How Much Do You Need to Know About Taxes and Legal?

One of the biggest hurdles many Makers have is worrying about setting up your company with taxes and any legal forms you might need.

I’m here to let you know, it’s not that hard and you don’t need a lot getting started. Many times you don’t need anything at all when you’re first starting out.

If you’re just selling at a bake sale or something simple and not making any money and it is a hobby, the IRS isn’t very interested in you.

When you really need to start to worry about this is when you get bigger. But by then, you have more money to hire professionals and connections to help you.

Food Industry

The hardest area I have found to start in is in food production or anything consumed. When starting a company that has food production you’ll want to call your health department to find out the rules, but also ask them about your state or city’s Cottage Laws. These are special laws for people just getting started that do less than $10,000 of sales. They are more lenient and will ask you where you’re selling etc.

Free Advice

It’s always great to research a bit and hire professionals when possible. But when this isn’t possible, a great resource is https://www.score.org/. This is is a website where retired professionals can donate their time to help others, it’s a great resource.  It’s impossible for me to cover all tax laws, accounting, and various laws because they are changing on a daily basis and can vary in every state, county, and city, but you may be able to find help on that website.

Knowing Who to Ask

Sometimes when you ask someone for advice, their response can be so overwhelming that you don’t want to start.  Those are not the people to be talking to. Yes, there are various forms and taxes you may have to pay, but the right person will show you it’s possible and show you what you need to know.

Especially when you are just starting out and not making any money, many people are not as concerned with your company as it can still be considered a hobby until you make money.

Many times a local Chamber of Commerce should be able to help and they may even be able to point you in the direction of various grants and programs that help you get your company started.

Try Not to Cut Corners

Should you cut corners? No, definitely not. It’s more expensive and you’ll have a lot of backtracking to do and fines for breaking the law. I have also seen companies limit themselves and the growth of their companies because they start to get audited and looked into once they’ve become successful. And you don’t want to hope for that right? Thus, people that do illegal things limit their reach. It’s just not worth it.

It is also much easier to start off on the right foot and put in the little extra time to learn about the subject than having to go back and find receipts, papers, forms and try to piece together the past.

One great way to stay on top of these things is to hire a local bookkeeper. If you decide not to hire a bookkeeper, try to keep your paper trail and open separate business checking and credit accounts so they can go back later when you can afford one and try to get it going. Or better yet, learn QuickBooks and do it yourself!

Sole Proprietorship vs Corporation

There’s an entire article dedicated to learning about Sole Proprietorship vs Corporation. One common misconception is that you need more than one person to create a corporation. This is not true for LLCs (Limited Liability Corporations), you can have a single member corporation that can protect you from personal bankruptcy and losing your personal assets in regards to your company.

The basics are that you can start a business with your own social security number, this is called a Sole Proprietorship. Or, if you want to limit your liability you can start an LLC, which is a Limited Liability Corporation.

There are a lot of types of corporations out there, but the basics are that if you were to get sued for any reason in your company, an LLC makes it so someone can sue your company but not your personal assets.

If you sell food or something someone could sue you for, having an LLC is a good idea. If in the off chance someone gets sick from one of your products, you do not want them also to be able to come after your personal assets easily.

Or if you ever have employees, this is also a good idea. There are also different types of corporations that can give you tax breaks so talk to your accountant about what type would best suit your needs.

Behind On Sales Tax?

If for some reason you already have your company and it was small and you weren’t paying sales tax, you can normally go in or call your sales tax office and work out payment plans and ask for penalties waived, on the basis that you were tiny and just getting started.

Side note on sales tax: It’s important to know when you’re selling on Etsy and Amazon if there’s sales tax. Definitely look into this. We will continue to look into providing resources for this, but it also depends on what state you live in.

Sales Tax Perks

A nice thing about registering for sales tax is that if you’re buying materials to make your product and you plan to sell this product to others, you no longer need to pay tax on purchasing materials if you have registered to pay sales tax. 

Once you register to pay sales tax, you’ll receive a Resale Certificate. 

For example, if you make bouquets of flowers to sell to people, you no longer need to pay sales tax for the wholesale flowers that you were buying. If you make jewelry, you no longer have to pay sales tax for the gems, chains, and other supplies that are used to make your jewelry.

This can save you a LOT of money and make your profit higher.

State by State Sales Tax

Sales tax can be complicated or a bit hard because depending on your state and how much you make, you’ll either pay monthly, quarterly or sporadically.

For example, when we pay sales tax in Nashville, TN we are now filing as a “Casual Filer” because we rarely come to Tennessee, and we have to call them to “open up the sales tax period” for the month that is due.

You also may have special percentages depending on the percentage required from that county. The easiest way to know percentages is on your checkout app there’s normally a setting to allow for location services, this will automatically give you the sales tax for the location in which you’re selling. 

Traveling to New Cities

As you expand and travel to new cities in markets or sell in new states, researching and calling around to find out about local business license and sales tax can be a bit time consuming and hard to learn. But, this is what separates out the winners and the losers and this is what makes a good business owner great. 

Some ask for forgiveness when they genuinely tried to learn but messed up and get caught, it’s very common, so don’t worry too much. You will be ok, but do what you can and make an effort. This is where a bookkeeper or accountant can help you out. It’s not always cheap but they’ll keep an eye on your finances and catch things you might not have caught. They also will make sure you pay things on time. Penalty fees can be very expensive and this along with various tax deadlines are a lot to keep track of. A bookkeeper or accountant will make you more money in the long run, I promise you.

Final Thoughts

Don’t quit your company because you are overwhelmed. You can easily start an Etsy business and follow the legal and tax processes when you start making money, that’s when you should really start looking into this because you’ve moved from a Hobby to a Business. But if you’re investing in your company, having your bases covered could help you save money. You can deduct investments in your company, travel and other things related to your new company.

Make sure you’re consulting experts and research online, I’m putting reputable websites below, websites that end in .gov are always going to be reputable.

Here are some great resources for small businesses on taxes, legal and permits!

Have any questions or resources for small business tax/permits? Comment below!

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