"I don't sell that much stuff," many Etsy shopowners tell themselves. "What
difference does it make whether I'm an 'official' business entity or not?"
Quite a lot, actually. Especially if you care about staying in the IRS' (and your
state taxing agency's) good graces.
Besides: If you're going to turn out professional-quality products (and you are,
right?), then you owe it to yourself to conduct all aspects of your business in a
thorough, professional manner. It's hard to "luck" into success; you pretty much
have to aim for it, and part of that aiming involves setting up and managing your business the right way from the ground up. The internet is littered with
horror stories of small-biz owners who naively thought they were "too small" to
attract the attention of those nasty, penalty-imposing tax authorities.
Here's the rub: If you're in small business, Mr. Government will figure it out, one way or another, at some point. Best to be prepared for that eventuality!
So what's a time-pressed small-business owner to do?
Well, for starters, you'll want to grasp a few concepts early on:
Separate Your Personal and Business Matters
Before you even start to consider what sort of business entity you'll be (more on
that in a bit), you need to understand one Ginormous Rule of Successful Business:
** KEEP YOUR PERSONAL AND BUSINESS MATTERS 100% SEPARATE **
It'd be tough to overemphasize this one. In fact, I don't think that can be done. If I had a dollar for every time I've heard a sob story regarding someone whose business and personal finances were inextricably knotted up, I'd have myself a nice chunk of lakefront property by now.
So what do I mean by "keeping things separate?" At a bare minimum, you'll need:
1. A separate system for tracking and filing your business documents. This includes receipts, invoices, legal docs, bank statements, and all the rest.
1a. Separate bank accounts for your business transactions and your personal transactions. If you buy business stuff with your credit card, use an entirely separate card/account for that, too.
1b. Some sort of organized system (Quickbooks, a batch of spreadsheets, or whatever) for tracking your profit/loss, taxes due (sales and income), revenues and expenses, bank account balances, and inventory.
Notice how those items are all numbered with ones? Just shows how important they are.
You can't neglect ANY of them and not regret it at some point.
A note about bank accounts: Even if you're a sole proprietor, PLEASE do yourself a favor and open a second bank account for all your business transactions. Even if it's just a second personal account in your name, do this ASAP. Keeping your business and personal transactions entirely separate is absolutely vital. Track all deposits and withdrawals to this account (and keep detailed records!) as if your financial life depended on it.
Because it does.
Trust me on this.
Invest In Yourself
If you have any interest at all in running your business well, and doing so
over the long term, then it's my opinion that you simply MUST begin learning about all aspects of business ownership. What this means, mainly, is that you need to get off your duff and go to your local library or bookstore and find a good book or three about running a small business.
Read those books. Do it yesterday.
For my money, the best book of this sort has been Jan Zobel's Her Own Business: The Self-Employed Woman's Essential Guide to Taxes and Financial Recordkeeping. As of today, the book is in its fourth edition. Just how good is it?
When and if a fifth edition is printed, I'll buy it AGAIN.
And I'm a guy.
Sole proprietor ... incorporation ... limited-liability company ... partnership ...
Which one are you?
More importantly, which one should you be?
It's not a decision you need to make right now, probably. But it IS a decision you need to make soon. (And you thought all you needed to do was to be able to make cool crafts and sell 'em on Etsy.)
The most troublesome aspect of this -- and I'll admit that it IS troublesome -- is
that each state handles small-business entities differently. You might pay $100 to set up an LLC in Oklahoma, versus $940 to do so in California. And that's just where the differences begin.
The best first step? Head to your state taxing authority's website, look for a
section on "small business," and start reading. Educate yourself.
Also, most states offer free or low-cost small-biz tax courses a few times each
month. Do yourself a favor and sign up for one near you. It'll be a fantastic
investment of a few hours, and you'll likely learn a LOT about handling taxes and records. It'll make your life MUCH easier.
Now, as far as the IRS side of this is concerned, start here:
IRS Small Business One-Stop Resource
If that looks like a lot to absorb ... well, it sorta is.
But it's very important.
Again I suggest that the longer you put this stuff off, the more you'll regret it. I know this from experience: Starting your small business as one sort of entity (sole proprietor, typically) and then discovering later on that an LLC is a better fit for you ... well, the hassles and added stresses are significant. Changing your setups and business relationships (particularly with online services like Google Adsense, Commission Junction, and Paypal) can be a paperwork nightmare.
Get a handle on it now, though, and you won't ever be one of those "naive 'net
businesspeople" that I'm always hearing about.
BYLINE: Michael is the owner of the IT'S YOUR MONEY website, the Money Musings personal finance blog, and entirely too many business and finance-related books. His unintended (though hugely rewarding) small-biz journey began in early 2002. Among other things, he offers lots of free excel sheets to households and small-biz owners just like you.