If your side hustle is turning into a lucrative endeavor, it’s time to set up your business legally. As with all money-making opportunities, if you’re making money, the IRS already considers you in business.
Write your business plan
This document will outline your objectives, strategies, and your action plan for achieving them. It’s a must to have a well-thought-out business plan when starting a new business, as it will keep you on track and ensure your business is growing in the future.
Here’s a brief overview of what the business plan outlines:
- Business objectives
- Research your business
- Target market
- Pricing structure
- Financial target
- Marketing strategy
Choose your business structure
Once the objectives of your business are clear, and you have your business plan in place, the next step is to do some research and decide on the business’s legal structure. This choice can affect everything from how you operate the company to the liabilities you’ll face to how you pay taxes.
Here are a few standard options for small business owners:
- Sole proprietorship
- Limited Liability Company or LLC
By default, even if you don’t take any action to set your business up, you are considered a sole proprietorship. It’s the simplest to set up because it doesn’t require completing any paperwork. However, because a sole proprietorship doesn’t form a separate business entity, there is no legal distinction between the owner’s debts, assets, and liabilities and those of the business, which can be risky if you were to get sued. Your income and expenses get reported on your personal tax returns also.
One way to protect your assets is to structure your business as an LLC or Limited Liability Company. LLC owners or “members” aren’t personally liable for business obligations. By default, LLC members are considered self-employed, and they file and pay taxes like owners of a sole proprietorship. To set up an LLC, you must file articles of organization with your state.
Corporations offer the most protection to their owners from personal liability, but the cost to form a corporation is more than other legal structures. Corporations also require more considerable record-keeping, operational procedures, and reporting. In addition, corporations pay income tax on their profits, unlike sole proprietors, partnerships, and LLCs. In some cases, corporate gains get taxed twice — first, when the company makes a profit, and again when dividends get paid to shareholders on their tax returns.
Partnerships are the simplest structure for two or more people to own a business together. These can be a good choice for companies with multiple owners, professional groups (like lawyers), and groups who want to test their business idea before forming a more formal business. Profits get passed through to personal tax returns, and the general partner — the partner without limited liability — must also pay self-employment taxes.
Streamlining your business once you’ve decided what kind of business structure you’ll have will be a must. Your new business will run like clockwork with a great software program like ServiceWorks.
Register your business name
Once you have your business name figured out, make it official by registering it with local and state governments. (Side note: check to ensure there isn’t another business in your state with the same name. Most states have a business name check tool as part of their online business services pages that you can utilize.)
The Small Business Administration suggests registering company names in a few ways:
- An entity name to protect you at the state level
- A trademark to defend you at the federal level
- A “doing business as” (DBA) to show you’re the real deal
- A domain name to save your web address.
Sign up for a business tax ID number
Another crucial step to setting up your business is that all companies should have an Employer Identification Number (EIN) from the Internal Revenue Service. Go to IRS.gov to sign up for your business’s EIN or federal tax ID number. This number is handy when you open a bank account, apply for business licenses, and pay taxes. Check with your state’s Department of Revenue to determine whether your business needs a state tax ID.
Get your licenses and permits
Remember business permits and licenses; we don’t want to get hit with hefty fines. Instead, check with federal, state, county, and local officials for your business’s requirements. If a federal agency regulates your business activity (for example, tobacco, firearms, or agriculture), you will need a national license or permit. States generally license more broadly, covering everything from landscaping and retail to building maintenance businesses.
Acquire insurance for your business
Purchase insurance to protect you and your money. In case something happens – property damage, liability, or injuries at work – insurance has you covered. Small businesses also should consider a business owner’s policy that combines property, liability, and income insurance. For example, your business owner’s policy will cover lost income if your company can’t run during a loss.
You’re all ready to set up your business legally
Today we discussed the steps to set up your business legally. Here’s a brief overview of what we covered today:
- Business plan
- The legal structure of your new business
- Business name registration
- Tax ID
- Licenses and Permits
- Business Insurance
Now you know how to start your new business.
However, once your business is up and running, you will likely want some help keeping things running smoothly. That’s where ServiceWorks comes in. ServiceWorks acts as an administrative assistant by helping with invoicing and scheduling, but without the costly overhead of an extra person on the payroll. Best of all, you can try it free for two weeks, with no credit card required.