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It's a design company. Websites, logos, book covers, posters, etc. Just something to do on the side (I've already done a book cover).
I've got a friend of mine and me as "employees".
Do you pay your friend? If you do, you have bigger things to worry about than a business license. (Which, as previously pointed-out, is a local matter that you will need to research.)
Like getting an EIN, paying unemployment and social security taxes, withholding taxes, (or issuing 1099's), etc. etc. etc.
If you are your friend are partners in the business, did you actually form a partnership (or corporation)?
If you get a business license you'll alert the locals you have a business, and you'll need to give an address--which might not be a legal location for a business (for example out of your house or apartment in some cities). The local authorities will share your registration with the state, and the state will want to you to get a sales tax license--which could cost a monetary deposit. Plus come April 15 the state will expect a tax return from your business.
If you get an EIN number you alert the IRS that you now have a business and they too will expect a tax return come April 15th. Of course if you're forced to do a state tax return they will share the info with the IRS.
There's really little reason to file for a fictitious business name, or set up a corporation in most cases either. As far as a corp goes, yea you can get some nicer write-offs, but at the expense of a tremendously more complex tax return--and typically it will be in addition to your personal tax return. Oh yea, corps also need a separate state tax return too.
What do You Need, Minimum?
Sales tax law is important, and you can get nailed pretty hard for that. What you need to know is if you need to charge tax or not when you make a sale. Each state is different. For example some don't collect on magazines but they do on books. The rules are sometimes wacky so check. If you must have a sales tax license then remember the magic phrase, "Well, it's really just a hobby," and estimate low, low, low on your annual sales. If you think you'll have under $1000 in sales for the first year you'll probably only have to report quarterly and pay a small deposit up front. If you estimate $100,000 in sales you'll probably have to report monthly and pay a much, much larger deposit.
In my city the local sales tax office gives free classes every month for potential business owners. They didn't take our names at the door and we learned more than just sales tax.
Understanding the sales tax law can save you a mountain of trouble. Let's say your state says you have to charge for something physical like a graphic print, but you don't have to charge for an intangible such as a service. When a client hires you to produce a logo, what are they buying? If you deliver the logo on a piece of photographic paper and you invoice them for one fee, you'll have to collect sales tax on the whole amount (and get a sales tax license). But if you charge them for the design service and e-mail them the file, you probably won't have to collect any sales tax. If the client must have a print, and you have a fancy printer you could invoice them $5 for the print and the remainder for the service of logo designing. But if Kinkos prints the file you can pay Kinkos the sales tax and take the receipt to the client for reimbursement. If you never have to collect sales tax, you won't need a sales tax license.
Keep it Simple!
"Well, it's really just a hobby," will keep you out of all kinds of trouble, but make sure it is just a hobby. The IRS has all these rules to try to determine what's a hobby and what's a business, but it boils down to one simple question: are you trying to make money? Usually their problem is a tax payer calling a hobby a business. Given the form of a sole proprietorship, if your enterprise looses money and it's a business you can write off the loss against your other income, but if it's a hobby you cannot. On the other hand if your enterprise makes a profit you pay the same tax either way. The IRS would much rather you do a hobby and will gladly support your claim of hobbiness.
If it's a hobby you probably don't need a business license or a fictitious business name, and you most certainly don't need an EIN number. Plus, if you don't make a profit you don't even need to fill in a Schedule C, but you do must for a business even if you loose money.
If you set up a corporation you probably cannot get away with calling your enterprise a hobby. Likewise if you have investors and spend lots of money up front in startup costs or hire real employees. If you don't need a big investment or employees stick to the sole proprietorship and call it a hobby--at least for the first year.
Speaking of forms of business, stay away from a partnership. From a liability standpoint it's like getting married. If your partner forgets to mail in his auto insurance and he gets in a wreck on the way to see a client, you could be sued! It sucks. Partnerships, unless they are with your spouse, are evil. BTW, if you go into business with your spouse you call it a sole proprietorship because in the eyes of the law (at least for business) you two are one.
The EIN Number
An EIN number is like an SSN, but for a business. The only time you must get one is if: #1, your business is an artificial person such as most forms of the corporation. #2, you have real employees. The EIN number creates paperwork and paperwork creates headaches. Don't bother unless you must have one.
Real Employees
Expensive! Lots of nasty paperwork and lots of complex laws and many new things to spend money on like extra taxes and insurance. Plus employees are a big liability (which is what the insurance is for). On the other hand be very careful of subcontractors. The IRS has its famous "20 Questions" to determine if a sub is really an employee and getting nailed can be very expensive. It boils down to: is the sub at risk for profit or loss just like any other business? For example, "Sit in this chair, at this desk, and do this graphic design work and I will pay you $10 per hour," looks an awfully lot like an employee. But, "Come back next week and deliver those logos we talked about and I'll pay you $300," looks an awfully lot like a subcontractor. The IRS has a saying, "If it looks like a duck, walks like a duck, and talks like a duck--it's a duck." They don't care what you call something, they care what it looks, behaves, and sounds like.
So how do You Handle this Partnership?
If you find a client and you need your buddy, hire him as a subcontractor. If he finds a client and he needs you, then he hires you as a subcontractor. Keep your businesses separate. Just exchange checks, and at the end of the year forms 1099.
The Critical Thing...
is to keep really good records. Keep every expense and every source of income. If you're working with other companies as your customers they will want to write off your services on their taxes, which means they will need your SSN and they will give you a 1099 at the end of the year. So the IRS and the state will know you had income. You also had expenses, but they become easier to justify if you have the records.
Profit and Loss
As strange as it might seem, loss is better than profit. The thing that really matters is cash flow. Expense everything you can, use the quickest depreciation schedules commonly used in your industry, and get those paper expenses up. On the other hand don't setup a deal that is low profit just to try to minimize your taxes. I once heard a real estate guru say, "I'd much rather have $500,000 per year taxable income than $100,000 a year tax free."
So, if you buy some little $50 program for you computer, then expense it. If you buy Photoshop you'll have to depreciate it, but do so on a three or four year schedule rather than five (software can often be depreciated on a quicker schedule than most items).
Nickels and Dimes
You do not need Better Business Bureau membership, or special insurance, or a fictitious business name, or other trappings of a business when you are a hobby. And if you do the business name thing your advertisement to that fact will just attract photocopier salesmen and other types looking to spend your money.
The Bottom Line
For a simple little enterprise such as you've described, do it as a hobby. If it turns out to be a money maker then shift it into business mode. All these little expenses like the licenses, filing fees, membership dues, etc. are each cheap, but they add up to hundreds of dollars you can't afford the first year.
Disclaimer
I Am Not A Lawyer, but I have been through this several times and on both the dumb and the smart side of the equation.
Scotty
[edited by: ScottyDM at 8:21 am (utc) on Nov. 1, 2006]
