Business Formation
Starting Your Own Business: Playing by the Rules
Are you thinking about starting your own business? You probably have a million things to do, from drafting a business plan and raising capital to registering a business name. It’s easy to forget about the important legal and accounting hoops you have to jump through before starting your business.
Licenses and Permits
The licenses and permits you need depend on the type and location of your business. In many states, finding out what you need is simple: if you contact the state business development office (or comparable agency), they will send you a packet of information that covers the licenses and permits that apply to your business.
Some businesses that are exempt from state licensing regulations are required to obtain a license or permit from a county or city to perform certain operations. Building contractors, for example, usually have to get a city or county building permit to build or remodel a house or commercial building.
Most cities and many counties also require businesses located in their jurisdiction to have a business license. In reality, this is a tax based on the gross receipts of the business rather than a regulatory license designed to protect the public against shoddy work and incompetence. Avoiding this tax can be an important factor in choosing the location of a business.
You Face More Regulation If...
Certain types of businesses face more regulation than others. This is common sense, with fields that have the capacity to do more harm facing more scrutiny. Besides health care and anything involving food preparation, highly regulated businesses include:
construction (even home repair in some places)
anything to do with alcohol
anything to do with dangerous materials
transportation (of freight and passengers)
anything to do with firearms
Some are regulated by the state; some by the federal government; some by both. Consult a trade association that covers your industry. They should be able to fill you in on the regulations that apply to you.
Tax Requirements
You should be aware of several federal and state tax requirements.
Federal Tax Identification Number
All businesses must obtain a Federal Employer Tax Identification Number (EIN) before beginning to operate. Each state also requires tax registration by a new business. In most cases the state will use the Federal Employer Tax Identification Number. You get your EIN by filing an IRS form SS4. You can get one from any office that has IRS forms, or online through the IRS website (see sidebar). If you mail the form, you’ll get your EIN in four to six weeks. You can get it more quickly if you fax the form or call direct.
What You’ll Need, Taxwise
The Internal Revenue Service (IRS) publishes a packet of forms and publications entitled “Your Business Tax Kit,” which is available at any IRS office, as well as on the IRS website (www.irs.gov). It contains a great deal of helpful information on the various federal taxes that apply to a business. Many state tax commissions have similar publications describing the state taxes that apply to a business. Both types of publications contain samples of the tax registration and other forms that must be filed.
State Sales Tax Registration
All states that have sales taxes also require any business not exempt from the tax to register with the appropriate state agency. You’ll be required to collect the tax and remit it to the state regularly. To avoid paying taxes on the materials you buy from wholesalers and subsequently sell to the public, you should get a resale tax certificate from the state tax authorities.
Withholding Requirements
If you have employees (including yourself if your business is a corporation), you’ll be required to withhold federal and state income taxes and FICA (Social Security and Medicare) taxes from their wages. You have to regularly remit these funds to the IRS and the applicable state tax agency.
Unemployment Insurance Tax
Most states require your business to register or periodically file with the state agency that administers the state unemployment insurance tax. This is a tax based on the business’ payroll. A business must also periodically pay the federal Unemployment Insurance Tax, which is also based on its total payroll.
Federal and State Income Tax Returns
All businesses must also file annual federal and state income tax returns. The applicable forms vary with the type of business. Your lawyer can brief you on various types of business organizations and how they are taxed.
Some Final Words of Advice
There are a lot of places that can help you work out which licenses and permits you need. Find out your obligations early, and plan accordingly. Starting a business can be quite complex, so if in doubt you should contact your lawyer to help you get it right.
Be sure to know your taxation requirements and follow them, since there may be heavy penalties for late payment. Remember that the principal officers of the company may be personally liable for payroll taxes that are not paid to the IRS. You may find it pays to use a payroll tax service for this job. If in doubt, consult a professional. We can help you with these issues. And any business, no matter its size, should consult a tax advisor.
Contact Us
If you would like to learn more about how we can help you and your business, please contact us for a free consultation by filling out our contact form or by calling us at (304) 574-2727. We look forward to hearing from you.