How to Set Up a Small Business?

[Orvell]

I'm asking for a friend (no really) but it's something I'd like to get the low-down on, too, as my potential future side hustle would need this as well.

Basically, there's a lot of information out there, and it's really confusing.
What does a person need to do (federal stuff, state stuff (WI), LLC, the whole kit and caboodle) to set up a small business, in what order?
Is there a clear and concise resource out there, or have people gone through the process and want to share their experience?

The person in question is an artist, although I'm not sure if that matters. They sell craft things (think etsy) as well as commissioned art.

Help??

[Kriegsspiel]

Register an EIN with the IRS, then register a business name with your state secretary of state. In Texas, you also have to pay a registered agent, but you'd just need to look at your state's requirements on the secretary of state's webpage to see if you would need to. Once you have that stuff, you can open a business bank account. You can register your business in whatever state you want, but it might be easier to just register it in Wisconsin since you'd probably have to pay foreign business fees there anyways.

[Orvell]

Register an EIN with the IRS, then register a business name with your state secretary of state. In Texas, you also have to pay a registered agent, but you'd just need to look at your state's requirements on the secretary of state's webpage to see if you would need to. Once you have that stuff, you can open a business bank account. You can register your business in whatever state you want, but it might be easier to just register it in Wisconsin since you'd probably have to pay foreign business fees there anyways.

Wow, sorry for failing to get back to this thread.
Thank you for the information!

So after the EIN you register with the state's secretary of state. Is that like, it?
Then magically you have a small business?

[Axecleaver]

You should choose the right corp structure from the beginning.

1. How much in revenue? Under 20-30k, you're best setting up a sole proprietorship and declaring business income on your schedule C. More than 30k you should set up an S corp. You'll pay payroll taxes (15.3%) plus your usual fed and state taxes on the portion of your profit that you recognize as your pay, but the remainder can be taken as a distribution and avoids payroll taxes. You can also write off a lot of normal business expenses, like art supplies.

2. Evaluate the risk of doing business. Do you have liability concerns? An LLC can protect your assets from lawsuits, but if you're found negligent, you can still be personally sued. I set up an LLC in the 90's and wish I'd done it as an S corp from the beginning. I really did not buy myself much protection. The added cost of LLC setup and maintenance (tax and state filings) is also a bit of a hassle.

If you're worried about risk, consider buying liability insurance. These are required by some larger employers you'll do business with. Making art sounds pretty low risk to me, but YMMV.

3. Other stuff - setting up a payroll service, establish a Solo-k or SEP-IRA, tax planning, expense tracking. Plus all the stuff that makes a business successful. Marketing, sales, delivery.

Here's a good checklist from the SBA: https://www.sba.gov/starting-business/how-start-business/9-steps-starting-business

[Orvell]

Thanks Axecleaver! Lots of helpful information. :)

Both the friend and I (different small businesses, same side hustle/passion - art) would not be making much money at all. But I think both of us want to do it "right."
I'll be checking out that link asap. :)

[Fishindude]

Many folks that do art or crafts type stuff, do nothing.
Just create the art, sell the art, end of story.

[Orvell]

Many folks that do art or crafts type stuff, do nothing.
Just create the art, sell the art, end of story.

Right, but if you make more than $400 on it, you need to report it on your taxes, yes? And would it not make things considerably cleaner to have a business bank account etc.?
This is one of those things that would be fantastic to have learned about while learning to make art. And yet here we are...

[SomedayStache]

This is one of those things that would be fantastic to have learned about while learning to make art. And yet here we are...

I know right!  My husband even took a small business CLASS through part of his sustainable horticulture degree program and didn't learn any of this stuff.  The class work included things like making a business plan and budget but the teacher and book never brought up anything about LLCs vs sole proprietorship vs other options.  Those terms weren't even mentioned all semester long.  !!!?

[robartsd]

Right, but if you make more than $400 on it, you need to report it on your taxes, yes? And would it not make things considerably cleaner to have a business bank account etc.?
This is one of those things that would be fantastic to have learned about while learning to make art. And yet here we are...

Technically any hobby profit must be reported if you are required to file a return. You are not required to file a return for self-employment income less than $400, but if you file a return for any reason you're supposed to report all your income. In actual practice, I'm sure many people who make a few bucks at a hobby do not track and report the earnings (nor do they track and deduct the costs from the earnings). If you have a business rather than just a profitable hobby, business losses can be deducted from your other income. To claim business losses, you must be running it with the intent to make a profit. Generally losses in more than 2 of the past 5 tax years will cause the IRS to classify the activity as a hobby rather than a business.

[skuzuker28]

You should choose the right corp structure from the beginning.

1. How much in revenue? Under 20-30k, you're best setting up a sole proprietorship and declaring business income on your schedule C. More than 30k you should set up an S corp. You'll pay payroll taxes (15.3%) plus your usual fed and state taxes on the portion of your profit that you recognize as your pay, but the remainder can be taken as a distribution and avoids payroll taxes. You can also write off a lot of normal business expenses, like art supplies.

2. Evaluate the risk of doing business. Do you have liability concerns? An LLC can protect your assets from lawsuits, but if you're found negligent, you can still be personally sued. I set up an LLC in the 90's and wish I'd done it as an S corp from the beginning. I really did not buy myself much protection. The added cost of LLC setup and maintenance (tax and state filings) is also a bit of a hassle.

If you're worried about risk, consider buying liability insurance. These are required by some larger employers you'll do business with. Making art sounds pretty low risk to me, but YMMV.

3. Other stuff - setting up a payroll service, establish a Solo-k or SEP-IRA, tax planning, expense tracking. Plus all the stuff that makes a business successful. Marketing, sales, delivery.

Here's a good checklist from the SBA: https://www.sba.gov/starting-business/how-start-business/9-steps-starting-business

Only thing I'd clarify/change: generally it is $30k of NET Profit, not gross receipts, that is used as the tipover point.

[rafiki]

There are 3 main reasons why people incorporate: tax advantages, protection from liability, and the ability to divide the ownership and responsibility of a business (eg, partners, investors, etc).

Most small business are most concerned with taxes and liability protection, and will want to form a LLC or S-Corp. Although if you are not making much money it may not even make sense to incorporate.

If you do decide to incorporate, the entity you select will depend on which state you are in, how lucrative you anticipate the business will be, and whether you will have partners or not. I would defer to your accountant or lawyer. Keep in mind that a LLC can take an S-Election and be taxed like an S-Corp. LLCs are usually simple and flexible and can be a good choice for a hobby business. If you are starting a business that you know is going to produce a lot of money then an S-Corp could be the better choice. In my state, they are slightly more complicated than an LLC.

With that said, the basic idea is:

1. Select and form your corporate entity.
2. Obtain an EIN (don't obtain the EIN first - the EIN is tied to the business entity and you enter the business' information when applying to the IRS for the EIN).
3. Use the corporate docs and EIN to open up a corporate business account.
4. Sign contracts on behalf of the business - not personally.
5. Obtain any state or local licenses required.
6. Possibly also buy insurance at this point depending on what it exactly it is you are doing.
7. Make some money.
8. Run your business income and expenses through your business account. Keep this separate from your personal accounts.
9. Get fancy with payroll, employees, retirement accounts, etc once you are making some money

But before you do all of that, you want to make sure you have a viable business model. I think a lot of people get bogged down in the minutiae and then their businesses never go anywhere. Who cares if you have a LLC or an S-Corp if you don't make any money? That is where I would spend the bulk of my time. If the business is already making money then hire an expert to help with this. Every business at least needs a good accountant and their services are a write off.

[Orvell]

Helpful stuff, thanks guys!