Monday, May 28, 2012

Do I Need a Business License?

John Abert

Do I need a business license?
Before you worry about keywords and web sites, you should first decide whether you need a business license, whether to do your own bookkeeping or hire an accountant, what software you might need, and how to use that business license to make money.
Over the years, I have seen so many people try to make money without being properly licensed, and there is really no excuse for it. Obtaining a business license is neither difficult nor is it expensive. But, in reality, for web work, you may not need one, unless you are buying physical products wholesale from another vendor.

Not that I am in favor of handing some government entity fees all the time, but having that license and making the decision to operate as an officially licensed business not only puts that money (and more) back in your pocket, but it gives you the mindset that this is serious legal business and your business should be taken seriously and run professionally.
You don’t technically “have” to have a business license in order to claim your expenses on your income tax deductions. For instance, my wife is a musician… specifically a church organist… and even then it’s only as she gets called to sit in for other people as she is available. Unless you are on salary as a music director, it’s normally not a regular job nor a business.
For that, she has no business license, but it is still technically a business, and as such, any expenses for travel or supplies are recorded and included in a Schedule C on our taxes. Any time you have a vocation or hobby that you make money from, you are legally allowed to deduct proper expenses from the income from that business in order to determine your profits. If you don’t do that, then you are paying income taxes on your expenses! And THAT is money foolishly thrown down the drain!
A few years back, I read a report that said a small business has about 27 legal deductions it can take that an individual cannot. That figure may have gone up or down slightly since then, but it probably remains pretty close to that figure. Basically, almost everything that you spend money on to operate your business, in order to make the money you make from it, is tax deductible, either in part or in full. The law changes every year, so it pays to stay informed.
If studying tax laws aren’t your favorite thing, then you need to use an accountant. But it still pays to know the rules, as an accountant can only use the information you give him. A good accountant should guide you in what you need to provide to him, and you need to pay attention and listen to him! If you fail to keep track of expenses that you should, he may not know that! It’s YOUR business, not his! Educate yourself in what you need to know to learn to manage it properly!
Monthly accounting… yes or no?
Do you need to pay an accountant every month? Most small businesses just starting out may not need to. I tried it for awhile with my contracting business, and I found I was paying $125 a month (early nineties prices) just to get some comb-bound report of less than a half dozen pages, that I glanced at once (upon receiving it) and then it got stored in the archives… never to be seen again!
Unless you are in the process of obtaining loans or credit for your business, monthly financial reports may be useless and expensive. Those monthly statements and having an accountant on call may be a great “showing” for the other people you do business with, but if you are operating on a “cash” basis (no credit accounts, no loans, and no accounts receivable nor payable) then you are going to be wasting money with monthly reports… unless… you don’t bother to do any bookkeeping of your own, and need someone to do it for you and sort it all out.
But that will still cost you. The more you can do “in house” the less you have to pay someone else, and that puts money in your own pocket. When you start making so much money that your accountant’s hourly time is worth less than yours, then you can hire one on a monthly basis!
Accounting Software
Many small businesses use ready-made programs for bookkeeping these days, such as Intuit QuickBooks, and most accountants are set up to know how to handle the information you give them on those programs. Even if you only use an accountant at tax time, you should ask them what programs they use and recommend. If you can work with your tax person and make things easier for them at tax time, it will save you a considerable amount of money. After all, they charge by the hour! And most of that software can be found on Amazon.

I spend about an hour and a half “total” on bookkeeping per month, even though I use my own custom designed spreadsheets. I have formulas in place so that I can go to the end of the spreadsheet and see exactly what my profit or loss is for any given day, or the month. I don’t need an accountant to tell me where I stand.
But I have developed this spreadsheet over the past twenty years! The columns are all laid out in the same order as the IRS tax forms, and marked with the corresponding line numbers, so when I do my taxes, all I have to do is transfer the figures onto the forms, and I’m done! I check it over every year to make sure it still complies with the current tax year, and update it where it needs it before starting the next tax year’s records.
Now, if I was making more than $100 an hour, and had to deal with credit and business loans, “maybe” it would be worth my time to pay someone else. But as a business owner, I would still want to know how to do it, just to protect myself. Only you can decide what works best for you.
Even if you don’t want to do your own bookkeeping, you need to talk to an accountant to learn what records you need to keep… even if it’s only the sales receipts and invoices you collect in a shoebox. An accountant can only process what you give him to process. It’s up to YOU to know what is important or not, and if you fail to give him the proper receipts or vehicle expense reports (like mileage), then he can’t very well give you proper deductions for those expenses!
Buy wholesale when you can!
Another reason to get a business license (usually issued by the state) is to prove to suppliers that you aren’t just some tightwad schmuck trying to save money by buying at wholesale prices… which they obviously reserve for those who really ARE in business. Although there are many places you can buy at cheap prices these days (and admittedly, some are less than what the wholesalers want for the same product), it is still better to have that license. Many suppliers will ask for it in the application you fill out, and they won’t let you buy from them without it!
The other reason to have a business license is that most states have sales tax laws in effect, and that license, which usually doubles as a sales tax license, is legally required to be able to collect sales tax on purchases within your state, which you then legally have to forward to the state with the proper form (normally) every month. Usually, after you have been in business a year, and can prove that you have very little taxes to report, they will allow you to file on a yearly basis, thereby saving you a lot of paperwork!
So in summary, even though you think that what you do is a “hobby”… it is probably in your best financial interest to treat it as though it were a business. If you don’t, you can’t take the proper tax deductions, and will end up paying income tax on what the business costs you to run! And that is the same as throwing money down the drain! If you expect to make money at your business, you have to pay certain fees to operate it, which in turn will save you even more money in the long run! And learning to operate your business efficiently and profitably is what it’s all about.
As always let me know if you have any questions.

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