How to Start a Business in the US: Taxes and Legal Requirements Handbook
You have a feasible business idea and are ready to start your journey as an online business owner. You’ve researched your target market, found a niche for your online store, and have come up with a brand name. Now, you need to make your business official. This includes understanding the legal and tax requirements you have to follow in order to run and grow your new business in the US.
That’s why we’ve put together this quick guide covering US regulations and taxes—what and where you may need to register, which taxes to file, and deadlines to remember.
Keep in mind that we’re not accountants or legal experts, so use this as a starting point for finding out the basics, not as professional advice. Always consult a professional for information specific to your circumstances.
Step 1: Choose a business structure
The business structure you choose will dictate the legal and tax requirements you have to follow. Most US small business owners choose from the following structures:
A sole proprietorship is a type of enterprise that is owned and run by one person.
This is the simplest form of business structure—sole proprietorships are easy to set up and don’t require a lot of paperwork. While a sole proprietor is entitled to all of the business’s profits, they are also liable for everything the company does, including losses and debts.
A partnership is a business that has two or more owners. Each person contributes money, property, labor, or skill, and shares the profits and losses of the business.
In a partnership, the parties involved are all financially and legally liable. It’s beneficial in the sense that you can split costs and responsibilities with someone else, but it can also be a risk if you end up falling out with any of your partners.
Limited Liability Company (LLC)
An LLC is a hybrid entity—it combines limited liability with a flexible structure. Unlike a partnership or a sole partnership, LLC’s provide some protection for your personal property.
Each state has different LLC regulations, so check with your state if you’re interested in taking this route. Definitely consult a lawyer or a certified public accountant, since starting an LLC is more complicated than forming a partnership or sole proprietorship.
Like an LLC, a C corporation (or C-corp) provides limited liability—owners of the corporation aren’t personally liable for the contractual obligations, debts, negligence, or wrongful acts of the corporation, but are more difficult to set up and maintain than an LLC.
Another downside of C-corps is that with this business structure, taxes are filed separately from its shareholders (the owners of the corporation), so it’s possible for corporations to be taxed twice (corporation pays taxes on profits, the shareholder pays on personal income).
An advantage of a C-corp is that it can be formed by non-US residents. Plus, some legal experts recommend it for companies who want to have shares of their company and who expect to have investors.
An S corporation is a business entity that passes almost all of its finances to its shareholders. These finances include income and losses, as well as tax deductions and credits.
Specifically, shareholders are responsible for income and losses. S-corps pay specific corporate taxes that apply only to passive income and gains outside of what shareholders keep. This allows S-corps to avoid the double taxation that often accompanies C-corps.
We always recommend consulting with a legal expert to determine the appropriate business structure for your new business. Note that each structure also has different tax requirements, so you may want to consult a tax professional as well.
Step 2: Register your business
Once you’ve decided on a business structure, you’ll need to file all the appropriate documents to make your business official, like registering your business with the appropriate authorities and sorting out all the permits and licenses.
Choose the state you’ll register in
You can register your business in any state you want, but it’s much easier to register in a state where your business is based, even if you operate your business online. Your business is considered based in a given state if:
- Your business has an office or a warehouse in the state
- Most of your company’s revenue comes from the state
- You conduct in-person business meetings in the state
- Any of your employees work in the state
If you form your business in a state where you’re not based in, you’ll have to register your business in your home state as well. A home state is a state where you were born, raised, or currently reside in. This means you’ll be responsible for annual fees in two states instead of one.
You can register your business by filing the appropriate paperwork to the IRS or hiring a service to do it for you.
Obtaining your federal tax number
Depending on the business structure you’ve chosen, you may need to register your business on a federal level as well.
This involves getting a federal tax number, also known as an Employer Identification Number (EIN) or Federal Employer Identification Number (FEIN). It’s used for identification purposes and for paying taxes at the state and federal levels.
This isn’t always mandatory, like if you’re a sole proprietorship. With this business structure, you can use your own Social Security Number as a tax ID instead.
First, consult a tax professional to find out whether or not you need to get an EIN. You can then apply for an EIN online. The application form is straightforward and you’ll get your EIN on the same day.
Step 3: Make sure you have a license to operate
Check with your city, county, and state to see what licenses you need and how to get those approved. One permit that you should definitely look into is a seller’s permit. This lets you charge your customers sales tax on orders where you’re liable to collect them. As a seller, you’ll need to get a permit from states where you have a presence or nexus. The application process and fees are different for each state.
If you have a seller’s permit, then you should also submit a resale certificate to Printful (and to your other suppliers) so we don’t charge you sales tax.
You might also need other licenses, for example, a home business license if you operate your business from home.
Step 4: Find out your tax obligations
To nail taxes, the first thing you need to understand is in which states you need to charge and remit sales tax, and apply for a permit for those states.
You have to pay sales tax in states where you have nexus, including in the state you’re located in. There are many different ways you could have nexus, including:
- If you have a physical location (even if it’s your kitchen bench)
- States you have employees in
- States you store inventory in
- E.g. If you are using Printful Warehousing and Fulfillment Services
- States where you make a certain amount of sales, in dollars or transactions
You can find a more expansive definition of nexus, including different types like affiliate or click-through nexus, on TaxJar’s guide to sales tax.
Tax rates and laws are different in each state, so consider consulting a tax professional to make sure you’re meeting the requirements.
Value Added Tax (VAT)
VAT applies to goods and services that are bought and sold for use or consumption in the European Union. It’s a consumption tax that’s added to goods and services at every stage of the supply chain.
If you sell in the EU and are based in the US, you’ll always need to register and remit VAT. If you sell to customers in the EU and are located in the EU, you have to register for a VAT ID and charge VAT only if your sales reach a certain threshold.
The format, reporting criteria, and filing deadlines depend on the country that you register your business in. You’ll have to fire VAT returns on either a monthly or quarterly basis.
Goods and Services Tax (GST)
GST applies to goods sold to Australian and New Zealand consumers by foreign online retailers. The tax is 10% in Australia and 15% in New Zealand, and is due to all goods valued at less than 1,000 AUD or NZD.
If you are not a resident of Australia or New Zealand, you should keep an eye on your sales threshold to Australia and New Zealand.
If you’re an Australian resident, you can become GST exempt:
- If your business is registered in Australia and you have an ABN, submit confirmation that you’re GST-registered to Printful and you won’t be charged GST. You would then charge your customers GST and remit it to the Australian government.
- Marketplaces like Etsy, eBay, Amazon, and Wish already charge GST on orders going to Australia. GST only has to be collected once, so that means Printful won’t collect GST if your marketplace already does.
Below are some of the other taxes you should look into as a business owner based in the US.
When you’re an employee, your employer will withhold income tax from your paychecks. When you’re a self-employed business owner, you’ll likely have to pay quarterly estimated tax and then file your annual return.
Some states may also require you pay income tax at the state level.
Self-employment (SE) tax
This is a social security and Medicare tax primarily for those who work for themselves, like sole proprietorships. SE tax contributes to your coverage under the social security system.
When you have employees, there are extra taxes you need to pay and forms to file, such as:
- Social security and Medicare taxes
- Federal income tax withholding
- Federal unemployment (FUTA) tax
There are several 1099 forms you may be eligible to file, but the most common in ecommerce is the 1099-MISC. This is needed if you paid an independent contractor more than $600 during the tax year.
Talk to a professional about what you’re liable to file for yourself and your employees. This guide from the IRS will also help you understand your tax responsibilities as a business owner.
Step 5: Get your bookkeeping up and running
It’s important that your books are up-to-date and organized. This gives you an accurate view of your income and expenses, and it’ll come in handy in case of an audit. Plus, if your books aren’t accurate, you run the risk of giving incorrect info to the IRS, which goes without saying, isn’t a good thing.
You can hire a professional or use online accounting software to do your bookkeeping. And if you have the time and feel confident enough to do it yourself, that’s always an option, too!
Step 6: Keep track of tax deadlines
These are some of the deadlines you should keep in mind for filing your taxes. They’re US-only deadlines, so research other countries where you’re liable to pay. For more tax deadlines, take a look at the IRS tax calendar.
States require sellers to pay at intervals (usually monthly, quarterly, or annually), and every state is different. You’ll be assigned sales tax filing due dates when you apply for your sales tax permit at your state’s department of revenue.
Annual tax return due dates
February 28, 2022—1099 MISC for 2021 tax year
April 15, 2022—Federal individual income tax return for Y2021 (For Tax Year January 1, 2021–December 31, 2021)
March 15, 2022—Income Tax Return for an S Corporation (Form 1120-S) (For Tax Year January 1, 2021–December 31, 2021)
April 15, 2022—Income Tax Return for Corporation Form 1120 (For Tax Year January 1, 2021–December 31, 2021)
Estimated tax payments due dates
April 15, 2021—for Q1 2021 (January 1–March 31)
June 15, 2021—for Q2 2021 (April 1–May 31)
September 15, 2021—for Q3 2021 (June 1–August 31)
January 15, 2022—for Q4 (September 1–December 31)
Most VAT returns are filed on either a monthly or quarterly basis. Deadlines differ from country to country. For example, in Germany, monthly or quarterly VAT filing is due on the 10th of the month following the previous period’s end.
GST reports are filed annually, quarterly or monthly, and are usually required on the 28th of the following month. You need to file:
- Monthly: If your GST turnover is $20 million or more.
- Quarterly: If your GST turnover is less than $20 million, and you weren’t told that you must report monthly.
- Annually: If you are voluntarily registered for GST. That is, you are registered for GST, and your GST turnover is under $75,000 ($150,000 for not-for-profit bodies).
Step 7: Consult a professional
We don’t mean to sound like a broken record, but always talk to a professional to make sure your business is in tip-top shape!
If you’re operating from a country other than the US, then look up their requirements, too, as they’ll definitely be different.
Remember that your online store is a business, so hold it to that standard! Register your business, apply for the permits you need, and file your taxes.
This article was originally published in January 2018; it has since been updated.