Starting a business can be easy or difficult depending on the drive and responsibility of the proposed business owner. People generally do not realize how arduous turning great ideas into profitable businesses can be in a long or short period of time. Important steps must be taken by the new entrepreneur to choose the appropriate business entity and obtain the right business licenses to conduct business properly and legally. Unfortunately, ignorance during the set-up process or during the initial stages can lead to legal issues or business failure. When starting a business, owners need to have their business recognized by the state they are operating in and acquire a sales tax license to gain legal protection and to properly charge sales tax for goods.
Most people start a business from their home by registering the business name as a sole proprietorship or partnership in the county in which they reside. The owners obtain Employer Identification Numbers (EIN) from the IRS and report information about the business on their personal tax return. This method is widely used because sole proprietorships and partnerships are by nature easy to create, maintain, and close down. Unfortunately, the characteristics of sole proprietorships and partnerships have many disadvantages to business owners. One of the disadvantages of having one of these two entities is the lack of separation of the business and the individual. If a customer files suit against a sole proprietorship or partnership, the customer can go after the possessions of the small business owner such as cars, houses, and property. Similarly if the business files bankruptcy or runs into financial hardship, banks and collectors can use the same personal property to settle debt or payment dilemmas. In this situation a failed business can not only destroy the dreams of a business owner but it can also alter their personal life in a huge way.
Knowledgeable business owners or those who have received professional advice will form a corporation or limited liability companies to offset such a situation. These businesses are not used initially by individuals because people are unsure how to create, maintain, and dissolve them correctly. The corporation and limited liability company are created by filing Articles of Incorporation or Articles of Organization within the state the business will operate. Corporations and limited liability companies separate the business from the individual and allow flexibility on taxation. If a customer files suit against a LLC or corporation, they are generally only able to make gains on the business. Similarly if the business enters into bankruptcy or financial hardship, only personal property owned by the business can be affected protecting the personal property of the shareholders or members. Owners of these entities are also able to choose how their business will be taxed. Limited liability companies can be taxed as a sole proprietorship, partnership, s-corporation, or c-corporation while corporations can file for sub chapter “S” status or by nature stay a c-corporation. Even though these entities can be complex to create, maintain, and close down, they offer the protection and flexibility that every small business owner deserves and needs.
Along with choosing the best business entity owners must know if they need to obtain a business license or sales tax ID number. A list of appropriate licenses and permits for businesses can usually be obtained from the county where the business operates. The sales tax ID number is usually harder to understand for small business owners. Sales tax was created in 1921 in the state of West Virginia. Today, 45 states and the District of Columbia require anyone who is physically engaged in selling taxable items to register as a retailer with their state and collect sales tax. Businesses operating E-commerce in any of the 46 areas usually need to obtain a sales tax ID while people engaging in Real Estate activities usually have no use for them.
In most jurisdictions the sales tax license is acquired from the Department of Revenue by submitting easily accessible applications. Again, business owners must check to see if the item they are selling is taxable property. Taxability varies by state/jurisdiction so local laws need to be understood before any selling occurs. Sales tax rates are always different as well and they usually vary from county to county. Items are taxable within jurisdiction where these items are delivered to customers or where customers take delivery of the product. However, sellers are only required to be registered and collect sales tax in the states where the sellers have a physical presence. For example a seller with a physical presence in New York will be required to collect sales tax from all taxable sales delivered customers within New York. Since each county in New York State has a different sales tax rate, the amount of tax is to be based on the county where product is received by the customer. However, if the same seller sells an item to a customer in Florida, no sales tax is to be collected unless that seller has a physical presence in Florida such as a warehouse or principle office. In this scenario sales tax will not need to be collected. Instead the Florida customer will be liable to pay Use Tax to the state of Florida based on the sales tax rate of the jurisdiction where the product is acquired by the purchaser.
New business owners must be well informed before engaging in ventures of their own. Failing to incorporate or organize a business with the state can result in the loss of personal property due to the lack of separation between the individual and the business. Failure to properly obtain a sales tax license can result in heavy fines from the IRS and the inability to properly conduct business. Professionals at The Tax Club can help you with questions you may have regarding starting your own business or obtaining the appropriate licenses to run your business legally. Contact us today for a free consultation at 888-773-7176.
