Setup Your Business Entity
This is the next step in setting up your business regardless if it's online or a brick and mortar location. For brick and mortars, your business license might be required to be displayed. Refer to your local jurisdiction for rules and regulations on displaying permits and licenses.
Once you’ve decide the type of business entity and tax structure, the next step is to officially setup your business. This includes getting your paperwork in place and opening your business bank accounts. The bank accounts could be a traditional banking entity or an online banking institution where you can purchase your supplies and the ability to receive revenue. We’ll cover the steps you’ll need to take in this article. Before we discuss the business paperwork, let’s discuss your responsibilities at the federal and/or local government level.
SALES TAX
How many states require sales tax?
There are 45 states and the District of Columbia collect statewide sales tax. Some states require you to setup an account with the local jurisdiction. In most states, this is the State’s Treasury Office. This is a bit tricky and you will need to understand who is responsible for collecting and remitting each state’s sales tax.
Are you a seller in a marketplace?
Each marketplace has its own’s rules and you need to read and understand their seller agreement specifically with the topic of sales tax. Some marketplaces collect and remit sales tax on your behalf. The MAC Online Marketplace does this for you. If the marketplace does not collect and remit on your behalf, then you are ultimately responsible for collecting and remitting to the correct state and/or local jurisdiction.
Does your business exist in a sales tax state?
If you are an individual retailer, or your marketplace does not collect sales tax on your behalf, and your business is in one of the 45 states or Washington, DC, you will need to setup your tax account with the state and/or local jurisdiction prior to selling your first product. The reason behind this is that most likely you’ll sell your products to a customer within your state.
What if I sell to customers not in my state?
If you sell to a customer outside of your state, you’ll need to establish a financial nexus. A financial nexus is a sales tax threshold. The threshold is either a monetary value, or both a monetary and transactional threshold. Most states have a sales threshold of $100K, and of course, some are higher. The usual transactional threshold is 200 transactions in a year. The good news is the threshold is based on the previous 12 months.
SETTING UP YOUR BUSINESS ENTITY
Do I need a business license?
This depends on the business entity, and each state has their own rules and regulations regarding business licenses.
Sole Proprietorships
Some states do not require sole proprietors to have a business license if you conduct business in your personal name. However, if you have a trade name, you should file a DBA (Doing Business As) and register your business name. This normally require a nominal fee when registering your DBA.
LLCs, Partnerships, S-Corps
These business entities will require business license, business registration, sometimes a business permit, and/or documents such as partnership agreement and/or articles of incorporation.
The documentation will require you to pay fees. The fees range from a few hundred dollars to thousands. Each state has their own fee schedule. These entities will also require its own federal employer identification number (FEIN). The FEIN is free and the EIN application is relatively quick and you can obtain it online.
There are some services, usually online, that bundles the creation of the business entity and its tax classification as well as establishing its FEIN. Be aware of scammers as the FEIN is free. Each of these entities will require paperwork for defining the partners, owners, shareholders, and/or stock classification.
SETTING UP YOUR BUSINESS BANK ACCOUNT
This step is key for getting paid. You’ll need a business bank account from either a traditional brick and mortar financial institution or from an online bank, sometimes called direct banks, branch-less banks, or virtual banks.
For sole proprietors, opening a bank account is relatively easy and simple. Most banks require only your business license, and/or DBA paperwork, and your social security number (SSN).
For LLCs, Partnerships, S-Corps you’ll need your federal Employer Identification Number (FEIN), the articles of incorporation, ownership agreements, shareholder agreements, and/or the state issued business license. You’ll also need to have cash to deposit into your bank accounts that matches the amount specified in the ownership agreement.