By Kat Sklar, CPA
This blog post is a holding pen for frequently asked questions about starting a new business venture in the United States. This FAQ is for educational purposes. It is not legal, tax, or accounting advice tailored to you, and if you want more peace of mind and/or certainty than a stray human with a blog can provide, definitely hire a lawyer and a tax professional to talk you through getting your new business sorted out! If you’re not sure how to go about hiring a lawyer or accountant… I’m working on a guide for that! You can hop on my currently-dormant mailing list if you want to be the first to know when that is ready: http://tinyletter.com/FriendlySpreadsheet.
What is an EIN?
An EIN is an Employer Identification Number, which is a United States federal tax identification number for businesses. By default in the US, a solo business starts out as a sole proprietorship and has the same tax identification number as the proprietor; that is, unless you choose a different entity structure or take action, your business tax ID is your social security number (SSN). If you are thinking, wait, isn’t giving people my SSN a bad idea because of identity theft… well, yeah. It is.
Do I need an EIN?
As a business, there are two groups of people who will ask you for your business’s tax ID. The first is financial institutions including banks, online sales platforms like Etsy, and payment processors like PayPal and Stripe. The second group is customers who themselves are businesses or customers who are other kinds of organizations like nonprofits and schools. Those customers are likely to collect your tax ID via a form called a W-9 before they will pay you so that they have the information needed to issue your business a 1099. Financial institutions collect your business tax ID for similar reasons, though they issue different flavors of 1099 forms.
When you’re starting a new business venture where your labor is the main ingredient, such as coaching, it’s likely that you are selling to consumers and that you are starting out small, possibly without even a separate bank account. In that case, you do not technically need an EIN unless your state requires it. In all other cases, you’re gonna want one; it usually takes a whopping 5 minutes on irs.gov to get one. An exception: if you’ve had an EIN before as a sole proprietor or household employer and now can’t remember the EIN, you likely can’t deal with that online. Brace yourself, you’re gonna have to call the IRS to retrieve that old EIN because they will not give you a second one. Or alternately, become a single-member LLC, because you’re gonna need a new EIN for that and then you won’t have to call the IRS! Which is brings us to…
A detour before we talk about LLCs: Please separate your business and personal finances as soon as possible. If you’ve got a tiny side hustle, you can do this with a second fee-free personal bank account. [Note that the fine print in the account agreement at the bank will likely prohibit you from using a personal type account to operate a business. You gotta decide for yourself if you’re okay using a personal account anyway. You may need to register your business with your state before you can open a business type of bank account.] From a tax perspective, as soon as you start a venture with a profit motive, even before you earn your first $1, you’ve got a presumptive business, and when tax time rolls around and you’ve got more than $1 in earnings, your life will be SO MUCH EASIER if all your business financial activity is in one place from your personal financial life. Even if your business is the tiniest business of all time! Be kind to future you! Separate your business and personal finances! If you could use a magic wand and make yourself a rent-free office just for your business that is only there when you need it, you’d do that right? This is that, but for your financial records! It’s magically simple! Do it! I will use as many exclamation points as it takes to convince you!!!!!
Okay, on to LLCs.
Should I form a single member LLC?
At a federal tax level, by default, single member LLCs and sole proprietorships get the same tax treatment. (Some states differ. Also you can do fancy things to get different tax treatment for your LLC later if you want, which is why tax professionals are especially fond of single member LLCs.) From a non-tax perspective, there are still good reasons to do this sooner rather than later. I’m not a lawyer, so take this section with a grain of salt, but here’s my understanding: if you properly form an LLC under your state’s statute, and you operate your business entirely and clearly as that LLC, then if people sue your business and win, their damages are limited to your business assets. Without the protection of a separate entity in this scenario, they can potentially come after your personal assets, including your home.
That whole “clearly and entirely” thing is really important though: you need a separate bank account that does only business things, you need to sign business documents including emails so that they are clearly you in the name of the LLC not you as a person, you need to mark things you publish on the Internet like a website or blog as belonging to the LLC and not to you personally. Basically you need to treat the LLC exactly as separately as you wish it to be treated should you wind up on the wrong end of a bummer legal situation.
LLC formation procedures vary by state, but services such as Rocket Lawyer (which is what I personally used) are familiar with them and will walk you through suitable robo forms to get set up. And while we’re talking about states…
Do I need to register my business with my state?
Requirements vary! Good news though, states don’t want you to mess this up, and they publish guides on how to have a beginner business that’s legit inside of them! In general, unless you are doing business under your exact personal legal name (so for me that would be Kathryn Farris Sklar, even though only telemarketers call me Kathryn), you are going to want to register a business nickname. These may be called DBAs (“doing business as”), ABNs (“assumed business name”) or my favorite, FBNs (“fictitious business name”) depending on the state.
To find your state’s guide to doing business, google “.gov starting a business in [your state]” and focus on search results from websites that include “.gov” in their URLs. Here are some examples of what you are looking for:
Oregon: https://sos.oregon.gov/business/Pages/starting-business.aspx
Pennsylvania: https://www.pa.gov/guides/starting-a-business/
Virginia: https://www.scc.virginia.gov/pages/New-Business-Resources
You’re going to want to repeat this process for the county and city you will be doing business in; your county and city may not have guides, but many do, especially if they have local taxes and local licensing requirements.
Chances are good that registering with your state will land you with a state-specific tax identification number specific on top of your federal tax identification number, and if your county or city also have taxes, you may also need to register with them and get even more ID numbers. Does that sound like a lot to keep track of? It is. This would be a stellar time to decide what safe cloud location you’re going to use to store your business legal records and to make sure you’ve got a scanning app on your smartphone so that you can scan important documents that come via mail RIGHT AWAY. (Don’t lose your EIN form folks! You can only get it once!)
I already have an LLC but now I’m doing something new, do I need a second LLC?
So first off, let’s revisit the purpose of an LLC, which is to isolate assets and potential liabilities into a separate entity. In order for that LLC to have a strong legal existence and actually provide insulating walls if you get into a situation where you need them, the LLC needs to clearly operate as a separate entity with separate banking, separate books & records, etc. If that sounds like a massive PITA for multiple LLCs… it’s because it is! Good news though, most states will cheerfully let you register multiple business nicknames for your existing single member LLC. So unless your new venture is going to own real property (equipment, real estate) or intellectual property that has a solid reason to be held in a separate entity, check if you can just get your LLC a new business nickname for your new venture.
From a tax perspective, if the primary ingredient in whatever business you’re in is your personal labor, whether it’s you as a sole proprietor or you as single member LLC or you as a single member LLC inside another single member LLC, it allll goes on the same return even if the kinds of personal labor are very different. From the IRS’s perspective, there are three kinds of income that must be separated from each other and which wind up on different parts of your tax return even if they all happen inside the same LLC:
- Active/ordinary income (the kind we earn from business activities we participate in and from wages)
- Passive income (investment income, business activities where we may own the business but participate minimally such as a franchise owner with a business manager)
- and Rental real estate income, which is a whole other thing and can be either active or passive depending on the facts and circumstances.
Within ordinary income, if you’ve got kinds of income that are from selling things (either tangible or digital) rather than services, there are some solid reasons to keep careful track of the costs specifically associated with the things rather than the services. But you can still separate these out and report them as separate activities (and get delicious tax incentives as a result) WITHOUT having them be in a separate entity.
Got more new business questions?
I highly recommend taking a class! The US Small Business Administration supports nonprofits all over the country in offering classes for new businesses. I took Mercy Corps NW’s Business Foundations I class and found it really helpful. Classes also have the happy side effect of placing you into a community of folks near you who are also starting new businesses, and being overwhelmed together is better than being overwhelmed alone. A real time class also gives you some structure and deadlines for getting nitty gritty details sorted out, like getting registered, opening a business bank account and business planning. These types of classes are also often gateways for qualifying for local new business grants and subsidized small business loans.