Online Business Types – You must Choose One
One of the things that attracts people to do business online is how easy it is to get started. Buy a domain, set up a hosting account, install WordPress, populate your website, and you’re in business. A lot of new online marketers believe that’s all there is to it and that’s where the trouble lies. Setting up a real business involves some legal moves that can’t really be ignored.
If you want to be recognized as a real businesses then it requires a legal business structure for a lot of reasons. The right structure can offer protection of personal assets and income tax benefits. Those are things that cannot be ignored when you go into business for yourself. However, figuring out which business entity is right for you can be tricky.
– This is where the majority of people start. Operating your business as a sole proprietor doesn’t involve much more than simply saying “I’m in business.” As a Sole Proprietor type of business structure you and your business are one and the same, that is, there is no separation of assets or liabilities between the business and you. There are no special tax forms to fill out except for a schedule C. You should still apply for an employer identification number just to help prevent identity theft. Banks usually require you to apply for a DBA (doing business as) and your local government might make you do the same.
Depending on how savvy you are this can cost probably less than twenty dollars in a small town community newspaper to nearly a hundred dollars in a large county or city. There are usually two separate charges, even though a newspaper will do both together. One charge to publish the DBA information and another charge for the County to record it. I have filed a DBA several times and using the local community paper to file it was a lot cheaper compared to the mid size city or newspaper I might normally consider using.
Another tip, at least for those in California; you can file multiple names on the DBA form even though it has space for one name. It will only cost you about ten dollars or so for each extra name. Yes you will have to squeeze the extra names in, but you save a lot of money and allow yourself another DBA at much less cost. The difference in cost can be sizable; for example for two names $90 if filed on same form vs $80 + $80 if using the normal two forms. I filed three additional business names once for an additional $30 which was way less money, time, and effort than filling out three separate forms. This same procedure applies to an LLC in California.
A Sole Proprietor type of business structure really does not offer you any sort of legal protection. So use caution if you adopt this form of business, although it is where most online marketers begin. Operating as a sole proprietor offers no protection of your personal assets should you be sued for any issue related to your business. It means you are personally responsible for any business debts you accumulate.
Limited Liability Company, or LLC
– A limited liability company is nearly as easy to set up as a sole proprietorship, but affords some legal protection for your personal assets, similar to a corporation. As an LLC, you will file your income tax just as you would if you worked a “real job,” so you don’t have to worry about any complicated filing requirements. You do, however, have to be careful to clearly separate your business from your personal finances. Failing to do so can leave your personal money vulnerable in the event your company is sued. It can also be a problem in figuring expenses for income tax purposes if you do not have good clear records.
Most states make it easy to set up an LLC yourself for a small fee. The fees vary greatly from state to state and some states like California the fees may not considered small fees by some. By filing out the appropriate paperwork with your state’s secretary of state office and filing it you can become an LLC. Like the sole proprietor, you usually need to file a DBA showing your business name and business address along with a few other bits of information. If you have the money, you can save yourself some time and possible frustration by having an attorney handle it for you. You can also find several legitimate companies online that will file all the paperwork for you at a very reasonable rate. Some will even file for your federal tax ID (EIN) number at the same time, although it’s easy for you to do that yourself directly with the IRS online.
– Starting and running a corporation is more complicated than an LLC or sole proprietorship, but it does have some additional benefits, like the ability to sell shares (or part ownership) in the company to raise funds. Corporations come in two flavors the S-Corp and the C-Corp, with the primary distinction being how they are taxed. Corporations also have at least one major downfall. That is double taxation. The corporation will pay Federal income taxes as well as you also having to pay Federal taxes on any income from the business. A second pitfall or possibly inconvenience is the formal paperwork and yearly meeting required for C-corporations.
– This type of structure is taxed the same as an LLC, meaning all profits and losses are claimed on the owner’s personal tax returns. A C-Corp is taxed as an entity itself, and any income you pay yourself (as payroll) is also taxed on your personal return. Deciding which choice is right for you and your business can be tricky, so it’s a good idea to speak to an attorney or accountant, or consult with a lawyer. In some states it may cost less to be or file for an S-corp, but in other states that’s not the case, as well as the normal favorable treatment in taxes for an S-corp may be non existent.
Business and tax laws vary from state to state, so before deciding which business structure is right for you, it pays to do some research. Talk to other small business owners, read about tax laws and what is required of business, especially in your state, which you can do by searching your own state’s online documentation.
For anyone looking to save money or even just to be aware of what’s required of the various forms of business in your state you should check this out. In some cases and for certain kinds of business, such as online businesses it might be advantages to even register your business in another state. For example I could easily register my online business in the state of Nevada because it cost less and Nevada has no state tax compared to California where I live.
The tax situation can be significantly higher in one state compared to another. Saving money and being knowledgeable of tax laws and business requirements should be high on your agenda if money is a consideration. It will help if you start off knowing this and starting your business structured the best way for your situation. That is the first step to building your online business to a successful, profitable enterprise.
Copyright © Charles Harmon