Before you launch your online store there are a few loose ends you’ll need to tie up. First, you need to decide how your business will be organized. Is your business going to be a sole proprietorship, partnership or corporation? If it’s going to be a corporation, what type of corporation suits it best? I am not going to get into a lengthy discussion on the advantages or disadvantages of the different types of business organizations. However, I do have a few observations to offer.
Why Choose a Sole Proprietorship
Doing business as a sole proprietorship is the simplest way to set up your business. You won’t need a lawyer to help you draw up partnership or corporate documents. When it comes time to file your income taxes, you will fill out a Form 1040, Schedule C (Profit or Loss From Business) right along with your personal income tax statement. If you’ve been keeping good records, which you should be from the start, this is pretty painless. Point of caution: when you are a sole proprietor, you are responsible to pay your share and an employers share for Medicare and Social Security on your profit.
Is a Partnership a Good Idea for Your Business?
I have nothing against partnerships but I would caution you to really think about this one. A lot of business partners started out as friends who went in to business together and ended up not being friends anymore. Think about both of your personalities. Are you both willing to compromise or is one of you more domineering and apt to think it’s “my way or the highway?” Are your work ethics similar, or is one of you a little bit more lackadaisical? This is your financial future. Think about how money can cause problems in a marriage. A business partnership is like a marriage and the financial pitfalls may destroy your friendship. You should have a lawyer draw up the partnership papers for your business.
Should I Incorporate My Business?
I started out my online business as a sole proprietorship and then change it to a corporation. Our business had gotten large enough that I started to worry a little bit about a customer having a skin reaction to a lotion and deciding to sue. Not a major concern but I wanted what amount of protection incorporating might offer against our personal assets. Some people may think that incorporating will take away all personal liability from business debts should the business go under. Not true! As a new corporation, if you decide you need a loan (even an SBA loan), you will need to give your personal guarantee on that loan, i.e. your house as collateral. You will definitely need a lawyer to draw up the corporation papers. You will also have to hold and document annual meetings in order to maintain your corporate status. And, last but not least, you will probably need an accountant to take care of the corporate income taxes (an added expense of at least $400/year).
The Rest of the Loose Ends
Once you’ve chosen the structure of your business, you need to finish tying up a few other things.
- Depending on your city’s regulations, you may need to get a license or permission to operate a business out of your home. Don’t skip this step! If you don’t do this and the neighbors start complaining about UPS pulling up to your door every day or semis unloading boxes, the city can shut you down if you don’t have a license to operate out of your home.
- Register your business name with the proper county or state office.
- Apply for a Sales Tax License through your state’s Department of Revenue.
- Apply for a Federal Employer Identification Number (EIN) if you will have employees. You need to file a Form SS-4. You used to have to do this by mail but you can now fill out the form and apply online. Note: If you are incorporating, you will be considered an employee of the corporation. Even if you have no other employees, the corporation will need to have an EIN.
- Purchase accounting software and use it from the beginning. Be sure to keep all receipts. I recommend starting a filing system from the get go. I have used QuickBooks Pro for years and highly recommend it. You may find the Retailing Edition helpful but it is not necessary. Sign up for the Payroll Subscription to relieve yourself of that headache. You can choose to process credit cards in the program, and you can set it up to download orders from your website directly into your accounting system with the purchase of an add-on. Whatever accounting software you choose, make sure it has the above capabilities.
There you have it. You are one step closer to opening your online retail store!