by Deborah Sweeney
Summer is literally right around the corner, and it seems that warm weather and entrepreneurialism go hand-in-hand. Every summer, without fail, I hear about all sorts of new business ideas and ventures popping up. Unfortunately, these businesses are often seen as side projects, so only a few of summer’s new entrepreneurs treat these ventures as real companies. And, while I know there are plenty of clandestine Etsy and eBay shops operating under the table, you really don’t want to play that game, or your fun summer project could become a nightmarish tangle of fines and late fees. For anyone thinking about opening up a side business during the summer, here’s what you need to know to keep everything above board.
You really, really do not want to get on the bad side of the IRS. Self-employment tax is no joke, and if the IRS thinks you’re trying to avoid what you owe, you could be audited. And don’t think low sales grant an exemption. Anyone who earns a net of $400 or more during the tax year must report that income, and pay self-employment taxes. Underestimating success is one of the biggest mistakes I see new small business owners make. Trust me – it doesn’t take long to hit that $400 threshold. On top of that, if you expect to owe more than $1,000 in income tax, you also have to send in estimated tax payments. Now, this is not all bad news. Your workspace/office, and even some start-up costs, may be deductible as long as the company made a profit, or was run with the clear intent of making one. Keeping track of your finances and tax obligations, then, is really in your best interest.
‘Doing Business As…’
Making businesses register a ‘Doing Business As’/Fictitious/Trade name is a fraud prevention measure. States require them so that fraudsters aren’t able to hide their identity behind the business, scam people, and then go into hiding. The only time you don’t need a DBA name is when you’re selling a product or service under your legal name. But if you change it slightly, you will need to register. For example, if your name is Jane Doe, and you sell flowers, you can call your shop Jane Doe and avoid filing a DBA name. But if you put Jane Doe’s Flowers in an advertisement or on a sign, you have to file the paperwork. A lot of summer businesses use online storefronts with admittedly cute and clever names but fail to register them. Remember, once you start selling under that name, you are legally obligated to register the DBA with your state. That registration will also allow you to open up a business bank account, and accept payments made out to the company. So, again, following this rule is a good idea as so much is tied to a DBA.
Licensing is vastly misunderstood – unless you’re selling a federally regulated product, like liquor or firearms, a business license is more of a way for your state, and occasionally your city and county, to make a little extra money and keep track of their local economy. Know that city, county, and state governments all keep an eye out for companies doing business without a license by trying to find evidence of business-related activity. Listing your company in a public directory, or putting out any sort of marketing material, even online, could count as business activity. Thankfully registering isn’t too hard. Most states, and even some local governments, put all the forms online. All you have to do is fill them out and send in a check. One important thing to keep in mind, though, is that you may have to file an extra form if the business is operated from a residence.
Taxing, a DBA name, and licensing – those three small hurdles are normally all that set a clandestine business apart from a legal one. My advice is always to run a business like a business. That means keeping good records, reporting income, paying taxes, and filing the paperwork you need to stay on the good side of the local, state, and federal governments. This may seem like a lot of work for a summer business, but trust me; the resulting peace of mind is worth the effort. Plus, you never know – this small summer experiment could wind up being your new career!
Know How To Manage Finances
Running any kind of business, big or small, means being able to handle the finances. That goes beyond simply spending less than you earn and it’s easy to get tempted to just put it off. From balance sheets to choosing your accounting method, it can get overwhelming.
Most small business owners and side hustlers take the DIY approach to finances because it’s the most cost-effective. DIY also can come with a knowledge gap and time commitment that stretches many too thin. Another option is to hire a tax, financial, or wealth management advisor. Hiring a trusted advisor will give you access to professional expertise and guidance that can help you make sound financial decisions.
With a bit of time and effort, you shouldn’t have a problem keeping your summer business legal and figuring out your business finances. It will take time, effort, and due diligence, but it’ll be more than worth it.
Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.