There are a few different types of businesses that a small business owner can establish. Here is an overview of your options.
If you treat your business like a hobby, there is a really good chance that it will pay you like a hobby. Most hobbies require you to pay to participate. A great visual is a weekend warrior softball player versus a professional baseball player. If you treat your business, like a business it will pay you like a business. There is something powerful in establishing a business. I coach all of my students to start a business once they are comfortable doing so. Let’s take a look at the various types of businesses that individuals can operate.
Types Of Businesses
The most common way to “open” a business is called a Sole Proprietorship. When you start a business, unless you incorporate or form a partnership, you by default are a Sole Proprietorship. This is the most basic business type for individuals.
Another approach to starting a business is to Incorporate. This can be done inexpensively in most states. Once your income goes over $30,000 per year net, you may wish to incorporate for tax purposes. According to official IRS publications, it is a statistical fact that small corporations are audited less frequently than sole proprietorships are. My Corporation at MyCorporation.Com has very favorable reviews. My Corporation will incorporate your business for as little a $99 fee. Please note that you will also have some state filing fees. If you own more than one business or if you own income-producing real estate, I would advise to hire a CPA to help you incorporate for there are several ways to incorporate – each with different tax advantages. Once incorporated, you can register an unlimited number of Doing Business As accounts (DBA), which are company names controlled by the master corporation.
There are two types of corporations that can be established: a legally registered Corporation or a Limited Liability Corporation. Either of these would be appropriate for small businesses. If you are going to raise money from investors or sell stock, a basic corporation may be required by your state. If you are no bigger than a husband and wife team, a LLC may be the best choice for you. A LLC gives you all the benefits of a corporation and with a lot less paperwork. (My personal online business is run through a Limited Liability Corporation.)
The third type of business ownership is a Partnership. I personally would avoid forming a partnership for they rarely work out. To be blunt, many partnerships end up leading to more lawsuits between the owners. If you wish to become partners with anyone, I would advise you to incorporate and establish who has the controlling share of stock (51%) . Equal partnerships are often disasters waiting to happen. There is a type of partnership called a Limited Liability Partnership. For the purposes of this overview, I am not going to go into Limited Liability Partnerships. If you are considering this, I would seek the advice of a CPA and / or an attorney that specializes in business formation.
Business License Overview
If there is one area that I often see people not grasping when it comes to small business formation, it is in the area of what business licenses are required. There are two main types of business licenses. They are:
- A Local Business License
- State Sales Tax or Resale Number
Let’s break down each license.
A Local Business License
A local business license is normally issued by the city or town where the business is formed. Typically, you will not need a local business license if you are operating out of your home, or if you rent a space where you are just working on the computer / storing merchandise AND you do not employ anyone. Business Licenses are usually only required if you have a retail location or if you have a business where customers are physically entering. Please note that there are a few cities and towns that require a local Business License for home-based businesses. This is not normally the case. It may be beneficial for you to make a quick call to your local city office to ensure that you do not need a Business License to run an Internet business from your home. If you employee anyone, you most likely will be required to obtain a Business License.
A State Sales Tax Number
Almost every state website provides information about how to obtain a sales tax number. The state’s websites are usually www.KY.gov. (This example is for Kentucky. Put the two-letter abbreviation of your state in the URL to access). There are some exceptions, for example: www.myflorida.com for Florida. Why is getting a state sales tax number important? By law, you are required to pay tax on sales made to other residents of your state. Furthermore, most wholesale companies require you to have a sales tax number.
Many states will let you apply over the Internet or allow you to download the forms to apply. All states charge a fee – usually less than $50. Some states require a deposit based on your annual estimated sales. The minimum deposit is usually $200-400. A few states do not charge sales tax. These states will give you a business license number that will basically serve the same purpose.
If you live in a state that charges sales tax, you must charge and pay sales tax on all sales shipped to buyers in your state. Not doing so can result in serious fines. Most laws about collecting taxes on sales to other residents of your state are written that the requirement to file is met after your FIRST sale. Not paying taxes will eventually result in the loss of your sales tax license. When you ship to a buyer in another state, generally you do not have to collect or pay sales tax.
Special Consideration: If you are an Amazon FBA seller, you may be required to collect and pay taxes in other states under Nexus laws. In short, Nexus is established when your business has some type of presence in a state. This could be owning a business. This could be owning real estate. This could be simply owning inventory in a warehouse. Thus, your FBA inventory in other states could result in your business have established Nexus. I am not a CPA and the understanding of Nexus laws is about as clear as mud. I honestly suggest that a CPA be consulted to determine if you have Nexus in other states.
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