I have something I can make and am trying to get distributors interested in. I know I will need a business license if they do start selling, but distributors may laugh me out of the building and I may never sell a single one too. I’m thinking of going ahead and getting my business license. Are there any downsides to this?
Obviously the answer to some extent depends on the legal and regulatory environment in the place where you propose to do all this. But a likely consequence is that the bureaucracy will have you flagged as a small business owner rather than a humble wage-slave, so expect an increased likelihood of, e.g. an audit of your tax affairs, possibly question from the local government about whether your home is being used for business/commercial purposes, that kind of thing.
My wife operated a small business for a year or two, and for years afterwards various bureaucracies were still giving her affairs extra attention on the assumption that she might still be doing that.
Some states will expect your buisness to file a tax return. Extra paperwork is perilous indeed.
Also, if you make a little money one year, and then stop filing tax returns the next year, you will draw attention to yourself. Even if it’s perfectly legit*, they may not believe you.And the burden of proof is on you.
(Disclaimer: I don’t have any hard cites—only second-hand stories about this.)
- (i.e. you simply stopped working because it wasn’t worth it to you, so naturally there’s no need to file a tax return )
Where I am the opposite is true -
if anything at all is sold, you will have to account for the revenue and expenses somehow, and businesses that you deal with will expect you to be registered somehow.
By NOT registering you would draw extra attention to yourself
It’s interesting that America of all places has obstacles like this to a potential entrepreneur setting up as a business.
I was self employed for a while, and had no need to tell any government bod about it until the end of the following tax year. Then, all I had to do was to register myself as self employed with HMRC and file a tax return online. The following year, things were a little more complicated and I payed an accountant to do it - his fees were less than the allowances he found that I was unaware of.
It only gets complicated here if you want to employ someone else, although there are ways round that, like using an agency worker.
A relative makes a useful income on Ebay. She makes a simple online declaration each year to HMRC and thus far has received no unwanted attention from them.
I’m a self employed dude in Pennsylvania. When I first started the business I had a partner and he felt it wise for us to form an LLC, so we did. Before the ink was dry, he had personal/family problems that led to him moving far away. Making the LLC go away was a huge pain in the ass.
Your chances of being audited increase sevenfold from what I know - a wharton grad I worked for once told me that but I am not sure how true it is.
Speaking as an American who has owned three small businesses… it depends greatly on what kind of business you run and what state you’re in. Generally, you do NOT need a “business license” in order to start a business. You can, as bob++ said, simply run your business (sole proprietorship) for a year and then report what happened on Schedule C of your next annual personal 1040 tax return. If you make less than $600 profit, you aren’t even required to do that. Just keep the money in your pocket and don’t tell anybody.
But if your business model involves selling something that would have sales tax attached to it (called VAT in most countries), then you need to register with the local government so they can set you up to collect the tax from your customers and turn it over to the state. In many US states, sales tax applies only to products, not services, so if your business model involves services only (such as mowing lawns or washing cars) then you don’t collect any sales tax. If you live in one of the states where sales tax is applied to services, then you’d need a tax license.
Some local governments require business licenses for all businesses above a certain threshold, usually $1,000 or so. For example, the city of Florence, Oregon, requires a business license for all companies doing business inside the city limits. It’s a very simple form to fill out and you pay a $180 fee for the year. But that has nothing to do with the state of Oregon. Meanwhile, in Eugene, Oregon, which is the county seat of the very same county where Florence is located, you do NOT need a city business license, or a county business license, or a state business license.
If your business is of a certain type, special licenses may be required. For example, bowling alleys usually require a city license, and if they sell alcohol, there’s a state license for that too. Construction businesses require a special license from the state Construction Contractors Board.
If you want to give your business a catchy name, you can register the Assumed Business Name with the state. This is technically not required in Oregon, but if you don’t register the ABN you’ll find it nearly impossible to open a bank account in the name of the company. So you won’t be able to cash any checks.
If you have employees, it gets more complicated.
But if you want to start a business in Eugene Oregon where you rent a building, sell handcrafted jewelry for cash only, don’t collect any sales tax because Oregon has none, and you have no employees, then there are absolutely **no licenses of any kind **that you have to get and if you make less than $400 profit you don’t even have to file any forms at the end of the year. If you make more than $400 profit, you just fill out your normal personal tax forms and fill in the section for self-employment, one form for the state, one for the federal, plus a one-page form for the the Lane Transit District payroll tax, which goes to the county bus service.
Sales Tax. I had to file out forms quarterly. I often had zero sales because I was building PC’s by request. No requests. No sales. I had to do the quarterly reports regardless. I missed doing them once and got a bill for several thousand bucks. :rolleyes: The finance dept had used averages for sales at computer shops in my city and “estimated” my sales tax. Scared the crap out of me. A long phone call was required and a certified letter to the finance dept. I never, ever missed filing one of those quarterly sales tax forms again.
I went through all that to get access to a Wholesale pc parts supplier. After all that headache I discovered their prices weren’t any better than what I could find on Ebay or searching the Web.
Be careful supplying merchandise. I sold a guy a 19 inch monitor to go with a PC I built him. I didn’t make $5 on that stupid monitor. Well it was defective. I got stuck returning it by UPS to my supplier. Then there was a wait to get a replacement. Made me look really bad. From then on I told customers to get their monitors and printers at Best Buy. The returns are so much simpler and quicker. Saved me the headaches and I couldn’t compete with their prices anyhow. Plus I had to declare that monitor sale on my quarterly sales tax form.
Anyway, if you get a business license. Expect to hear from your State’s Finance dept. They will want you collect sales tax on any retail work or sales. That means record keeping, the worry of audits etc. They don’t care if it’s a part time business that you only spend a few hours on a month. It’s still a business.
The relief I felt turning that sales tax license back in is indescribable. Lost quite a bit of money trying to do what I loved. Part time businesses can really cost you.
My experiences running my TV repair shop in the early 80’s was completely different. I got real wholesale prices. A $8 vacuum tube retailed for $16. Nearly all my parts had 100% markup plus my shop labor. I did pretty good servicing tv’s. Good steady income for several years.
Computer parts are so different. They expect you to buy a bulk pack of 100 hard drives to get any kind of decent wholesale price. Even then there’s people on Ebay buying those same bulk packs and selling the hard drives individually. It’s cheaper to buy off Ebay than mess with a wholesaler. Imagine how much money gets tied up buying a bulk pack of parts.
Lessons learned the hard way.
Yes we do have VAT, but again the declaration can be deferred. You do not have to even register unless your VAT taxable turnover is more than £81,000 (the ‘threshold’) in a 12 month period.
Of course if you don’t register then you cannot recover the VAT on any goods or services that you buy. So if I buy a computer for £800 (inc VAT) and sell it for £1000, I make no declaration at all. The government got its tax on the first transaction. If I was registered I would have to add VAT to the sale and recover the VAT from the purchase.
When I worked for the NHS we could not, as a government organisation, recover VAT on purchases. I spent several £thousand a year on taxis, and it was advantageous to deal with an unregistered taxi business.
The esteemed **sbunny8 **did an excellent job of outlining how it works in a couple of locales. My experience in several non-Oregon locales is similar; bottom line it’s an illogical hodge-podge of overlapping specific and arbitrary rules at each level of government.
Assuming the OP is in the US, the only good answer for him/her right now is “Tell us what line of business in what city, county, and state, and we can help you hunt up the details.”
Many states have helpful websites which address the administrivia of starting a business in that state. That would be a good place to begin. Typically the info is connected to the office which does corporate registrations. This is generally called the “Secretary of State” although with 50 states it’s a virtual certainty other terms are used in at least a few of them.
Counties & cities are usually less helpful online, but you can probably get somebody on the phone from the right department to answer your questions.
I know how to do it, I’m just wondering if I should. If I can run it for a year without a license, I may do that. I’ll read up on it for my state (Tn). There is actually too much info at the state, county and city websites and I haven’t had time to go through it all.
For what it’s worth, as some have mentioned, I’d need a city, county and state license and have to file taxes with one or more of them (can’t remember). I also have to fill out a simple form with the city to work at home and actually have to call them to explain what I’d be doing. That should be easy, the city is pretty cool, and I won’t be making any noise or using any dangerous chemicals or anything.
I don’t think sales tax would be an issue. I’d be making things for a distributor to sell to businesses which the businesses sell to customers. I assume the sales tax would only be done at the end. I work at a business now and we don’t pay tax to the distributor.
I thought I should get licensed so I’d be ready to get raw materials through a wholesaler that requires a business license. For what I’m doing, it’s really the only place to get them in bulk. I have gotten a local company to order me enough to make samples and get started, but they charged me extra and it took them a week and a half instead of the two days they promised. If I get a distributor interested, I’ll need a lot of those materials fast. However, I know a couple small business owners which are completely outside the field I’m in but I think I could get one to order the materials for me.
I also figured I’d have to get a license before selling. I didn’t want to have to tell a distributor to wait while I scrambled to get my license. But if I can get it within a year, that should be fine.
If you start a business but it doesn’t make money doesn’t the IRS consider it a hobby? So no Federal Taxes are owed?
I’m not sure how TN would classify this.
Your thought here is probably dead wrong.
The reason your employer doesn’t pay taxes to their supplier(s) is because your employer has registered as a business and has what’s usually called a “resale permit” or “resale number”. They had to provide that number, or a copy of their permit, to the supplier. If they didn’t (or couldn’t because they don’t have one), then the supplier is obligated to charge sales tax.
IOW, the default is that every level of the value chain charges full sales tax on everything they sell to everybody. BUT (and it’s a huge but) IF a buyer is buying stuff that’s ingredients for whatever *they *in turn sell, then they can present their supplier with their resale permit, and the seller will not collect or owe taxes.
So the effect of this big chain of resale permits is that sales tax is charged just once, at the end, to the final user of the final product for the final price.
That’s also why your employer pays sales tax when they buy computers or pens or paperclips or warehouse shelves or forklifts or … . Yes they are a business. Yes they have a resale permit. But unless the items being bought are ingredients in the product they sell, the permit is not applicable and those items are 100% subject to sales tax.
And yes, most states have an enforcement division that goes around checking that businesses aren’t using their resale permits to cheat on office supplies or factory equipment. They usually hold the supplier company liable for the tax they failed to collect from you. So that incentivizes every one of your would-be suppliers to scrutinize your resale permit to ensure that whatever they’re selling you is on the approved list of stuff your permit was issued for.
Late add: This being the US, there are 50 states using 50 systems. But what I’ve described is broadly how it works in the several states I’ve done this. None of which were TN.
This is the difference between VAT and sales tax. VAT is collected in increments all along the way. A tiny bit of additional tax missed at the end is not a big deal. Sales tax is all collected at the final sale, where you sell your item for 1000 pounds in your example.
The sales tax issue is one I had experience with. I got a ridiculous bill from NY state for sales tax owed after I sold one piece of taxable equipment, collected the sales tax and sent it to them. They decided that all of my revenue must consist of sales of folding office tables and that I owed a percentage of that as sales tax. It didn’t take long to clear up, but it’s annoying to deal with those things.