What you need to know about business licenses and taxes if you sell online from home can be confussing to many individuals. Before we get into taxes and business licenses, lets take a look at the various type of business you can set up.
The most common way to start a business is called "Sole Proprietorship." When you start a business, unless you incorporate or form a partnership, then you are automatically a sole Proprietorship. This is the basic business type.
Another approach is to actually incorporate which can be done very inexpensively in most states. Once incorporated, you can register an unlimited number of DBA's (Doing Business As), which are company names controlled by the master corporation. Once your income goes over $30,000 per year net, you may wish to incorporate for tax reasons. Also, small corporations are audited far less frequently than sole proprietors are. I use My Corporation at Mycorporation.com. They will incorporate your business for as little as $99 + state filing fees
There are two types of corporations: Corporation and Limited Liability Corporation. Both of these work fine for a small business. If you are going to raise money from investors, or give or sell stock to friends or family members, they a basic corporation is best. If it is just you or you and your spouse, then an LLC gives you all the benefits of a corporation and is a lot less paperwork and hassle.
The third type of business ownership is a Partnership. I personally would avoid this as it leads to more lawsuits than any other type of business. If you wish to become partners with someone, you should incorporate and decide who gets the controlling (51%) share of stock. Equal partnerships are usually a disaster waiting to happen when it comes to small business. There is, however, a type of partnership called a limited liability partnership. This has interesting tax advantages and if you will have partners or co-investors, ask you CPA about this option.
There are two types of business licenses and people are often confused about the difference:
Local Business license
State Sales Tax or Resale Number
Let's look at each one.
Local Business License
A local business license is issued by the city or town you live in. These are usually only required if you have a retail location or if you have a business where customers are coming and going. I have heard of a few cities or towns that require a local business license for home-based businesses, but these are rare.
In general you will not need a local business license if you are operating out of your home, or if you rent office space where you are just working on the computer, storing merchandise –and you have no employees.
State Sales Tax Number
If you are serious about buying goods from true wholesale companies, you will need a sales tax number for your state (or a State Business License number if your state does not have sales tax). Almost every state has a website that gives information about how to obtain a sales tax number. The state's websites are usually www.WA.gov. (This example is for Washington. Put the two-letter abbreviation of your state in the URL to access). There are some exceptions (such as www.myflorida.com for Florida). If you want to link directly to your state website, or learn more about state sales tax, read my free article How and Why to Get a State Sales Tax Number.
Many states will let you apply over the web or 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 still give you a business license number that will serve the same purpose.
If you live in a state that charges sales tax, you must charge (or pay) sales tax on all transactions shipped to buyers in your state. Not doing so can result in fines and eventually 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.
When you get a sales tax number, ask your state authority for a pamphlet or instructions that specify exactly what products and services are taxable. In many states, food, vitamins, periodicals, books, etc. are exempt from sales tax. If you are selling one of these items, you need to know if they are taxable or not.
You will need to create a Resale Certificate to purchase from most wholesale distributors. Most states have a certificate you can simply download and print out. If not, you can create one on your computer.
Simply draft a document with the words: "Resale Certificate" at the top. Now put the following information on the page:
The Business name and address
Sales Tax ID number
A description of the type of goods you normally purchase (i.e. gifts, clothing, jewelry, electronics, etc.)
A statement that says: "This property is being purchased for resale."
A line for your signature and the date.
Many companies will just ask for your resale number before selling to you tax-free. Others will ask you to mail or fax a copy of the Resale Certificate for their files. If you ever sell to anyone else free of sales tax, then you should ask them for their resale certificate so you can keep it on file.
Taxpayer Identification Number (TIN)
This is not a license, but some people confuse it with one. A Taxpayer Identification Number is nothing more than a number the IRS uses to identify your business. Most people just use their social security number. As a business owner (even if you just started yesterday) you can also get an Taxpayer Identification Number (TIN) to use in place of your social security number. If you are a sole proprietor, this is not mandatory and you can just use your SS number. However, I strongly recommend getting a TIN. This way you are not sharing your social security number with strangers.
If you are incorporated, or you have any employees, you are required to get a TIN number. TINs are provided by the IRS. Go to the IRS website (www.irs.gov) and you can download the form and mail it in (IRS Form: W-9). A better way is to call the IRS at 800-829-4933. This is the fastest way to get a number because they give it to you immediately while you are on the phone.
Even if you don't need a TIN number it is a good idea to get one. Besides keeping you from having to share you social security number with strangers, a lot of wholesale companies will take you more seriously if you have one. But remember, you will still need a sales tax or resale number to do business.
Once you have a business license (sales tax number) in your own name you can register a DBA (doing business as) business name. You can use almost any name that isn't already taken in your state. Once you have a DBA registered, take this to a bank and open a business checking account.
When you select your checks, pick one of the large business-type checkbooks with room for more information than just the name and amount of the check. You can also get checks printed to use with Quicken or Quick Books if you use those programs.
Don't forget to use your resale number to avoid paying tax when purchasing shipping supplies. Most eBay sellers add a shipping and handling surcharge to the amount they charge for shipping. Since shipping is technically part of your product cost you do not have to pay sales tax on shipping supplies.
Lastly, once your business starts to make money, you will need to keep good business records for the purpose of paying taxes. Yes if you make money (more than $600 year profit) then you must claim the income and pay taxes to the IRS.
You will want to keep a record of your sales and income and your product costs, shipping supplies & expenses, office supplies, hosting fees, charges for DSL, telephone and so on. All of these expenses can be deducted from your profit and you only pay tax on the remainder. I really advise using a CPA or a professional tax preparer such as H&R Block. If you use H&R, each office usually has one small business specialist. Be sure and ask for that person when you walk in.
If you own more than one business or if you own income-producing real estate, it would be better to spend a little more money and have a CPA help you incorporate as there are several ways to incorporate and each has different tax advantages.
by Skip McGrath