If you are selling something, whether it is a product or service, to the public or to businesses, you are “in business.” This means you must act like you are really in business by creating a formal business structure and doing all the things real businesses do.
Last time, I presented 5 reasons why you should act like a real business. Today, 5 more:
1. Required for Paying Sales Taxes, Use Taxes, other Taxes
The business owner I mentioned in my last post is selling crafts at flea markets and craft fairs. She wondered if she must collect sales tax on her sales. Most likely YES! It depends on the state where she is selling. Most states require that sales tax be collected for most products, including hand-made products. So she is going to have to figure out a mechanism for collecting those taxes. This means she must (1) register with her state taxing authority, and (2) implement some kind of sales tax process, either by hand or computer. Many craft vendors use point-of-sale machines (little credit card processors). To do all of this, there are processes she must go through, including getting a business bank account, an employer ID number, and getting the equipment.
2. Saves Money on Attorney Fees
This is one of those “pay me now or pay me later” things. If you have an attorney help you set up your business, you will pay some money now. But it will save you from having to call an attorney in a panic later, and paying lots more money. For example, when something goes wrong and the business owners start to feud is not the time to put together a buyout (or buy-sell) agreement. And when you have a tax problem and realize you should have formed a corporation, you can’t do it for last year.
3. Same Goes For CPA and Tax Advisor Costs
Have a CPA (not just an accountant) help you set up your business financial structure, and get good tax advice, either from your CPA or someone else, from the beginning. What if you made lots of money the first year and you weren’t tracking deductions? You would pay a hefty amount to the IRS for taxes! It’s better to pay the CPA now than to pay that person more money later to help you fix the mess you’re in.
4. Makes Transitions Easier
When you start a business, you figure it will always go on as it has; no one likes change, and we try to avoid it. But stuff happens: one of the owners becomes disabled, or someone decides to get out of the business. What if one of the owners gets divorced and his/her spouse sues to get part of the company? This stuff can be a mess. If you go into business with others, I urge you to get a legal document that prepares you for transitions. This “what if” language can be in your LLC operating agreement, your partnership agreement, or your corporation’s by-laws, or it can be a separate agreement. But you need something that helps you get through this change by following what you have all agreed upon when things were not so hectic.
Next, the Most Important Reason to start a business “for real.”
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