|Do I Need a Business License?|
I have a decent-sized mainstream site.
I run a site that gets about 45,000 unique visitors and half a million page views a month. We are mainstream and fairly respected in our field, but the people who ran it before me never aggressively pursued advertising.
We are being courted by advertisers and potential affiliates, and I intend to market the site more sensibly. My question is, should I look into incorporating or setting up an LLC if I expect to make (and spend) thousands of dollars off the Web site in 2003? I think I can make at least hundreds a month easily.
I got us a Federal Employer Identification Number because a trade show we wanted to cover required it. Will I be required to pay taxes on the site as personal income or will I have to fill out a separate return? I am in Illinois.
What do you guys do?
If you are running a business, you will need to register as a business.
Consult an accountant and lawyer for tax and legal advice.
You will have to pay taxes on your earnings.
|My question is, should I look into incorporating or setting up an LLC |
First off, considering the thread title, you should recognize that whether you need a "business license" is completely separate from whether you are incorporated, and would generally be a local issue. That is, creating a legal entity under which to operate your business and getting any necessary licenses needed to operate that business are two different things.
There's nothing inherently wrong with operating as a sole proprietor using an assumed name or "dba," but a more formalized business structure would probably bring tax advantages and some legal protections.
Each person's situation is quite different; and this is an issue that -- if you aren't comfortable that you have a very strong understanding of it -- it's worth spending some money on consulting with an expert (an accountant experienced in small business formation, in this case).
|Will I be required to pay taxes on the site as personal income or will I have to fill out a separate return? |
Depends on the form of business you formalize, or whether you do or do not create a separate business entity. If you operate as a sole proprietor, you'll report your business income by filing a Schedule C along with your 1040. With an LLC or an "S" Corp you would generally do the same thing, as that company's profits would "pass through" to you; but an LLC could elect to be treated as a separate entity and so would, like a "C" Corp, file a corporate tax return.
Well, my only "business" will be selling advertising space, but I plan on reinvesting that income into the site. I guess there's no need to set up any special status right now.
Thanks for the help. This forum is an incredible resource.
Lawyers always advise to incorporate but are seldom incorporated themselves. How many doctors do you know who are incorporated? If anyone needs limited liability they do.
The best advice I've ever received regarding the matter:
Make the money...and THEN worry about paying the lawyers/business fees etc.
If you don't make any money...the money you spend is wasted. Another issue is the time getting 'set up' as a business is time wasted while trying to actually START making money.
Get the money coming in...and then worry about the tax implications, etc.
From the USA Government's point of view, if you don't show a profit in the first few years of your business...it's just a failed business plan or a HOBBY.
'Hobby' being the keyword.
When does a 'hobby' become a business? When you start showing that you are serious about making a profit.
Granted...this is a grey area in the tax code, but the IRS looks at a lot of businesses and says they are 'hobbies'; the effort to make a business profit out of it is not there. If the 'effort' is NOT there, it's a hobby. If the effort IS there, AND you are showing an income that has tax implications (without considering any expenses or losses), then you can look at calling it a business.
There is some wisdom in writing off many first year expenses, though, so make sure you keep your receipts for your expenses. Don't be afraid to take a loss the first year...businesses cost money to start.
In otherwords: get SOME money coming in and THEN worry about being called a business. With no money coming in, the IRS won't bug you at all. When money STARTS flowing in, make sure you have kept track of your expenses for that year, and take a loss if necessary. Re-invest the tax refund into your new business the next year.
No money coming in = No business. Wait for the money.
Disclaimer: Not a Tax Attorney...but this was good info. from a guy who has started many businesses..and has worked well for me.
Don't you need a business license to set up a merchant account though? Or even open a business bank account?
|Lawyers always advise to incorporate but are seldom incorporated themselves. How many doctors do you know who are incorporated? If anyone needs limited liability they do. |
Which is why they all have malpractice insurance.
Most medical practices, and most law firms, are incorporated, either as Corporations or as some form of LLC. You'd find few lawyers actually billing out hours on their own without having formalized an entity under which to do it.
Not that there aren't good valid reasons sometimes not to incorporate; there are. But "lawyers and doctors don't" isn't one of them.
|Don't you need a business license to set up a merchant account though? Or even open a business bank account? |
No. Again, though, a business license is a permit, issued by a local government, to operate a particular type of business, or to operate a business in a particular location. The thread title notwithstanding, it's not what's being discussed here.
Depending on your location and your bank, you may need some documentation of your business name in order to open a business bank account. That is, if you're not operating under your own name you should have a registered assumed name or dba and might be asked to document that.
But there's never a requirement that you incorporate in order to operate a business. The "sole proprietorship" is completely legitimate and recognized by everyone, including banks and the IRS.
[edited by: JayC at 9:57 pm (utc) on Dec. 17, 2002]
|Don't you need a business license to set up a merchant account though? Or even open a business bank account? |
There are many credit card gateway processors that do not require this because all transactions are technically processed by the service you sign up for. And they do not require a business license nor a business bank account.
Be advised that an LLC doesnt offer half of the liability protection it use to, its not even a corporation, its a Limited Liability Company. I agree though make the money first and then worry about your paperwork.
|Be advised that an LLC doesnt offer half of the liability protection it use to |
Could you elaborate on that? What has changed to lessen the liability protection of an LLC?
The LLC, like the corporation, is a construct of the individual states. So the specific protections it brings vary depending on the state in which it is formed. In general, though, in most states the LLC form offers the same limited liability (essentially that the LLC itself is the only entity responsible for the company's debts; the individual members are shielded -- though there are exceptions) as is offered by the corporation. Both the LLC and the corporation are separate, independant legal entities from the members or shareholders.
The LLC can also leave you with the same "alter ego liability" as the corporation can, so neither is complete protection... and "limited liability" in either case refers to financial liability for debts of the company, you're still responsible for your own acts of negligence, etc.
But the point is that in most US states the liability protections are pretty much the same for the operators of either form of entity -- and there are some cases where the LLC, being the newer form, has protections that weren't created for the earlier "corporation" structure.
I would always recommend that you incorporate. It protects you and the company. Secondly, it shows that you are a real professional, not just a hole-in-the-wall.
For years, I operated as a schedule "C". When we incorporated, we got a lot more business. It helps.
I would go for a "S" corporation. Forget the LLC, unless you are going to have more then 75 shareholders. To incorporate as an "S" corporation, you need to be filing the incorporation in January, to meet the March 15 deadline.
To research this go to:
Illinois Secretary of State
Springfield IL 62756
(217) 782-2201 or (800) 252-8980 or (312) 814-2262
$75 + 25 franchise fee - Expedited Service fee of $50
If you want to save money, go to a book store, and get a book on incorporating in IL. It will give you all the forms you need, and any necessary paperwork and permits, IF needed. It is actually pretty easy to incorporate.
I live in New York, and business permits are not needed, but each state is different.
|I live in New York, and business permits are not needed, but each state is different. |
I also live in New York, but formed an LLC in Delaware.
I had my reasons for doing so (not taxes).
It actually cost me more to form it and then to register it with NYS DOS as an FLLC.
So you might want to consider forming or incorporating in your own state - wherever your are going to do business.
Otherwise, you'll pretty much have to pay twice for all paperwork.
Thanks for all the amazingly detailed advice. I will definitely look into what mikie and others here have suggested.
Mikie recommends always incorporating, but I disagree that this is the right answer for everyone. Incorporating brings with it additional ongoing paperwork and tax consequences (sometimes beneficial consequences, sometimes not).
With an LLC (even moreso with a single-owner LLC, if your state permits it), there is very little (or zilch) extra paperwork beyond the initial organizing papers. Like as S Corp, all income/loss is reported on your personal income tax return.
Forming an LLC in most states is pretty darn easy (my Georgia Articles of Organization was two paragraphs), so if the choice is between a sole proprietorship and an LLC, I'd pick the LLC 9/10 times. It is just too simple not to, and it provides tangible benefits (some liability shielding) and some intangible ones as well (more "professional looking", at least to some).
(insert usual "I'm not an attorney or CPA" disclaimer here)
I'm not at all sure about this, but if I recall correctly,
when you have a corporation, you need to "register" the corporation
in every state you plan to do business in...and pay any fees
associated with that -- yearly -- in each of those states.
Some large companies are so registered in every state.
I recall some folks and books advising incorporating in a
state offering the best tax advantages, rather than the "home"
state you actually do business in. Most states get around
this by making those corporations doing business in them --
and located in them -- pay as much if not more tax to them
as you would had you incorporated in your "home" state rather
than in the "tax haven" state.
Also, I recall something about legal issues involving being
incorporated in a different state from the one you actually conduct
business in if one gets sued.
For web folks, I wonder if one is "doing business" in the
state the servers hosting your sites are in -- or just the
one you FTP or SSH in from? Anyone know of any case law on this?
I'm not a lawyer, and the above is not legal advice -- just
my opinion and recall of some issues to consider when forming
Maybe we should have a paypal button for Lawman we could all
chip in on for answers to questions like this! :-)
You want competent help here. Talk to an accountant. A lot depends on your entire tax and company picture on what is the right choice.
Choosing between a sole prop and a corporation of any kind: if you do a corp, you must keep your books entirely separate from your personal accounts. If you mix money, take loans from the business that aren't accounted as loans, etc., the corporation will not give you any protection. Creditors can do what's called "piercing the corporate veil" and come after you personally. So if you treat your books like you are running a sole prop, it gives you as much legal protection as a sole prop.
Example: don't put personal expenses on the company business credit card unless you document it as a loan and repay it.
I guess I have a few questions.
Why did you buy the site? Do you want to make money from it? Is it a hobby? How many hour per week do you spend on it?
If you bought it to turn it into a business or to use it to transition into "business owner, then of course, find out from your clerks office (state, city, town, county (all that apply). What the process is for becoming a licensed business. affiliates, and I intend to market the site more sensibly.
As far as sole prop, LLC, Incorporation and evrywhere inbetween, the best person to ask those questions is a lawyer and your cpa. You can do some research on www.businesslaw.gov and nolo.com, too.
Having a Federal Employer ID only means that you have or will have employees and/or you don't have them and like the situation you have, you need the number. Call the IRS up and let them know IF you'll have employyes or not. Why? They automatically set folks up to require taxes for employees quarterly and they send a horrid note out, with a penalty fee, if you don't send them the money. By calling them up, you'll make sure that you're set up so taht they don't expect employee taxes from you.
Since you expect to make money from your business, even a low amount, you might as well look into the process AND take an free IRS tax class for home or small business owners. Well worth the few hours.
No matter what you do, any income would be considered ordinary income and you'll pay taxes on it.
What have I done?
I registered and have a license as a sole prop. I hope by the end of 2003 to become an LLC or corporation. IN my state, both cost the same to do. I'll be using www.activefilings.com to do it.
And of course, by being a sole prop... I get to have a whole host of deductions.
IMO, you're much better off looking into being a viable business owner now... before things get hectic. You don't score points with the IRS for "not knowing" or "not being aware".
Now, if you're doing it for a hobby, check with the IRS to see what the maximium income from it might be before it's considered a business.
IRS - 800-829-1040