How your micro-entrepreneurial business is structured affects your taxes, liability, and other legal and business issues. Each micro-entrepreneurial business type has different benefits and responsibilities, and tax laws can affect the net income and expenses.
Discuss this topic thoroughly with a tax professional who is familiar with business entities and explore the pros and cons of each type of business set-up.
The simplest micro-entrepreneurial business structure . . . you!
Many people think that to go into business you’ll need lots of paperwork and that you must register yourself as a corporation and jump through lots of hoops just to hang an “open for business” sign on your shingle. Not really!
As far as the IRS is concerned, you can be in business as long as you have a legal name, and a tax ID number (like your Social Security number or an Employer ID number).
Keep in mind that your name is a legal business title and your Social Security number is acceptable as a tax ID number for tax reporting purposes. Under this status, you’re a sole proprietorship, and you report this activity on Schedule C, which is attached to your Form 1040.
The second-simplest micro-entrepreneurial business structure: Sole proprietorship (DBA)
You may find that it makes a lot of sense to register a business name. At this point, you’re still a sole proprietor. But with a business name, you can do more. Registering a business name is also called registering a DBA, which stands for doing business as. (It’s also referred to as filing a fictitious name certificate or registration.)
You can use the DBA designation to claim a name for your business so that you can conduct your entrepreneurial activities.
Some micro-entrepreneurs choose to go the DBA route for a few reasons:
Some state or local jurisdictions may require it. It just depends on the kind of business it is.
Some micro-entrepreneurs choose it because it’s a marketing choice. A DBA can help you in selling what you offer. For instance, using a DBA of “Gift Basket Ideas” when you’re selling gift baskets ideally can bring you more customers (and make marketing easier) than if you go by your name of Irv Shlabotsky.
In addition, when you formalize your business name as a DBA, you can take that registration form to your bank and get a bank account so that you can accept payment (deposit checks and so on) with your business name.
You can do DBA registration at either the county level or the state level. You can call, go online, or visit in person the county government main office building or your state capital about registering. Of course doing a search on your search engine can also help.
If your state registers DBAs at the county level, then contact the county clerk’s office. If DBAs are filed at the state level in your state, then contact the Secretary of State. Keep in mind that DBAs are kept in easily searchable databases either in their office or online at their website, so you can find out whether a business name is available.
The Small Business Administration (SBA) keeps track of all the states and their DBA filing requirements. In addition, if you get a DBA and then need a bank account, you might consider opening your new business checking account at a credit union because they usually charge less, yet still have some of the basic services a small business needs.
After you get your DBA, you should get a separate tax ID number for it as well. A Tax ID number is also referred to as a Taxpayer Identification Number (TIN) or Federal Employer Identification Number (FEIN).
The Tax ID number is for businesses and other organizations, and it’s effectively the same for organizations as the Social Security number is for individuals. The IRS issues tax ID numbers. You can get one with Form SS4.
LLCs, corporations, and partnerships for micro-entrepreneurs
If you choose, you can also go with other more complex business structures in the form of Limited Liability Company (LLC), corporation, or partnership. Each can be great for a variety of factors, such as personal considerations, tax laws, liability concerns, and so on.
The costs, paperwork, and filing requirements are extensive with these business structures. In other words, the benefits at that point in your home-business career probably don’t justify the costs and burdens you would have to undertake. You don’t even know yet if your fledgling enterprise will be a long-term success yet.
If you have a few years under your belt as a micro-entrepreneur, you may want to talk to others, such as an accountant, business attorney, or other business adviser, about the pros and cons of incorporating (or going with an LLC).
At that stage in your business, going one of these routes may be a better option when you see your business growing and showing sales profits. In other words, these business structures become valuable when you see a clear path to becoming a macro-entrepreneur.
If you want additional information, you can check out Service Corps of Retired Executives’ website to find thousands of business folks who can act as a mentor for your budding start-up. Consider contacting the organization and asking to speak in person (or chatting online) with a retired CPA or business attorney.
The people you talk with won’t give you tax or legal advice, but they can answer questions about the pros and cons of various types of business structures.