So you want to start a business. The question on your mind now is: how?
Step 1: See if a business license is required in your county.
Not all counties require business licenses, but most of them do. Some counties don’t require licenses, but individual cities (called “incorporated cities” — those cities having their own government) do.
If a license is required, go to your city/county government office. Your first stop is the Treasurer/Tax Collector’s Office. This is where you apply for a business license. Mine cost $75. The Treasurer will send you to a couple other offices (usually they’ll provide a map) that need to sign off on your license. Usually these are the Planning Department and the Assessor’s Office, so they can check that the location you want to have your business at is in fact a legal location (some cities/counties have very strict rules about where certain types of businesses can be located). If you’re conducting an internet business, your business location would be your home.
Step 2: Obtain a Fictitious Business Name
You need an official name for your business, so your next stop will be the County Clerk’s Office. You want to register for what is known as a “Fictitious Business Name.” That is because legally (if you’re operating a sole-proprietorship), your business name is the same as your full legal name. So if your name is John Manuel Smith, your business name is John Manuel Smith. Any other name must be registered as a Fictitious Business Name (e.g. “John’s Tires”). This is so someone can find out who the actual owner of your business is. You can have more than one fictitious name associated with your business, but each one costs money. One name is usually around $15. Once you register a name, you have to run a notice in a local newspaper for four weeks. This usually costs about $40, and is required by the government to complete your registration.
Step 3: Breathe
Congratulations! You are now an official business. Take a moment to breathe, and then get back on your feet! There are some other steps you may need to do.
Step 4: Obtain an EIN
You need a Tax Identification Number to start a business. If you’re running a sole proprietorship (meaning you’re the sole owner) and you have no employees, your Social Security Number will suffice. However, if you plan on having employees, you need to obtain an EIN. An EIN (Employer Identification Number) is like a S.S. Number for a business. Even if you don’t plan on having employees other than yourself, an EIN is a good idea, and some businesses require you to have one before they’ll work with you.
You can apply for an EIN electronically on the IRS website.
Step 5: Obtain a Sales Tax Permit (a.k.a. “Seller’s Permit,” “Resale Permit”)
For every tangible good you sell within your state, you are required to pay a sales tax to your state (note: some states don’t collect sales tax — e.g. Oregon). A tangible good is anything you can touch. For instance, a coffee cup is a tangible good. Coffee is a tangible good. An eBook about coffee is not a tangible good, although an eReader (e.g. Kindle) to read your eBook on is.
Most businesses don’t like having to pay money to sell goods, so they collect the sales tax from their customers instead, which they then use to pay the sales tax they owe to the state. A Sales Tax Permit (a.k.a. “Seller’s Permit” or “Resale Permit”) is needed in order to collect tax from customers.
California businesses can learn how to register for a Seller’s Permit on the California Board of Equalization’s website.
Sales tax only gets collected once per product (not once for each time the product changes hands). Therefore, an added benefit of having a Seller’s Permit is that if you buy a product (e.g. purchase books from a printer) that you intend to resell, you can give them a copy of your permit to the business you’re buying from and they won’t charge you sales tax, since you will be charging sales tax to the end consumer.
Even if you choose not to pass on a product’s sales tax to its consumer, you will still need a permit because the government requires you to report all the sales tax you owe to it. Depending on how much sales tax you earn, you will have to files Sales Tax Reports either annually, quarterly, or monthly. The Board of Equalization will determine how often you need to file.
Although services don’t qualify as “tangible goods” (e.g. a plumber doesn’t have to pay sales tax on fixing someone’s sink), Shipping and Handling often do get charged sales tax. Read here for more information.
Step 6: File Annual Taxes
In addition to your sales tax filings, you will need to file annual income taxes at both the state and federal level. For a sole proprietorship, this is relatively easy. You use the same personal income tax form that you usually would, and add Schedule C (to calculate the profits/losses for your business) and Schedule SE (to calculate the Medicare etc. tax that all self-employed individuals must pay).
- 2011 example of Schedule C and Schedule SE
Note: In California, at least, you do not have to report sales on your state tax return if you have not yet been paid for them. I do not know yet if that holds true on the federal level.
Step 7: The Rest Is Up to You
As far as the government is concerned, you now have a valid business. Whether it succeeds or not is up to you. Things like creating a business plan, financing your business, obtaining and building a website, etc. are important and helpful (though not always essential) elements to creating a profitable business.
An organization called SCORE exists to help you on your journey. Their entire purpose is to answer questions from (prospective) business owners and provide you with the resources to run a successful business. You can access their website here: http://www.score.org/
I imagine a lot of what you have said here will be new to most people, such as the requirement for a ‘fictitious business name’. The intricacies and regulations involved with running your own business can be plentiful, and it’s wise to check them out before you start so you don’t fall foul of any laws.