of failing to contribute: ______ 3. Management. ☐ Member-managed ☐ Manager-managed · Who can bind the company: ______ 4. Major decisions requiring consent. ☐ borrowing above $______ ☐ admitting a member ☐ selling assets ☐ changing the business ☐ distributions ☐ ______ 5. Allocations vs. distributions. Tax distribution provision: ☐ Yes ☐ No — without one, owners can have taxable income and no cash 6. Transfer restrictions. ☐ right of first refusal ☐ consent required ☐ permitted transfers to trusts/family 7. Involuntary transfers. Death: ______ · Disability: ______ · Divorce: ______ · Bankruptcy: ______ · Creditor charging order: ______ 8. BUYOUT AND VALUATION FORMULA. ______ · Payment terms: ______ · Funded by insurance? ☐ 9. DEADLOCK. ☐ buy-sell shotgun ☐ mediation then arbitration ☐ tiebreaker third party ☐ dissolution trigger 10. Amendment. Vote required: ______ 11. Dissolution and winding up. ______ 12. Dispute resolution. ☐ litigation, venue ______ ☐ arbitration ☐ mediation first

Items 8 and 9 are the ones that matter most and are omitted most often. A buyout formula agreed at formation costs a paragraph; one negotiated during a dispute costs the business.

Module 4 — The formalities card

Tape this inside the filing cabinet.

THE FILING CREATED THE ENTITY. THESE FOUR HABITS CREATE THE SHIELD.

1. Separate bank account. Always. No exceptions. No personal expenses from business accounts. No business expenses from personal accounts. Money out of the business is a documented distribution or payroll — never an ad hoc transfer.

2. Sign on behalf of the entity. ACME DESIGN STUDIO, LLC / By: ____________ / Name: [Owner] / Title: Member Signing your own name alone creates personal liability regardless of the entity.

3. The entity's full legal name on everything. Contracts · invoices · estimates · website · signage · email signature · vehicles.

4. Annual filings current. An administratively dissolved entity provides NO SHIELD, and dissolution for a missed annual report is silent.

AND THE SHIELD NEVER COVERS: Your own torts. Personal guarantees. Trust fund taxes under 26 U.S.C. § 6672.

Module 5 — Registration and license tracker

Item Agency Filed Number Renews Notes
Formation Secretary of State —
Registered agent Annual
Annual report Secretary of State Annual Dissolution if missed
Franchise tax State Annual
EIN IRS —
Tax classification election IRS — Deadline: ______
Beneficial ownership report Federal On change Check current applicability
Income tax withholding State Quarterly
Unemployment insurance State Quarterly
Sales tax permit State Monthly/Quarterly
Local business license — city Annual Most commonly missed
Local business license — county Annual
Industry license May bar enforcing contracts if absent
Fictitious name
Foreign qualification — state ___ Annual
Zoning / use permit
Bond

Two rows carry consequences out of proportion to their difficulty.

The annual report, because an administratively dissolved entity has no shield.

The industry license, because operating without one is frequently a bar to enforcing the business's own contracts — an unlicensed contractor may be unable to sue for payment on completed work.

And note: most licenses do not transfer on a sale of the business.

Module 6 — Insurance schedule

Coverage Carrier Limits Deductible Renews Notes
General liability
Professional liability Claims-made? Tail needed on exit?
Workers' compensation Mandatory nearly everywhere with employees
Commercial auto Personal policies exclude business use
Property / business interruption
Cyber
Employment practices liability
Social engineering fraud endorsement Frequently excluded absent an endorsement
Umbrella

Three annual actions.

Read the exclusions, not the summary.

Compare limits to current revenue — a policy bought at launch is frequently inadequate at year three.

Confirm the fraud endorsement, because the wire sent on fraudulent instructions is a common and commonly uncovered loss.

And when something happens, tender immediately — late tender is itself a coverage defense. See Tendering a Claim and Preserving Coverage: A Policyholder's Checklist and Insurance Coverage Law: A Comprehensive Guide for Policyholders.

Module 7 — Contract clause library

Change order

"No change to the scope, schedule, or price is effective unless set out in a written change order signed by both parties. If Client requests additional work, Contractor will provide a written change order stating the additional scope, price, and schedule adjustment. Work on the change begins only after signature."

Payment and stop-work

"Invoices are due within [] days. Amounts unpaid after [] days accrue interest at [] percent per month to the extent permitted by law. **If any invoice remains unpaid more than [] days after the due date, Contractor may suspend performance on [___] days' written notice** until payment is received, and any resulting delay extends the schedule accordingly. Client is responsible for costs of collection, including reasonable attorney fees."

Intellectual property assignment — contractor

"All work product created in the performance of this Agreement is a work made for hire to the extent permitted by law. To the extent any work product is not a work made for hire, Contractor hereby irrevocably assigns to Company all right, title, and interest in and to such work product, including all copyright, trademark, and other intellectual property rights, and waives any moral rights. Contractor will execute any documents reasonably necessary to perfect this assignment, and retains no license to use the work product except as expressly permitted in writing."

Limitation of liability

"Except for [indemnity obligations / breach of confidentiality / gross negligence or willful misconduct], neither party is liable for indirect, incidental, consequential, special, or punitive damages, and each party's aggregate liability arising out of this Agreement will not exceed [the fees paid under this Agreement in the [___] months preceding the claim]."

Confidentiality

"Each party will hold the other's Confidential Information in confidence, use it only to perform this Agreement, and disclose it only to personnel with a need to know who are bound by comparable obligations. These obligations survive termination for [___] years, and indefinitely as to trade secrets."

Dispute resolution

"The parties will first attempt to resolve any dispute through good-faith negotiation for [___] days, and then through mediation. [Thereafter, any dispute will be resolved by binding arbitration under the Federal Arbitration Act, 9 U.S.C. §§ 1–16, administered by [] in [venue], before a single arbitrator. / Thereafter, the exclusive venue is the state and federal courts located in [].]"

Choose the arbitration option deliberately. It is enforceable — AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), Epic Systems Corp. v. Lewis, 584 U.S. 497 (2018) — with arbitrability delegable per Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63 (2010) and Henry Schein, Inc. v. Archer & White Sales, Inc., 586 U.S. 63 (2019), severability per Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395 (1967) and Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006), class arbitration requiring consent per Lamps Plus, Inc. v. Varela, 587 U.S. 176 (2019), waiver by litigation conduct per Morgan v. Sundance, Inc., 596 U.S. 411 (2022), and a stay pending appeal per Coinbase, Inc. v. Bielski, 599 U.S. 736 (2023). See Drafting an Arbitration Clause: A Practical Checklist.

Module 8 — Worker classification worksheet

Complete before the first payment, and keep it.

Worker: ______ Role: ______ Start date: ______

Behavioral control Who sets the hours? ______ · Who directs how the work is done? ______ · Is training provided? ______ · Are there required procedures? ______

Financial control Who provides tools and equipment? ______ · Has the worker invested in their own business? ______ · Can the worker realize a profit or loss? ______ · Paid by the job or by time? ______ · Are expenses reimbursed? ______

Relationship Is it ongoing or project-based? ______ · Is the work integral to the business's core service? ______ · Does the worker serve other clients? ______ · Are benefits provided? ______

Conclusion: ☐ Employee ☐ Independent contractor Basis: ______ If close: treat as an EMPLOYEE.

Why "if close, employee." The consequences of getting it wrong stack: back employment taxes under 26 U.S.C. § 3111, 26 U.S.C. § 3121, 26 U.S.C. § 3401, and 26 U.S.C. § 3402; unpaid overtime under 29 U.S.C. § 207; unemployment and workers' compensation exposure; benefit plan liability; and information return penalties at 26 U.S.C. § 6721 and 26 U.S.C. § 6722.

And the personal one. 26 U.S.C. § 6672 reaches responsible persons individually, passes through the entity, and generally survives bankruptcy. When cash is tight, pay the payroll taxes first.

See Classifying Workers: Employee or Independent Contractor: A Practical Checklist.

Module 9 — First-employee card

BEFORE THE FIRST DAY:

☐ Workers' compensation bound — mandatory nearly everywhere, frequently at one employee ☐ Payroll service selected and account opened ☐ Unemployment insurance registration complete ☐ Classification decided (Module 8) and documented ☐ Exempt or non-exempt determined under 29 U.S.C. § 213 and 29 C.F.R. Part 541 — a title is not an exemption ☐ Written offer letter — at-will status, compensation, classification ☐ Employment eligibility verification completed and retained ☐ Required workplace posters displayed ☐ Timekeeping system in place and in use ☐ Safety obligations reviewed — 29 U.S.C. § 651, 29 U.S.C. § 654

AT THRESHOLDS — and check the STATE, which is frequently lower: ☐ Anti-discrimination — 42 U.S.C. § 2000e, 42 U.S.C. § 2000e-2 ☐ Disability accommodation — 42 U.S.C. § 12111, 42 U.S.C. § 12101 ☐ Family and medical leave — 29 U.S.C. § 2601, 29 U.S.C. § 2612

The timekeeping line is not clerical. In a wage dispute the employer bears the recordkeeping burden, and where records are inadequate an employee's reasonable estimate may control — see Wage and Hour Law: A Comprehensive Guide to Minimum Wage, Overtime, Tips, and Recordkeeping and The Wage and Hour Claim Toolkit.

Module 10 — Compliance calendar

MONTHLY ☐ Reconcile the business account ☐ Confirm payroll tax deposits were actually made ☐ Review receivables and act on anything past due

QUARTERLY ☐ Employment tax returns ☐ Estimated taxes ☐ Sales tax ☐ Classification review — has anyone drifted from contractor to employee in practice?

ANNUALLY ☐ State annual report ☐ Franchise tax ☐ Registered agent confirmation ☐ Business license renewals, city and county ☐ Industry license renewal ☐ Insurance review against current revenue ☐ Entity and owner tax returns ☐ Information returns to contractors ☐ Workplace poster updates ☐ Read the operating agreement against how the business now operates

ON ANY CHANGE — new owner · new state · new location · new line of business · first employee · first contractor ☐ Run the Module 5 registration list again for that state

Most compliance failures are calendar failures. Set reminders, not intentions.

Module 11 — Personal guarantee register

An owner who cannot state their total guaranteed exposure does not know what the liability shield is worth.

Date Beneficiary Obligation Amount guaranteed Term Release conditions
Landlord Lease
Lender Line of credit
Supplier Trade credit
Equipment lessor
TOTAL: $______

Three rules.

Negotiate them — a cap, a sunset after a payment history, or a release on a financial covenant.

They survive a sale of the business unless released in writing by the beneficiary. Get the releases at closing.

And they are the reason the shield frequently protects less than an owner believes. A business with five guarantees has an entity that shields against the acts of others and almost nothing else.

Module 12 — Exit readiness

The diligence list a buyer will run — which is also the list of everything in this toolkit.

☐ Good standing certificates in every state; never administratively dissolved ☐ Governing documents, and whether consents are required to sell ☐ Filed returns and payroll tax deposits, including any 26 U.S.C. § 6672 exposure ☐ Worker classification, examined independently — the most-skipped and most expensive item ☐ Wage and hour practices and exemption classifications ☐ Licenses, and whether they transfer — most do not ☐ Contracts, with assignment and change-of-control clauses; customer concentration ☐ Intellectual property ownership, including assignments from every contractor ☐ Litigation, claims, and insurance history; tail coverage on claims-made policies ☐ Personal guarantees and their releases ☐ Leases and landlord consents

Asset sale or equity sale. An asset sale generally leaves liabilities behind; an equity sale transfers the entity with everything in it. Buyers want assets; sellers want equity; the price should reflect which it is.

And dissolution, if the business simply ends: dissolution filing · notice to creditors · payment of liabilities in order · final returns · cancellation of registrations and licenses · final payroll tax deposits. Walking away without dissolving leaves franchise taxes accruing and filings unmade.

Module 13 — Reference tables

Authorities

Authority Proposition
26 U.S.C. § 1361 · § 7701 S corporation eligibility; entity classification
26 U.S.C. § 3111 · § 3121 · § 3401 · § 3402 Employer taxes and withholding
26 U.S.C. § 6051 · § 6721 · § 6722 Wage statements; information return penalties
26 U.S.C. § 6672 Personal liability for trust fund taxes
29 U.S.C. § 203 · § 206 · § 207 · § 213 · 29 C.F.R. Part 541 Wage and hour; the duties tests
29 U.S.C. § 651 · § 654 Workplace safety
29 U.S.C. § 2601 · § 2612 Family and medical leave
42 U.S.C. § 2000e · § 2000e-2 · § 12101 · § 12111 Discrimination; disability
15 U.S.C. § 45 · § 632 Deceptive practices; small business status
15 U.S.C. § 1051 · § 1114 · § 1125 Trademark
9 U.S.C. §§ 1–16 The Federal Arbitration Act

Vocabulary

Entity form vs. tax classification — two axes. Veil piercing — setting aside the shield; commingling is the first fact examined. Operating agreement — where the real rules live. Charging order — a creditor's remedy against a member's interest. Trust fund taxes — withheld employee taxes; personal liability under § 6672. Exempt — a salary basis, salary level, and duties test, not a title. Change order — the clause that prevents the most common unpaid invoice. Work made for hire — and the assignment needed when it does not apply. Foreign qualification — registration where the business operates. Administrative dissolution — the silent loss of the shield.

Module 14 — Where this connects

The narrative and the doctrine. The Paperwork That Protects You: What a Small Business Actually Has to Get Right and Starting and Running a Small Business: A Comprehensive Guide to Entity Choice, Licensing, Contracts, and Employees.

The step-by-step. Forming and Launching a Small Business: A Practical Checklist and Incorporating a Startup the Right Way: A Founder's Legal Checklist.

Tax. Business Taxation: A Comprehensive Guide to Entity Choice and Federal Income Tax · Choosing a Tax Entity: A Practical Checklist · The Business Tax Toolkit · Responding to an IRS Notice, Audit, or Collection Action: A Practical Checklist.

Employment. Wage and Hour Law: A Comprehensive Guide to Minimum Wage, Overtime, Tips, and Recordkeeping · Employment Discrimination Charges: A Comprehensive Guide to Title VII, the ADEA, the ADA, and the EEOC Process · Unemployment Insurance: A Comprehensive Guide for Claimants and Employers.

Contracts, disputes, and getting paid. Sales of Goods Under UCC Article 2: A Comprehensive Guide to Formation, Warranties, and Remedies · Drafting an Arbitration Clause: A Practical Checklist · Enforcing a Money Judgment: A Comprehensive Guide to Discovery, Liens, Levy, and Fraudulent Transfer · When a Customer Files Bankruptcy: A Creditor's Checklist.

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