Starting an online business can seem overwhelming at first. Finding
right domain name, getting reliable hosting, web design, and figuring out credit card transactions are full-time concerns. One often-overlooked component is taxes. If your website is selling something tangible, you are required by law to report it. Leafing through myriad of tax rules and regulations is frightening, and some just ignore it altogether (at risk of being audited). However, if you want to save yourself from future headaches and lawsuits, it's best to get everything straightened out as soon as possible.Do I need a tax ID number? An Employee Identification Number (sometimes called Federal Tax ID number) is a nine-digit number assigned by IRS that identifies your business to government. You will need to get one if one or more of these apply: 1.You pay wages to any employees. 2.Your business is a corporation or partnership. 3.You file pension or excise tax returns.
If you are only employee for your business, then you can run your business as a Sole Proprietorship entity, and use your Social Security Number as your EIN. However, you should look at all of business structures before you decide which one is right for your business.
What are my business entity options? A Sole Proprietorship is most common for an upstart online business. It is owned and maintained by one individual, and has no existence apart from that individual. All income and expenses are on your personal tax return (form 1040). It is simplest form of business. However, you are personally liable for your company's liabilities. If someone sues your business or your business gets too far into debt, your personal assets can be seized.
A Partnership involves two or more people who share profits, or losses, of business. It's just like a Sole Proprietorship, except you need an EIN. Also, profits, losses, and liabilities are split between partners.
A Corporation is a separate legal entity from individuals who started it. It can be taxed and is legally liable for what it does. The benefit of a corporation is that its corporate status does not hold employees liable. The downside is that it is expensive to start, and requires a lot of bookkeeping.
A combination of a Corporation and a Partnership is Limited Liability Company (LLC). The advantage is that profits and losses are passed to owners without taxing business itself, and owners are not personally liable. However, there is no stock, fewer incentives, and loads of paperwork.
As you can see, there are pros and cons to each business structure. It is highly recommended that you talk to a local accountant or lawyer as to which structure best fits your needs.
What other forms and taxes do I need to worry about? Business License There are many types of licenses, and even for an online business you will probably need one to operate legally. If business is located within city limits, then your license comes from city. If you are outside city limits, license comes from county.
Fictitious Business Name If your business uses a name other than your own, then it is required by Trade Name Registration Act for you to register fictitious name (which is also known as D/B/A, doing business as). It verifies that you and your business are one and same. Depending on where you live, form is usually filed at county clerk's office.
