Legal Entity Setup for SMBs: The Complete Guide for 2025

Starting a business is an exciting endeavor filled with possibilities. However, amidst the dreams of success comes the sometimes necessary yet daunting task: legal entity setup.

In simple terms, legal entity setup is the process of structuring your business in compliance with legal requirements. 

For many SMB owners, the mere mention of legalities can be overwhelming. The complexities involved, coupled with high costs and time investment, can seem like significant challenges.

Plus, there are alternatives to consider, like using an employer of record (EOR) to hire employees locally and abroad compliantly.

Fortunately, the process becomes easier with the right guidance.

Understanding traditional legal entity setup

Registering your business entity can indicate stability and growth, but it’s also quite complex and costly. 

Be prepared for the following:

1. Cost analysis

Establishing a legal entity involves some expenses. You’ll need to pay for things like registration fees and legal consultations. Maybe even hire lawyers or accountants to ensure everything is done correctly.

Use our entity set up calculator to determine your total costs.

See also: Top 5 Hidden Costs of Setting up A Foreign Subsidiary

2. Complexity of legal requirements

The legal landscape can be a maze, especially for first-time business owners. Different countries and regions have different rules and regulations regarding business structures.

3. Time investment 

You can’t rush the whole legal entity setup process.

There’s a lot to be done—researching, completing the necessary paperwork, and handling government processes. Waiting periods for approvals or registrations may add to the overall timeline, too.

4. Risks and compliance issues

Ensuring compliance is another crucial aspect. Failing to do so can lead to fines, legal disputes, or even your business’s dissolution. Be sure to dot your i’s and cross your t’s to avoid these pitfalls. 

If you’re not quite ready to jump headfirst into legal entity setup, use Deel EOR to hire talent compliantly, test new markets, and build a local presence wherever you want.

Here’s what Joey Leung, Director of Strategic Alliances at BBMSL, has to say about partnering with Deel:

How to set up a legal structure for your business

Forming a business entity involves several steps, which can vary depending on the country or jurisdiction. 

Here’s a quick rundown:

1. Pick a location

Do you want a local entity in a specific physical location? If yes, where are you thinking of setting it up?

Take your time to consider this carefully because it can have a big impact on your sales. 

Depending on where you decide to set up, you might need extra licenses and permits, zoning clearance, and more. Each jurisdiction has its own rules for different kinds of businesses, so check the guidelines specific to your chosen location. 

You might also need to file articles of incorporation and create bylaws for your business.

Take this as an opportunity to put together a business plan. It’ll help you outline your company and lay out your goals and long-term plans.

See also: Business Expansion Strategy: Plan & Execute With Our Guide

2. Choose a legal structure

When starting your business, one of the initial and crucial steps is selecting the appropriate business structure. 

Factors influencing your choice

Determining the right business entity depends on various factors tailored to your specific needs:

• Tax implications: Different structures come with varying tax obligations. Understanding how each structure impacts your tax liabilities is crucial
• Operational dynamics: Think about how your business works. Consider things like the level of control you desire, the management structure, and how you plan to raise capital
• Liability protection: Check how much your personal assets are protected. Some structures better protect your assets from business problems than others (e.g., corporations)
• Investor preferences: Some entity types might look better to investors because they seem more stable and organized (e.g., LLC)

Key entity types

• Sole proprietorship: Ideal for small businesses with one owner seeking simplicity and minimal startup costs. However, personal liability is a concern
• Partnership: Formed when two or more individuals join forces to run a business. Partners share profits, losses, and liabilities
• Limited liability company (LLC): Offers a balance of liability protection and flexibility in management. Members also don’t get taxed twice like some other structures
• Corporation: Provides the highest level of liability protection, but there are more formalities and administrative requirements

Different countries offer varying entity types, meaning not all of the above concepts may be available everywhere. 

For example, S corporations are a business structure available specifically in the United States. Other countries may have similar structures, but the specific designation of an “S corp” is unique to the US.

3. Pick a name

Your business name should reflect your status or the products/services you provide. 

Here’s what you need to know depending on your type of business:

• For sole proprietorship: You can use your own name or choose a made-up name. If you opt for a made-up name, you’ll need to file a doing business as (DBA) form to operate under that name
• For LLCs: Your business name should end with “limited liability company” or “LLC.” You can also use abbreviations like “Co.” or “Ltd.”
• For corporations: Naming rules for corporations vary by country. Typically, your name must include terms like “incorporated” or “Inc.” to indicate it’s a corporation

Before finalizing your name, check an official database of registered business names to ensure they’re not already in use. Consider registering a federal trademark to protect your business name.

4. Complete the paperwork

Next, it’s time to handle the paperwork, which varies depending on your business type and location.

Here’s what you might need to do:

• Registration: This is the process of officially recording your business with the relevant authorities
• Licensing: Certain businesses require specific licenses to operate legally. These licenses ensure that your business meets certain standards and regulations
• Permits: Depending on your business activities and location, you may need permits for things like construction, signage, or health and safety
• Zoning clearance: This ensures that your business location complies with local zoning laws and regulations

In certain jurisdictions, you may have to create extra documents like partnership agreements, articles of incorporation, or operating agreements.

For instance, in Europe, you’ll have to file articles of association (or memorandum of association) outlining the company’s purpose, structure, and rules for operation. Similarly, in the US, you might need an employer identification number (EIN) from the internal revenue service (IRS).

5. Organize finances and taxes

Think about where you’ll get the money to run your business. Knowing where your money is coming from — personal savings, bank loans, investors, or crowdfunding — is crucial for accurate tax calculations.

Once funded, establish payment processes for customers, including credit cards or PayPal, and implement systems for revenue tracking. 

You should set up a separate business bank account even if you’re running a sole proprietorship without a separate legal entity. This makes it easier to keep track of your expenses and business income.

And let’s not forget about the tax implications of running a business. Think about required forms, deadlines, deductions, and credits.

You’ll need to submit annual tax returns to report your business income. However, tax rules can vary from country to country, so staying updated is important to avoid penalties.

For example, most Emirates in the UAE do not impose corporate income tax. However, in contrast, the UK taxes the profits of resident companies at the main rate of 25% if you make a profit of more than £250,000. 

6. Get your insurance

It’s easy to forget about insurance, but you must consider keeping your business, assets, and reputation safe.

Here are some key types of insurance you might need:

• General liability insurance: This helps protect your business if someone claims it caused them harm, like damaging their property or causing them physical or personal injury
• Commercial property insurance: If you own or rent property or equipment for your business, this insurance can help cover any damage to them
• Professional liability insurance: If someone claims your business messed up its services, this insurance can help cover legal fees and settlements
• Workers’ compensation insurance: If you have employees, this insurance is crucial. It helps cover their medical bills and lost wages if they get hurt on the job

7. Hire and pay employees

Once you start hiring and onboarding employees, you must withhold and pay payroll taxes. To avoid this burden, consider partnering with a global payment processing service like Deel Global Payroll. 

Discover how Mynewsdesk saves 120 hours monthly with Deel’s Global Payroll.

Entity or EOR, you can do it all with Deel

Deel provides Entity Setup services and Global Payroll solutions for small to medium-sized businesses looking to establish their own legal entities. And, for those not ready to take that step, Deel’s EOR service offers a simplified approach to international expansion and global hiring. 

Moreover, Deel offers the flexibility to mix and match its services according to your needs. You can leverage the Deel EOR model for specific locations, run Deel Global Payroll through your own entities in others, or even engage independent contractors through Deel Contractor of Record for compliant and convenient contractor management. 

Plus, you’ll receive support at every stage of growth. We recommend starting with the EOR model to test new markets and explore talent hubs. Later, when you’re ready, Deel can assist you in setting up a legal entity. 

Whatever your chosen approach, you’re never stuck with Deel. We can transition you into a different setup with our range of services.

To discuss your options with an expert, book a 30-minute demo with our team today.