How to Start a Business: Taxes and Legal Requirements in the US
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.
The important 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. Seller’s will need to get a permit from states where they have a presence or nexus. The application process and fees are different for each state.
If you have a seller permit, then you should also submit a resale certificate to Printful (and your other suppliers) so we don’t charge you sales tax.
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 have to pay sales tax in states where you have nexus, including in the state you are located. 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 or salespeople in
- States you store inventory in
- E.g. If you are using Printful Warehousing and Fulfillment Services
- States where you make enough 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.
Printful has nexus in most states, meaning we charge you sales tax for orders to these states. You should submit a resale certificate for each state you wish to become exempt from.
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.
Goods and Services Tax (GST)
All orders being shipped to Australia or New Zealand are charged GST unless GST was already charged by your marketplace. 10% GST is charged on all orders being shipped to Australia, and 15% GST is charged on all orders going to New Zealand.
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. Here you can find out more about tax for orders going to Australia and New Zealand.
If you’re an Australian resident, have an Australian Business Number (ABN), and have confirmation that you are GST-registered, or if you’re a resident of New Zealand, have a New Zealand Business Number (NZBN), and have confirmation that you are GST-registered, you can submit them to Printful and become exempt from GST. You then have to charge their end-customers GST.
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!
You can learn how to get started with small business bookkeeping in this post.
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!
Your sales tax due dates come down to your individual sales tax situation. 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
January 31, 2020 – 1099-MISC for 2019 tax year
March 16, 2020 –S corporation returns for 2019
April 15, 2020 – Personal Income Tax returns are due to the federal government for tax year 2019
April 15, 2020 – individual tax return extension form due for tax year 2019
October 15, 2020 – extended individual tax returns due
Estimated tax payment due dates
April 15, 2020 – 1st Quarter 2020 Estimated Tax Payment Due
June 17, 2020 – 2nd Quarter 2020 Estimated Tax Payment Due
September 16, 2020 – 3rd Quarter 2020 Estimated Tax Payment Due January 15, 2021 – 4th Quarter 2020 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.
GST reports are filed annually, quarterly or monthly, and is 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 we have not told you 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 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.
This article was originally published in January 2018; it has since been updated.