More and more teens are embracing the BYOB (Be Your Own Boss) culture. According to a recent study, three in five American teens would rather start a business than work a traditional job.
That sounds great, but it also serves as a reminder of the need to educate minors about the legal issues that surround minors’ businesses. By understanding issues such as minimum age requirements, work permits and age certificate issues, and legal liability in business ownership, minors can figure out how to best actualize their business ideas while staying within the confines of federal and state laws.
Legal Landscape For Minors In Colorado
In Colorado, a minor is any person under 18 years. Under the Colorado Youth Employment Opportunity Act, minors under nine years cannot be employed in the state. However, certain exemptions from this law exist for:
- Newspaper carriers
- Home chores
- Schoolwork and supervised educational activities
- Work done for a parent or guardian provided the parent or guardian doesn’t receive any payment for the same
- Actors, models, and performers
Generally, Colorado allows minors to operate a business, albeit on a limited basis, without needing the approval of a local government. The Colorado General Assembly enacted a bill in 2019 prohibiting any county, municipality, local government, or local government agency from requiring a license or permit for a business owned and occasionally operated by a minor. However, the business should be situated sufficiently away from a licensed commercial entity to ensure that the minor’s business isn’t a direct economic competitor of that commercial entity.
Can Minors Operate A Business In Colorado?
Minors can operate a business occasionally in Colorado (no more than 84 days in a calendar year). The act legalizing minors’ businesses in the state bans the requirement for obtaining a license or permit before engaging in the business.
In most states, minors can freely turn their brilliant business ideas into small businesses or “side hustles” as sole proprietorships. However, those in states with certain restrictions on business ownership can explore workarounds such as:
- Relying on their parents or guardians to form a business on their behalf
- Forming other business entities that may apply to minors in their states
- Starting their business in a state with more lenient business formation laws.
Legal Considerations For Young Entrepreneurs
While starting a business as a minor isn’t complicated, it isn’t something to do on the fly. It requires one to make considerations on things that may impact business operations. Below are essential legal considerations for entrepreneurs looking to start their own businesses.
Business Entities for Minors’ Businesses
In most cases, minors’ businesses will be sole proprietorships. Depending on the type of business, however, a minor can choose a limited liability company (LLC) as their preferred entity for business. In such cases, minors must check whether their state’s laws allow them to form LLCs. Some states, including Colorado, prohibit minors from filing LLC formation paperwork with the state.
“Parents ask if their kids under 18 can own an LLC,” says Ryan Clement of Business and Technology Legal Group. “I explain that while minors can benefit from an LLC’s legal protections by serving as members, they legally cannot file formation documents listing themselves as organizers or owners in Colorado.”
Nevertheless, nothing stops a minor from being a member of an LLC. As such, a minor who wishes to own a business by forming an LLC can be a member while the parent or guardian acts as the LLC’s organizer.
Signing Contracts
Another vital consideration is the ability of minors to enter into contracts. In most states, minors can’t get into contracts. Even in cases where it is possible, many people are wary of entering into contracts with minors due to their ability to disaffirm a contract.
Since contacts signed by minors may not always be legally binding, young entrepreneurs should consider having their parents or guardians sign or cosign any business contract.
Accessing Funding
Minors looking to start businesses should also figure out funding. Service businesses often require minimal resources and supplies to start and run. For others, the need for supplies and tools may necessitate significant financing. Before starting a business, minors should consider the money they need. If it is more than they have in savings, they could turn to other funding sources, including family, friends, and grants.
Remember that when it comes to credit, most lenders will avoid entering into any contract with minors because they can disaffirm a contract. Therefore, a parent or guardian must sign any loans or lines of credit for a minor’s business.
Tax Obligations and Guidance
Minors who own businesses must remember to file a tax return if they have a net self-employment income of at least $400 in a year. Even if a parent or guardian claims the minor as a dependent, that should be done.
Running a business can be tricky on many fronts, especially for young, inexperienced entrepreneurs. Such individuals can approach their parents or guardians for basic advice on how to run their businesses. They may also reach out to Small Business Development Centers in their area for assistance and counseling about starting, running, and growing their businesses.
Key Takeaways
Business ownership by minors in Colorado is not only possible but also rewarding. But before setting up that lemonade stand or starting a fitness program out of a garage, young entrepreneurs must consider certain fundamentals.
Choosing the most appropriate entity for their business is a great starting point, as is considering various legal issues, such as their contractual capacity and potential tax obligations. For young entrepreneurs, starting a sole proprietorship is the most viable way of owning a business, as Colorado law doesn’t allow minors to own a company.Doing the right things early on gives young entrepreneurs a better chance at success. Luckily, Colorado is a state that supports and celebrates youth entrepreneurship, meaning minors can actualize their business ideas, learn valuable business skills, and contribute to their communities.
However, business isn’t without challenges and risks, making it vital for business owners to leverage available resources and seek legal counsel before starting a business. That way, they can be better equipped to face the challenges common with minors’ businesses.
