As a business owner, you have to comply with tax and legal regulations. But between tax requirements, deadlines, and registering your business, it can be difficult to navigate what, exactly, you’re supposed to do.
That’s why we put together this quick guide on how to start a business. It covers US regulations and taxes – what and where you may need to register, taxes to file, and deadlines to remember.
Keep in mind that we’re not accountants or legal experts, so this shouldn’t be used as professional advice. Use it instead as a starting off point to learn some basic information. Our recommendation is always to consult a professional for information specific to your circumstances.
With that being said, let’s dive in!
Step 1: Register Your Business
The first thing you should do is look into registering your business and choosing your business model or structure.
We’re only going to cover the most common business models in the US for ecommerce:
- Sole proprietorship
- Limited Liability Company (LLC)
1. Sole Proprietorship
This is the most common form of business in the US. With a sole proprietorship, there is no legal distinction between the company and the individual who owns it and runs it. Taxes are filed under the individual owning the sole proprietorship, and the owner is personally liable for everything the company does.
Sole proprietorships are easy to set up and it doesn’t require a lot of paperwork, but a downside is that you’re legally and financially liable for your business.
A partnership is a business that has two or more owners. Each person contributes money, property, labor, or skill, and shares in the profits and losses of the business.
Partnerships are beneficial in the sense that you share costs and responsibilities with someone else. But a drawback is that depending on the type of partnership, parties involved are financially and legally liable. Things can also get messy if there’s a falling out or conflict between partners.
3. Limited Liability Company (LLC)
An LLC is known as a “hybrid” entity. That’s because it combines limited liability with a flexible structure. LLCs provide some protection for your personal property and have a straightforward taxation process.
Each state has different regulations, so check with your state if you’re interested in going this route. You should also consult a lawyer or a certified public accountant, since starting an LLC is more complicated than forming a partnership or sole proprietorship.
A corporation (or C corporation) is a business organization that is considered a separate entity from its owners. Owners of a corporation aren’t personally liable for the contractual obligations, debts, negligence, or wrongful acts of the corporation.
Corporations are more difficult to form and maintain – check with your state’s laws for how to go about it. Corporations file all taxes separately from its shareholders (the owners of the corporation).
It’s possible for corporations to be taxed twice (corporation pays taxes on profits, shareholder pays on personal income), which is why some business owners opt for an S corporation. An S corporation is similar to a C corporation, but one of the main differences is that it doesn’t get taxed twice.
Choosing the State You’ll Register In
Take some time to consider in which state you’ll register your ecommerce business. You can register in any state you want, but it’s easier to register in a state where you have a presence (more on that later!).
You can register on your own by filling out the appropriate paperwork from the IRS or hire a service to do it for you.
Obtaining Your Federal Tax Number
Once you’ve filled out state-level paperwork and registered your business, you may need to register your business on a federal level.
This involves getting a federal tax number for your business – 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 level.
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.
You can apply for an EIN online. The application form is straightforward and you’ll get your EIN on the same day. Consult a tax professional to find out whether or not you need to get an EIN.
Step 2: Make Sure You Have a License to Operate
Registering for the right licenses and permits is a must for a business to operate legally. Check with your city, county, and state to see what sorts of licenses you need and get those approved before you start operating. One example of this is a home business license.
These are important permits that you should definitely look into:
- Sales tax permit – this lets you charge your customers sales tax on in-state orders where you’re liable to collect.
- Reseller permit – this lets you buy items for resale without being charged sales tax. To be eligible for this exemption, submit the reseller permit to your supplier.
Basically, anyone who sells physical goods should obtain a sales tax permit (also known as a seller’s permit) from states where they have a presence. This is required by law to collect sales tax. The application process and fees are different for each state.
It’s also a good idea to apply for a reseller permit (also known as a resale certificate) and submit it to Printful (and your other suppliers) so we don’t charge you sales tax for orders going to California and North Carolina.
Buckle up – more about sales tax in the next section!
Step 3: Find Out Your Tax Obligations
Understanding sales tax can be complicated, especially in ecommerce.
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’ll most likely have to pay sales tax in the state where you’re located. You also have to pay sales tax in states where you have nexus. Nexus means that you have some kind of presence, like an office, employee, or warehouse.
If Printful is your drop shipper, you have nexus in California and North Carolina, and should collect sales tax on orders going to those states. Printful will also charge you sales tax for these in-state orders, which is why you should submit a resale certificate and become exempt.
Tax rates and laws are different in each state, so consider consulting a tax professional to make sure you’re meeting the requirements.
You can take a look at Printful’s sales tax FAQs here.
Value Added Tax (VAT)
VAT is a consumption tax that’s added to goods and services at every stage of the supply chain. It applies to goods and services that are bought and sold for use or consumption in the European Union.
You should look into VAT requirements if you sell products to customers in the EU. If you’re located in the EU, you only have to register for a VAT ID and charge VAT if your sales reach a certain threshold. If you’re based in the US, you may need to register and remit VAT if you sell products to customers in the EU, regardless of your threshold.
The format, reporting criteria, and filing deadlines depend on the country that you register in. Most VAT returns are filed on either a monthly or quarterly basis. VAT returns still need to be filed during periods where no taxable activity has taken place, just report zero transactions.
Take a look at Printful’s VAT info here.
These are some of the other taxes you should look into. It may be worth your time to talk to a professional about what you’re liable to file for yourself and your employees if you have any. Take a look at this guide from the IRS if you want to learn more details.
Income tax – Typically when you’re an employee, your employer will withhold income tax from your paychecks. When you’re self-employed, you 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.
Employment taxes – 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
1099 forms – 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.
You might be liable to pay other taxes not mentioned here, so consult legal advisors to find out!
Step 4: 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 business’s income and expenses, and it’ll come in handy in case of an audit.
You can hire a professional or use online accounting software to do your bookkeeping. One of the more popular options is QuickBooks (disclaimer: this is an affiliate link). Or if you have the time and feel confident enough to do it yourself, that’s always an option!
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.
Step 5: Keep Track of Tax Deadlines
These are some of the deadlines you should keep in mind for filing your taxes. They’re USA-only deadlines, so research other countries where you’re liable to pay!
Sales tax due dates
Monthly filers – 20th day of the following month.
Quarterly filers – April 20, July 20, October 20, and January 20 of the following year.
Annual filers – February 5 of the following year.
*You’ll be classified as a monthly, quarterly, or annual filer when you file for your sales tax permit.
Annual tax due dates
January 31, 2018 – 1099-MISC for 2017 tax year
March 15, 2018 – Partnership returns, S corporation returns for 2017
April 17, 2018 – the day when individual tax returns are due to the federal government for tax year 2017
April 17, 2018 – individual tax return extension form due for tax year 2017
October 15, 2018 – extended individual tax returns due
Estimated tax payment due dates
April 17, 2018 – 1st Quarter 2018 Estimated Tax Payment Due
June 15, 2018 – 2nd Quarter 2018 Estimated Tax Payment Due
September 17, 2018 – 3rd Quarter 2018 Estimated Tax Payment Due
Take a look at the IRS tax calendar here.
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.
Step 6: Consult a Professional
And finally – it’s always a good idea to talk to a professional and make sure your business is in top shape, from a tax and legal perspective. This likely sounds like a broken record at this point, but we can’t stress it enough!
If you’re operating from a country other than the US, then also look up requirements there, 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.
Want to learn more about launching an online store? Check out our ebook.