|Is Your Side Business Legal?|
Nellie Akalp is the CEO of CorpNet.com, an online legal document filing service, where she helps entrepreneurs incorporate or form an LLC for their new businesses. Connect with Nellie on Twitter or visit her free resource center.
From blogging to handling a one-off PR project for a former client, today’s digital economy offers new opportunities for bringing in a little extra income. But when does a casual project turn into a business, and how do you keep that business legal?
According to the IRS, an activity is considered a “business” if it has made a profit in three of the past five years. Since you’re supposed to report all income, the IRS defines gross income as income “from whatever source derived.” This means that if you’re making money doing anything — whether that’s selling ads on your blog or selling items on eBay — the tax authorities will want their cut.
The hobby versus business debate really comes into play when the activity loses money. If developing a mobile app lost you money when you factor in related expenses, the IRS will let you deduct that loss from other income, such as the income from your day job. However, that’s only if the venture is considered a business. You wouldn’t be able to deduct that loss if your mobile app is considered a hobby.
If you’re just starting out and are likely to lose money this year, your project can still count as a business if you can show that the primary goal is to make a profit. Here the IRS will apply a subjective standard to determine if you have a profit motive, by looking at things like:
In short, if you can demonstrate that you are involved in the activity with the expectation of making money from it, the IRS will consider it a business. And this means you’ll be able to deduct expenses directly from your income, as well as deduct overall business losses from your total income for those years that you don’t turn a profit. Beyond your tax deductions, there are other administrative aspects you need to consider for your side business. Here are the four key ones.
1. Form an LLC or Incorporate
Forming an LLC or corporation for your side business will protect your personal assets, such as your savings and personal property, from any liabilities of the company. Each business structure has its own advantages and disadvantages depending on your specific circumstances, but the LLC protects your personal assets, with a minimum of paperwork and legal red tape.
2. Register a Fictitious Business Name or DBA
A DBA, also known as a fictitious name, allows you to run a company under a name that is not your legal name. For example, if you’ve got a sole proprietorship/general partnership, you’ll need a DBA if you’re using a name for your business that’s different from your own name. For an LLC or Corporation, a DBA must be filed to conduct business using a name that’s different than the official Corporation or LLC name you filed. For example, my company is officially incorporated as CorpNet, Inc., so we needed to file DBAs for the variations CorpNet.com and CorpNet. These are typically filed at the state and/or county level.
3. Get a Federal Tax ID Number
To distinguish your business as a separate legal entity, you’ll need to obtain a Federal Tax Identification Number, also referred to as an Employer Identification Number (EIN). The tax ID number is issued by the IRS and is similar to your personal social security number. It basically allows the IRS to track your company’s transactions. If you’re a sole proprietor, you’re not required to get a Tax ID number, but it’s still good practice as you won’t have to provide your personal social security number for business matters.
4. Obtain the Necessary Business Permits and Licenses
Depending on your business type and physical location, you may be required to have one or more business licenses and/or permits from the state, local, or even federal level. These licenses can include: A general business operation license, zoning and land use permits, sales tax license, health department permits, and occupational or professional licenses.
You may think of your activity as a side project, but if you’re making money from it, it’s time to take your legal obligations seriously. Getting your legal ducks in a row right from the start will help you avoid any pitfalls down the road and ensure you can take whatever deductions are available to you. And who knows, it just may help you scale more successfully if your business morphs from side project to full-time career.
Newer news items:
Older news items:
by Ayaz Nanji | shared from MarketingProfs Some 66% of small-business owners are using mobile devices and/or mobile solutions as part of their operations, according to a recent report from Constant Contact. Of those small-business owners using mobile devices, 73% said they use their phones or tablets to...
by Hank Blank | shared from The UPS Store Often when I talk to small business owners about networking many say they have no time to network. They are too busy. I have heard that many times. Who isn’t busy today? I also know that many small business owners have simply selected the wrong priorities in allocating their...
by Eric Michaels | shared from The UPS Store To make your business grow, you need the help of the latest technology. No matter what device or operating system you use to power your business, there's a way to get technology on your side. These six essential apps for small business owners do the work for you. 1....
by Lara Galloway, The Mom Biz Coach, www.MomBiz.com Having my first child ten years ago made me a mother. And starting my business eight years ago made me an entrepreneur. I can’t say I had any idea what either of those terms really meant before they happened to me. But here are a few things I’ve learned since then about what it means...
by Dr Billy M. | shared from The UPS Store Kicking off a business initiative can be overwhelming, but often, just starting is the hardest part. Many people find themselves starting a small business from home as a result of such life-changing events as retirement or parenthood. A business based at home will benefit you personally by eliminating a...
by Michael Mothner | shared from Inc. Over the past five years, social media has become an increasingly important part of many companies' marketing strategies. But there are still some misconceptions about how to use social media to drive sales and which services are worth the investment of company time and resources. Here are the six...