When the dreaded tax season comes around, whether you operate an online business or not, you’ll be feeling pretty much the same way every business person does. Here are some facts about your taxes that might help ease your fears and your woes.

Do you operate your business from your home? The majority of online entrepreneurs do, and that entitles you to take some significant tax deductions if you meet certain IRS conditions. For one, your home office must be used “exclusively” and “regularly” for business use. That means the primary purpose of that space is for business, such as contacting clients or managing your books.

It also means that the space is not used for family or personal activities, unless you want to start dividing up that time by saying 75 percent of the time the home office is used for business and 25 percent of the time it’s used for playing games or doing homework.

The second IRS stipulation is fairly easy for most online business owners to meet: Your home office must be your “principal place of business.” Essentially, that phrase just means that the business activities you conduct in your home office can’t be conducted anywhere else, such as in a rented office space.

If you meet both of those requirements, then you can deduct many of the costs associated with your home, including property taxes, utility bills, insurance costs, mortgage or rent payments, even the cost maintaining your property. Of course, if your mortgage payment is $800 per month, you can’t deduct that entire amount if you only use a small portion of your home for business.

You need to determine what percentage of your home is used as a home office, then you’ll use that figure to calculate the deductions you can take. For example, if your home office represents 10 percent of your home’s square footage, and your mortgage payment is $800 per month, then you could deduct $80 every month, which would be $960 for the year. The same applies to all the other expenses related to your home.

You do need to be aware of one thing when calculating these deductions: You can’t use them to demonstrate a net loss during that tax year. For example, if your online business generated $50,000 in revenue in 2004, but you could claim $60,000 worth of home business deductions that year, then you can’t claim a net loss of $10,000. Instead, you could only report zero net gain. However, you can carry that remaining $10,000 onto next year’s taxes to help you reduce your tax burden.

To calculate your home office deductions, you’ll need to complete Form 8829 and report that total amount on Schedule C. All of these forms are available online at the IRS’s website. Remember that you can also deduct other business expenses, such as the cost of owning your domain name, paying your web-hosting company, designing your website and accessing the internet. (These fees will have to be pro-rated, however, if your family or you use the internet for non-business-related activities.)

Another tax-related issue that might be bothering you is what to do with any and all of the people who did work for your online business, such as the web-design company that helped you establish a presence on the internet, the copywriters who created press releases and marketing letters to help you gain new business and publicity, and the person who answers your customer calls or responds to customer e-mails.

By law, you have to report how much you paid these individuals during the tax year, but you also have to know how to report that information and which forms to send to those individuals.

You have two choices: They could be independent contractors or employees. There is a big difference between them. With independent contractors, you aren’t responsible for paying Social Security, Medicare or unemployment taxes, while with an employee you have to cover all those expenses. For that reason, most online business owners choose to work with independent contractors.

While the IRS has established a set of 20 questions that can help you determine whether an individual doing work for you is an employee or an independent contractor, one of the easiest ways to make that determination is to ask yourself one question: Do I control “what will be done and how it will be done”? If you answered yes, then the individual is an employee, and you will need to send him a W-2 regardless of how long he worked for you and how much money he earned.

If you answered no, then the individual is classified as an independent contractor by the IRS. With an independent contractor, you still can control “what will be done,” but you can’t control “how it will be done.” You would send them a Form-1099 if they did more than $600 worth of work for you during the year.

Because classifying the individuals who do work for your online business is important (the IRS could force you to pay the back taxes and even a penalty if you don’t classify an employee correctly), you should always have them sign a contract stating that they are doing work for you as an independent contractor. That way, both parties know what their specific relationship is going to be from the beginning, and you don’t have to sort everything out during tax time.

Money management is tricky business. In addition to customers, cash flow and managing your accounts properly is what keeps your business humming along. Consequently, getting paid in full and on time, as well as understanding money management, has to become a priority, even if you elect to hire an accountant or bookkeeper to manage the books.

You will still need to familiarize yourself with basic bookkeeping and money management principles and activities such as understanding credit, reading bank statements and tax forms, and making sense of accounts receivable and payable. You also have to give careful consideration to the purchase payment options you offer customers, including cash, checks, debit cards, credit cards and online payment options, as well as establishing payment terms and debt collection in the event of nonpayment.

Opening a Bank Account

Once you’ve chosen a name and registered your business, you will need to open a commercial bank account. Setting up a business bank account is easy. Start by selecting the bank you want to work with–think small-business-friendly–and call to arrange an appointment to open an account. There’s not much more required than that.

However, when you go, make sure you take personal identification as well as your business name registration papers and business license, because these are usually required to open a commercial bank account. The next step will be to deposit funds into your new account (even $100 is okay). If your credit is sound, also ask the bank to attach a line of credit to your account, which can prove very useful when making purchases for the business or during slow sales periods to cover overhead until business increases. Also be sure to ask about a credit card merchant account, debit account, and other small business services.

Bookkeeping

When it comes time to set up your financial books, you have two options–do it yourself or hire an accountant or bookkeeper. You might want to do both by keeping your own books and hiring an accountant to prepare year-end financial statements and tax forms.

If you opt to keep your own books, make sure you invest in accounting software such as Quickbooksor Quickenbecause they’re easy to use and makes bookkeeping almost enjoyable. Most accounting software programs allow you to create invoices, track bank account balances and merchant account information, and keep track of accounts payable and receivable.

If you’re unsure about your bookkeeping abilities even with the aid of accounting software, you may wish to hire a bookkeeper to do your books on a monthly basis and a chartered accountant to audit the books quarterly and prepare year-end business statements and tax returns.

To find an accountant or bookkeeper in your area, you can contact the U.S. Association of Chartered Accountantsor the American Institute of Professional Bookkeepers. In Canada, you can contact the Chartered Accountants of Canadaor the Canadian Bookkeepers Association.

If you’re only washing windows on weekends to earn a few extra bucks, there’s little need for accounting software or accountant services. Simply invest in a basic ledger and record all business costs and sales. Since you are doing it on your own, be sure to use a commonsense approach when calculating how much to invest in your business vs. expected revenues and profits.

Also remember to keep all business and tax records in a dry and secure place for up to seven years. This is the maximum amount of time the IRS and Revenue Canada can request past business revenue and expense information.

In today’s super-competitive business environment, you must provide customers with many ways to pay, including cash, debit card, credit card and electronic cash. There is a cost to provide these payment options–account fees, transaction fees, equipment rental and merchant fees based on a percentage of the total sales value. But these expenses must be viewed as a cost of doing business in the 21st century.

You can, however, reduce fees by shopping for the best service with the best prices. Not all banks, merchant accounts and payment processing services are the same, and fees vary widely. You can also check with small business associations such as the chamber of commerce to see if they offer member discounts; it’s not uncommon to save as much as 2 percent on credit card merchant fees. Just remember, consumers expect choices when it comes time to pay for their purchases, and if you elect not to provide these choices, expect fewer sales.

Cash is the first way to get paid, which is great because it’s liquid and there’s no processing time required. As fast as the cash comes in, you can use it to pay bills and invest in business-building activities to increase revenues and profits. The major downside is that cash is risky because you could get robbed or lose it.

In cases like that, collecting from your insurance company could prove difficult if there’s no paper transaction as proof. Even if you prefer not to receive cash, there are people who will pay in cash, so get in the habit of making daily bank deposits during daylight hours. Also invest in a good-quality safe for cash storage for times when you cannot get to the bank.

If you’re running a service business, one the most popular way people still pay for services is with a check. You have to take a few precautions to ensure you don’t get left holding a rubber check, especially when dealing with new clients. Ask to see a photo ID and write the customer’s driver’s license number on the check.

If the amount of the check exceeds a few hundred dollars, ask the buyer to get the check certified or pay with a bank draft instead, especially if the client is new to your business. Also get in the habit of checking dates and dollar amounts to make sure they are right. I have been caught a few times with wrong dates and dollar amounts and it can be time-consuming to have to get a new check because of a simple error.

Debit cards are another option, but to accept them, you will need to buy or rent a debit card terminal. Most banks and credit unions offer business clients debit card equipment and services. The processing equipment will set you back about $40 per month for a terminal connected to a conventional telephone line and about $100 per month for a cellular terminal, plus the cost of the telephone line or cellular service.

There is also a transaction fee charged by the bank and payable by you every time there is a debit card transaction, which ranges from 10 cents to 50 cents per transaction, based on variables such as dollar value and frequency of use.

Opening a Credit Card Merchant Account

Many consumers have replaced paper money altogether in favor of plastic for buying goods and services. In fact, giving your customers the option to pay for purchases with a credit card is often crucial to success. This is especially true if you plan to do business on the web because credit cards and electronic cash are used to complete almost all web sales and financial transactions.

To offer customers credit card payment options, you will need to open a credit card merchant account. Get started by visiting your bank or credit union or by contacting a merchant account broker such as 1st American Card Service, Cardservice International or Merchant Account Express to inquire about opening an account.

Providing your credit is sound, you will run into few obstacles. If your credit is poor, you may have difficulties opening a merchant account or have to provide a substantial security deposit. If you are still unsuccessful, the next best option is to open an account with an online payment service provider, which is discussed in the next section.

The advantages of opening a credit card merchant account enabling you to accept credit card payments are numerous. In fact, studies have proven that merchants who accept credit cards can increase sales by up to 50 percent. Not to mention that you can accept credit card payments online, over the telephone, by mail and in person, as well as sell services on an installment basis by obtaining permission to charge your customer’s credit card monthly or per agreement.

Of course, all these benefits come at a cost, especially when you consider that you’ll have to pay an application fee, setup fee, purchase or rent processing equipment and software, pay administration and statement fees, and pay processing and transaction fees ranging from 2 to 8 percent on total sales volume. Once again, these fees must be viewed as the cost of doing business.

Online Payment Services

Online payment services allow people and businesses to exchange currency electronically over the internet. These services are very popular with consumers and merchants. PayPalis one of the more popular online payment services with more than 40 million members in 45 countries, offering personal and business account services. Both types of accounts allow funds to be transferred electronically among members, but only the business account enables merchants to accept credit card payments for goods and services.

The advantages of online payment services are that they’re quick, easy and cheap to open, regardless of your credit rating or anticipated sales volumes, and you can receive payment from any customer with an e-mail account. You can have the funds deposited directly into your account, have a check issued and mailed, or leave funds in your account to draw on using your debit card. The only real disadvantage is that most services redirect your customers to their website to complete the transaction. This can confuse people who in some cases will abandon the purchase.

Every small-business owner also needs to establish a payment-terms policy. Although you certainly want to standardize the way you get paid, at the same time you will also have to be flexible enough to meet clients’ needs on an individual basis. Setting payment terms covers deposits, progress payments and extending credit.

It’s important to establish clear, written payment terms with clients prior to providing services or delivering product. Your payment terms should be printed on your estimate forms, included in formal contracts and work orders, and printed on your final invoices and monthly account statements.

Securing Deposits

If you’re run a service business, you have to get in the habit of asking clients for a deposit prior to providing services, especially if the work also involves product sales that have to be paid for by you in advance. In this case, the deposit should be for at least the value of the materials. If you’re supplying labor only, try to secure a deposit of at least one-third to one-half of the total value of the contract in advance of providing any services.

Your order form or contract should have the deposit information clearly stated. Information on canceled orders or contracts and your refund policy should also be on your forms. Securing a deposit is your best way of ensuring that, at minimum, basic out-of-pocket costs are covered should the customer cancel the job or contract.

Progress Payments

Progress payments are also a way to ensure that you do not leave yourself open to financial risk. The key to successfully securing progress payments is to prearrange your contract and payment terms. Agree on the amount that will be due at various stages of the project. You can use percentages to calculate the progress payments, such as 25 percent deposit, 25 percent upon delivery of any materials, 25 percent upon substantial completion, and the balance at completion or within 30 days of substantial completion.

Or you may arrange for more concrete progress payments based on indicators that are relevant to the specific scope of work, the job or the services provided. Regardless of the system you use, progress payments on larger jobs can dramatically lessen your exposure to financial risk.

Extending Credit

In most cases there’s no need to extend credit to consumers unless you deliver a service such as pest control that’s billed monthly or a major contract that is completed in stages. As a general rule, when a transaction is complete you should be paid in full. However, in the case of business-to-business sales, commercial clients will generally want some type of credit on a revolving-account basis, such as 30, 60, 90 or sometimes 120 days after delivery of the product or completion of the service.

Ideally, you want to be paid as quickly as possible, so you might want to offer a 2-percent discount if invoices are paid within one week. And if you do extend credit, make sure to conduct a credit check first, especially when large sums of money are at stake. There are three major credit-reporting agencies serving the United States and Canada: Trans Union, Equifaxand Experian. All three credit bureaus compile and maintain credit files on just about every person, business and organization that has ever applied for credit.

Debt Collection

No matter how careful you are when it comes to extending credit privileges to customers, once in a while you will not be paid on time or at all. What can you do to get paid? The first rule of getting paid is to keep the lines of communication open with your delinquent client, and keep the pressure on to get paid through the use of nonthreatening telephone calls, letters and personal visits.

You cannot legally intimidate clients into paying you, but you can explain why it is in their best interest to pay you–namely, to keep your business relationship intact, that nonpayment can hurt their credit rating or that you may sue them if they do not pay.

Another option is to hire a collection agency to collect the outstanding debt. Collection agencies generally charge a percentage of the total amount owed as their fee, which can range up to as much as 50 percent. The Association of Credit and Collection Professionals is a good starting point for finding a collection agency to work with.

Your final option is to take the delinquent account to small-claims court, but remember that small-claims courts have limits as to how much you can sue for in your state or province, ranging from $1,500 to $25,000. Filing fees vary by state and province as well, and these must be paid upfront. But if you win, the fees are added to your award.

As a rule of thumb, small-business owners that take people to court for nonpayment generally represent themselves, as the amount of the potential award is usually small and doesn’t justify lawyers’ fees and expenses. Even if you win, you will not necessarily be paid the amount you’re awarded. You may win a judgment, but still have to chase the defendant through garnishment of income or seizure of assets to get paid. You can learn more about the small-claims court process and filing fees by contacting your local courthouse.

It’s not enough to build a business worth a fortune; you have to make sure you have an exit strategy, a way to get the money back out. For entrepreneurs who like to plan ahead and for those of you who don’t but should, here are the five primary exit strategies available to you:

1. The Modified Nike Maneuver: Just Take It. One favorite exit strategy of some forward-thinking business owners is simply to bleed the company dry on a daily basis. I don’t mean run it in the red–I mean pay yourself a huge salary, reward yourself with a gigantic bonus regardless of actual company performance, and issue a special class of shares that only you own that gives you ten times the dividends the other shareholders receive. Although we frown upon these practices in public companies, in private companies, this actually isn’t such a bad idea. It’s called a “lifestyle company.”

   Pros

   • Who doesn’t like seven figures of take-home pay?
   • Private jets are fun.
   • There’s no need to think hard about getting out: Just pull out the money when you need it.

   Cons

   • The way you pull the money out may have negative tax implications. For example, a high salary is taxed as ordinary income, while an acquisition could bring money in the form of capital gains.
   • Without careful long-term planning, you may end up pulling out money now you’ll need later.
2. The Liquidation. Even lifestyle entrepreneurs can decide that enough is enough. One often-overlooked exit strategy is simply to call it quits, close the business doors, and call it a day. I don’t know anyone who’s founded a business planning to liquidate it someday, but it happens all the time.

   Pros

   • It’s easy and it’s natural. Everything comes to an end.
   • There’s no negotiations involved.
   • There’s no worrying about transfer of control.

   Cons

   • Get real; it’s a waste! At most, you get the market value of your company’s assets.
   • Things like client lists, your reputation, and your business relationships may be very valuable, and liquidation just destroys them without an opportunity to recover their value.
   • Other shareholders may be less than thrilled at how much you’re leaving on the table.

   My favorite piano bar in Boston simply vanished one day when the owner decided he was tired of show tunes. His regular patrons were crushed, but then, he didn’t consult with us first.

3. Selling to a Friendly Buyer. If my neighborhood piano bar owner had asked, we might have wanted to buy the business ourselves. You see, if you’ve become emotionally attached to what you’ve built, even easier than liquidating your business is the option of passing ownership to another true believer who will preserve your legacy. Interested parties might include customers, employees, children or other family members.

   Pros

   • You know them. They know you. There’s less due diligence required.
   • Your buyer will most likely preserve what’s important to you about the business.
   • If management buys the business, they have a commitment to making it work.
   • Selling to family makes good on that regrettable offhand promise made 30 years ago, “Someday, son/daughter, all this will be yours.”

   Cons

   • You can get so attached to being bought by someone nice that you leave too much money on the table.
   • If you sell to a friend, they’ll be peeved when they discover they just bought the liability for that decade’s worth of taxes you forgot to pay.
   • Selling to family can tear the company apart with jealousies and promotions that put emotion way ahead of business needs.
4. The Acquisition. The acquisition was invented so you can sell your business and leave the kids money, still spoiling them rotten, but at least sparing the business from second-generation ruin. Acquisition is one of the most common exit strategies: You find another business that wants to buy yours and sell, sell, sell.
   Pros
   • If you have strategic value to an acquirer, they may pay far more than you’re worth to anyone else.
   • If you get multiple acquirers involved in a bidding war, you can ratchet your price to the stratosphere.

   Cons

   • If you organize your company around a specific be-acquired target, that may prevent you from becoming attractive to other acquirers.
   • Acquisitions are messy and often difficult when cultures and systems clash in the merged company.
   • Acquisitions can come with noncompete agreements and other strings that can make you rich, but make your life unpleasant for a time.
5. The IPO. I’ve saved IPOs for last, because they’re sexy, they’re flashy, and they get all the press. Too bad they make the lottery look good by comparison. There are millions of companies in the U.S., and only about 7,000 of those are public.

   Pros

   • You’ll be on the cover of Newsweek.
   • Your stock will be worth in the tens–or maybe even hundreds–of millions of dollars.
   • Your VCs will finally stop bugging you as they frantically try to insure their shares will retain value even when the lockout period expires (Warning: they won’t necessarily be looking out for your shares, too.)

   Cons

   • Only a very few number of small businesses actually have this option available to them since there are very few IPOs completed annually in the United States.
   • You need financial and accounting rigor from day one far above what many entrepreneurs generally put in place.
   • Some forms of corporation–S-corps, for example–will require a reorganization before they can be taken public.
   • You’ll spend your time selling the company, not running it.
   • Investment bankers take 6 percent off the top, and the transaction costs on an IPO can run in the millions.
   • When your lockout restrictions expire, your stock will be worth as much as a third world hovel.

You’ve decided to strike out on your own. So, what kind of business structure will you choose? Answer these two questions and you’ve got your answer:

1. How can I get the best protection from general business liabilities that will threaten my business assets and my family’s assets?
2. How can I get the best tax breaks out of the business entity that I select?

The answer to Number 1 above is best answered by first talking with decent business attorneys, then talking with your potential business partners (if any) and finally deciding for yourself. It is also beyond the scope of this article.

The rest of this article will try to help with your answer to Number 2 above. The search for shelter from high taxes is what we’ll be trying to help you with.

How to Save Taxes with Your Business Entity

New business owners are quick to learn that confiscatory tax laws have a profound influence on the success or failure of all small business operations. As a small business owner, you want to get every break available under the law, and you don’t want to see the results of all your hard work get eaten up by the IRS and the tough tax laws.

The problem, however, is that those tax laws have become so painfully complex that new business owners automatically assume they could never make the best of their available options without conceding the strategy planning to the tax professionals. Interestingly, the tax professionals themselves are often at odds with each other as to the best tax saving options in this ever-changing environment.

Understand the Differences Between the Entities

Before we discuss the specific tax advantages and disadvantages of the various business entities, it is important that you know some fundamental tax considerations between a:

1. Sole proprietorship
2. General partnership
3. Limited partnership
4. Corporation
5. Limited liability company

The Sole Proprietorship

The sole proprietorship is thought of as the quickest and easiest way to set up a business operation. There are no blanket prerequisites, nor are there any specific costs in starting a sole proprietorship. There may be some minor formalities, however, that will need attention depending on your state or your jurisdiction. These formalities, which of course apply to all business entities, mean that you will probably have to:

• Obtain an occupancy permit for your place of business
• Secure a business license
• Apply for a franchise or registration number for your operation. This registration number will be used by the state agency to monitor the collection of sales tax and other regulatory matters

All of these procedures are simple and can be done without the assistance of an attorney or accountant regardless of the state in which you are doing business. Once you start a sole proprietorship, you are the sole owner. Unless you are in a community property state in which your spouse is vested with a one-half interest, you alone have full control and responsibility for the operation.

The General Partnership

Like the sole proprietorship, starting up the general partnership could be a relatively easy process. No costs or formalities are required. Wise counsel, however, will give you about a dozen reasons why you should have a detailed partnership agreement drafted whenever you put yourself on the line with any other individual. A few items that you would be best advised to spell out in writing are:

• The amount of capital each partner is expected to contribute up front
• The rights and duties of the partners
• The method for sharing profits and losses
• The authorization for cash withdrawals and salaries
• The methods for resolving disputes or taking in new partners
• The method for dissolving the partnership should dissolution become necessary

The Limited Partnership

A limited partnership is much like a general partnership except for one important fundamental difference. The limited partner is protected by law because the limited partner’s legal liability in the business is generally limited to the amount of his or her investment.

It enables this special type of investor to share in the partnership profits without being exposed to its debts in the event the company goes out of business. This protection exists as long as the limited partner does not play an active role in the partnership operation.

Unlike the partnerships described above, the corporation is considered an artificially created legal entity that exists separate and apart from those individuals who created it and carry on its operations. With as little as one incorporator, a corporation can be formed by simply filing an application for a charter with the respective state. By filing this application, the incorporator will put on record facts, such as:

• The purpose of the intended corporation
• The names and addresses of the incorporators
• The amount and types of capital stock the corporation will be authorized to issue
• The rights and privileges of the holders of each class of stock

It is true that operating as a corporation has its share of drawbacks in certain situations. For example, as a business owner, you would be responsible for additional record keeping requirements and administrative details. More important, in some cases, operating as a corporation can create an additional tax burden. This is the last thing a business owner needs, especially in the early stages of operation.

Remember, aside from tax reasons, the most common motivation for incurring the cost of setting up a corporation is the recognition that the shareholder is not legally liable for the actions of the corporation. This is because the corporation has its own separate existence wholly apart from those who run it. However, let’s examine three other reasons why the corporation proves to be an attractive vehicle for carrying on a business.

• Unlimited life. Unlike proprietorships and partnerships, the life of the corporation is not dependent on the life of a particular individual or individuals. It can continue indefinitely until it accomplishes its objective, merges with another business, or goes bankrupt. Unless stated otherwise, it could go on indefinitely.
• Transferability of shares. It is always nice to know that the ownership interest you have in a business can be readily sold, transferred, or given away to another family member. The process of divesting yourself of ownership in proprietorships and partnerships can be cumbersome and costly. Property has to be retitled, new deeds drawn, and other administrative steps taken any time the slightest change of ownership occurs.
• Ability to raise investment capital. It is usually much easier to attract new investors into a corporate entity because of limited liability and the easy transferability of shares. Shares of stock can be transferred directly to new investors, or when larger offerings to the public are involved, the services of brokerage firms and stock exchanges are called upon.

There are pros and cons to operating your business as a corporation. One of the biggest tax disadvantages for the ordinary C corporation is the dreaded double taxation. Many business owners opt for electing to operate their corporations under subchapter S of the Internal Code. Also known as an S corporation, this entity allows income to pass through to the individual shareholders.

The Limited Liability Company (LLC): New Kid on the Block

In earlier editions of this Top Tax Savings Ideas, the S corporation had been referred to as the logical choice for those small businesses that need to steer away from the regular corporation and its potential tax pitfalls. Increasingly, however, the LLC has been coming to the forefront as another viable alternative. This is especially the case now that much of the air is clearing within the various state laws and professional organizations that deal with LLCs. In fact, many practitioners argue that the LLC is now the preferred choice in the following situations where:

• Legal liability protection is a primary concern
• A simplified “one time” tax on the owners is preferred to dealing with cumbersome corporate tax liability
• The entity cannot qualify for subchapter S status

An LLC is a hybrid entity that has the legal protections of a corporation and the ability to be taxed (one time) as a partnership. In many regards, LLCs are treated much like S corporations for tax purposes. However, there are some additional advantages over S corporations, including the following examples:

• The LLC usually offers better leeway for owners who wish to write off business losses in a business that relies on entity-related debt that is incurred
• The LLC allows greater flexibility for the owner to take assets out of the company without incurring unplanned tax liability

Remember to check with your lawyer or accountant about the advantages of the LLC in your particular state. Ask up front what it would cost to form a corporation versus the cost of forming an LLC. You may be surprised to learn that in some states an LLC could be established by filing a simple, one-page document, which lays out the Articles of Organization of your LLC, with the secretary of state.

You can form an LLC for any lawful business as long as the nature of the business is not banking, insurance, and certain professional service operations. By simply filing articles of organization with the respective state agency, an LLC takes on a separate identity. Similar to a corporation, but without the tax problems of the corporation, it will be taxed like a partnership.

When starting a new business, it’s easy for you to ignore licenses and permits. Getting them is about as fun as a dentist’s visit. Failing to do so from the beginning is one of the most common mistakes new entrepreneurs make.

Here is our list of the most common licenses and permits small-business owners may need, plus where you can go for more information.

Business License

Contact your city’s business license department to find out about getting a busines(after you pay a fee, of course) to operate a business in that city. When you file your license application, the city planning or zoning department will check to make sure your area is zoned for the purpose you want to use it for and that there are enough parking spaces to meet the codes.

You can’t operate in an area that is not zoned for your type of business unless you first get a variance or conditional-use permit. To get a variance, you’ll need to present your case before your city’s planning commission. In many cases, variances are quite easy to get, as long as you can show that your business won’t disrupt the character of the neighborhood where you plan to locate.

County Permits

County governments often require essentially the same types of permits and licenses as cities. If your business is outside any city or town’s jurisdiction, these permits apply to you. The good news: County regulations are usually not as strict as those of adjoining cities.

State Licenses

In many states, people in certain occupations must have licenses or occupational permits. Often, they have to pass state examinations before they can get these permits and conduct business. States usually require licensing for auto mechanics, plumbers, electricians, building contractors, collection agents, insurance agents, real estate brokers, repossessors, and anyone who provides personal services (i.e., barbers, cosmetologists, doctors and nurses). Contact your state government offices to get a complete list of occupations that require licensing.

Federal Licenses

In most cases, you won’t have to worry about this. However, a few types of businesses do require federal licensing, including meat processors, radio and TV stations, and investment advisory services. The Federal Trade Commission can tell you if your business requires a federal license.

Sales Tax License

There are two reasons you need a certificate of resale (in other states, this may be called a “seller’s permit” or a “certificate of authority”). First, any business selling taxable goods and services must pay sales taxes on what it sells. The definition of a taxable service varies from state to state. Depending on individual state rulings, both the parts and labor portions of your bill may be taxable.

Sales taxes vary by state and are imposed at the retail level. It’s important to know the rules in the states and localities where you operate your business because if you’re a retailer, you must collect state sales tax on each sale you make.

Before you open your doors, be sure to register to collect sales tax by applying for each separate place of business you have in the state. A license or permit is important because in some states it’s a criminal offense to undertake sales without one.

Fire Department Permit

You may need to get a permit from your fire department if your business uses any flammable materials or if your premises will be open to the public. In some cities, you have to get this permit before you open for business. Other areas don’t require permits but simply schedule periodic inspections of your business to see if you meet fire safety regulations. If you don’t, they’ll issue a citation. Businesses such as restaurants, retirement homes, day-care centers and anywhere else that lots of people congregate are subject to especially close and frequent scrutiny by the fire department.

Air and Water Pollution Control Permit

Many cities now have departments that work to control air and water pollution. If you burn any materials, discharge anything into the sewers or waterways, or use products that produce gas (such as paint sprayers), you may have to get a special permit from this department in your city or county. Environmental protection regulations may also require you to get approval before doing any construction or beginning operation. Check with your state environmental protection agency regarding federal or state regulations that may apply to your business.

Sign Permit

Some cities and suburbs have sign ordinances that restrict the size, location and sometimes the lighting and type of sign you can use outside your business. To avoid costly mistakes, check regulations and secure the written approval of your landlord before you go to the expense of having a sign designed and installed.

Health Department Permits

If you plan to sell food, either directly to customers as in a restaurant or as a wholesaler to other retailers, you’ll need a county health department permit. This costs about $25 and varies depending on the size of the business and the amount and type of equipment you have. The health department will want to inspect your facilities before issuing the permit.