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Confused about what is required to start and run a sole proprietorship? We break down the sole proprietorship advantages and disadvantages, registration, filings, taxes and…
Question – What is workers’ compensation insurance and why does my business need it?Our Answer – Workers’ compensation benefits provide medical treatment to cover medical care for injured workers in addition to disability payments for lost wages from time away from work. Should the injury be more substantial, this insurance provides a disability benefits and job training should the injury prevent the employee from returning to the job they previously had. Worker’s compensation provides coverage regardless of who is at fault, but what is important to know about this insurance is that in most cases, the injured employee isn’t able to sue the employer. According to the Occupational Safety and Health Administration (OSHA) and the Bureau of Labor Statistics, there are almost 3 million serious injuries and illnesses and almost 4,500 deaths annually from job-related injuries. Precautions can be taken to keep the workplace safe, but accidents are going to happen. Without this insurance, one claim could close a business.Workers’ compensation law and requirements vary by state. Workers Compensation Insurance is mandatory for companies with a minimum number of employees in 49 of 50 states, but the minimum number varies by state. Workers compensation is almost always required when employing 3-4 people, but it’s critical to check your state’s laws as you may need Workers Comp coverage, even as a sole proprietor. Sole proprietors and partnerships without employees may not be required to have coverage and in some states, immediate family members may not require coverage either. The only state that does not broadly require Workers Compensation Insurance is Texas; however it is required under certain circumstances.Check out Step 8 in our guide to starting a business to find more information.Who pays for workers compensation insurance?The business, not the employee pays for workers’ compensation insurance. How does a business purchase workers’ compensation insurance?Purchasing workers’ compensation varies by state but generally there are three ways for companies to purchase it.State-run ProgramsIn most states, employers can purchase workers comp insurance through a state-run program through the department of labor, department of industrial relations or other similarly named department that regulates labor in the state.While most states give business owners the option of purchasing this insurance through the state-run program or a private company, four states require the insurance to be purchased through the state administered program (North Dakota, Ohio, Washington and Wyoming)State-run insurance programs have often been created with the intention of keeping the costs of private insurance down by creating competition. Therefore, an employer with fewer than ten employees may choose a state-run insurance program as they do not need extensive coverage. If an employer has been a part of several incidents or is in a high-risk industry and private insurers will no longer provide them with coverage for an affordable price, enrolling in a state-run insurance program may prove to be a helpful option.Private Insurance CompaniesMost states employers have the option of purchasing workers’ compensation insurance through the insurance carrier of their choice.Similar to state-run insurance programs, employers will often pay a premium to an insurance company to provide workers’ compensation Insurance to their employees. An employer may choose a private insurance company over a state-run insurance program as its services may be more comprehensive and offer greater coverage.Self-InsuredIn most states, very large businesses with sufficient resources have the option to self-insure.How much does workers’ compensation insurance cost?Workers’ compensation insurance premiums are calculated based on what a business does, the number of employees and total wages. As you would probably guess, premiums will be higher for higher-risk work-related activities.Private insurance is usually going to cost less than a state-run program, but many owner-operated sole proprietorships are too small to get an affordable price. State run programs provide a minimal, inexpensive policy just to show proof of insurance and is usually a better option in these cases. Depending on the riskiness of the business activities, these policies will often cost less than $1,000 annually.Do business owners need workers’ compensation?It varies by state, but most states don’t require sole proprietors and partnerships to purchase workers’ compensation insurance until they hire employees who also aren’t owners. Most states will allow sole proprietors and partners to cover themselves for workers’ compensation if they choose to, but it isn’t required.That being said, it’s not uncommon for clients to require the independent contractors they hire to have workers’ compensation coverage. So, even if no one works for you, your clients may require you to be covered as a way to limit their liability.Another thing to think about is that even if you aren’t required to carry workers’ comp insurance, you may want to consider it to pay for any medical expenses and replacement wages if the business owner is injured at work. This way they are still able to receive an income while you are healing. Ask us your Question! .
Question – How many bids do we need for a business loan?Our Answer – The bank does not usually require the business owner to get multiple bids to get a business loan. They assume you are taking precautions to get the best vendor for your business and they aren’t really interested in managing the loan. That being said, especially when doing any construction or renovation to a building, I would typically recommend getting 3 quotes to make sure you are getting the best price and contractor. Depending on the extent of renovations or construction, it can be a bit of a pain to coordinate contractors and this threshold will vary depending on how much the project is going to cost as you won’t want to spend as much time vetting vendors for a $5,000 project as you would a $500,000 project. Ask us your Question! .
Question – What is the best way to finance a start-up business from your home?Our Answer – Every business is going to have different financial needs but fundamentally, getting a home-based business loan isn’t really any different from getting a loan for any other business. First you may want to read more about financing a business. One of the challenges many home-based businesses face when getting financing is a lack of collateral. Collateral includes any assets that are pledged as security for the repayment of a loan. Many entrepreneurs starting a business from their home need funding for working capital needs like salary, marketing, accounts receivable, etc. Unlike real estate or equipment purchases, working capital can’t be used as collateral because once the money is spent, there is nothing that the bank can hold title to and sell should the loan default. Another common loan request for home-based businesses is for inventory purchases. At best, banks will loan against 50% of the cost of inventory, leaving a large collateral shortfall the entrepreneur needs to come up with.The result is the home-based entrepreneur will have to come up with a larger personal investment or use personal property to secure the loan. Banks will consider personal real estate or investments as collateral and occasionally even vehicles, jewelry and toys (boats, ATV’s, etc) depending on the project. Ask us your Question! .
Question – My husband and I started a business recently and formed an LLC. We are confused about whether we should be filing a Schedule C as a Sole Proprietor or Partnership Form 1065. Are a husband and wife considered one member or partners in an LLC?Our Answer – While on the surface, it would seem this would be pretty easy to answer, there are several considerations for a married couple to consider when forming an LLC. Since an LLC (Limited Liability Company) is an entity created by state statute, there isn’t a one size fits all answer as every state has different laws. Depending on the state the LLC was formed and the elections made by the LLC, there can be long-term ramifications on this selection. One major complexity is that there are differences on how living in a community property state (AZ, CA, ID, LA, NV, NM, TX, WA, & WI). Community property states have laws any property acquired by a married individual while married is owned in common and those assets are evenly split in the event of a divorce. One of the great benefits of an LLC is the flexibility of how the entity is taxed. Owners can elect to have a Limited Liability Company elect to be taxed as either as a corporation, partnership, or as part of the owner’s tax return (a “disregarded entity”) by the Internal Revenue Service (IRS). A disregarded entity just means an entity that is not recognized by the IRS for tax purposes. The profits of the business are passed to each of the owners based on their ownership, also known as pass-through taxation.The information below largely refers to the ways an LLC can choose to be taxed. Partnership ElectionA multi-member LLC, this includes an LLC that is jointly-owned by a married couple, is generally classified as a partnership by default for Federal tax purposes. Keep in mind that many accountants have been cautious in applying the election of a disregarded entity to an LLC in a non-community property state. Because a business jointly owned and operated by a married couple is generally treated as a partnership for Federal tax purposes, the spouses still must follow with tax filing and record keeping requirements.Qualified Joint Venture ElectionAnother option for married couples is the Qualified Joint Venture Election. If both spouses take part in the business and are the only members of an LLC, and a joint tax return is personally filed, a qualified joint venture can be elected instead of a partnership.This election treats each spouse as a sole proprietor instead of a partnership. This is something to consider over the partnership as it will give each spouse credit towards their social security earnings and Medicare coverage. Since income and deductions are divided between the two Schedule Cs, both spouses receive their individual Social Security quarters since FICA (Federal Contributions Act) and Medicare goes to each spouse and not the married couple as a couple.How to file for the Qualified Joint Venture ElectionSpouses make the election on a jointly filed Form 1040 by dividing the LLC’s income, deductions, gain, loss, and credit between each spouse’s respective interest in the joint venture. Each spouse will file the Form 1040, a separate Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship) Single-Member LLC ElectionIn most cases, an LLC jointly owned by husband and wife in most cases can elect to be treated as a Single-Member LLC (SMLLC) in community property states (AZ, CA, ID, LA, NV, NM, TX, WA, & WI). The IRS provided this designation under IRC Section 7701 –“Taxpayers’ treatment of business entity owned solely by a married couple as community property under applicable local laws, where no other person would be considered owner for tax purposes and where the entity isn’t treated as corp., as either disregarded entity or as a partnership, will be respected for federal tax purposes.“At tax time, spouses will file a joint tax return, which typically provides income tax savings. To make the election, income, deductions, asset gain or loss must be divided between each spouse based on the percentage of their ownership in the LLC. Then each spouse must file a separate Schedule C or C-EZ and will also file a Schedule SE to pay any self-employment tax.The single-member LLC election may not require an EIN (Employer Identification Number) since both spouses are filing as sole proprietors, but one would be needed if the LLC had employees. One Spouse is the OwnerAnother solution if the single-member status is desired, is to have one spouse to be the sole owner of the LLC and be a “disregarded” entity. A disregarded entity is an entity that is separate from the owner legally but is not recognized as being separate for tax purposes. In this case, a single-member LLC files with the IRS as a sole proprietorship. When the LLC is set up where only one spouse is the owner, often the other spouse works in the business as an employee.This may not be an acceptable solution for some couples, especially if both spouses are significantly involved in the operations of the business. They may feel more comfortable in having the ownership of the business more formalized. Corporation ElectionThe last election to consider is having the LLC classified as a corporation. While the primary reason for forming an LLC is asset protection, there may be tax benefits too.One way the LLC can be taxed is as a C corporation. An LLC that elects to be taxed as a C corporation is first taxed on profits. Any remaining profits can be distributed to the members as dividends. The big downside for most people is that the C corporation has double taxation since both the profits (which are subject to income tax) and then the dividends are taxed. There are situations where this provides advantages for large business. To elect C corporation status, IRS Form 8832, Entity Classification Election will need to be filed. The other election for a Limited Liability Company is to elect S corporation status. The S corp is an IRS designation for smaller businesses. There are some restrictions, like only having up to 100 members and some limits on who can own one along with a few other restrictions. As an S corporation, the LLC isn’t taxed on profits, much like the single-member LLC and partnership election. The individual members are taxed on the profits. Why the S corporation election is especially interesting is because instead of taking all profits as income for the owners (which are subject to self-employment income taxes), some of that income can be distributed as dividends, which are usually taxed lower than taxes on income.To have an LLC to be taxed as an S corporation, IRS Form 2553, Election by a Small Business Corporation.Regardless of how you choose to have your LLC taxed, it is recommended to get professional advice to best protect yourself. This advice may also be especially important if you live in a community property state. Ask us your Question! .
Question – Do I need a state tax ID if I have an EIN?Our Answer – When starting a business there are lots of applications and numbers you may not be familiar with. Two numbers that are often mixed up are the state tax ID number and EIN. As a new business owner, you’ll want to know what these different numbers are and what they are used for. Here we will explain the difference between the state tax ID and EIN.What is a State Tax ID Number?Most businesses selling goods and certain services or will hire employees will need to get a state tax identification number. In some states, every business will need to apply for one. Check out guide for starting a business in your state to see if a state tax ID number is required for your business. State tax ID numbers are issued by the Department of Revenue or similarly named agency in the state where the business is located.The purpose of a state tax ID number is for reporting taxes at the state level and are usually associated with sales taxes or income tax withholding for employees. This number also allows a retailer to enroll or obtain a Resale Certificate, Sales Tax Permit or Seller’s Permit (all refer to the same thing) which allows for tax-exempt status. Tax exemption allows a business to purchase goods that will be resold at retail. When those goods are sold to the eventual customer, the retailer collects the sales tax.If the business has nexus in other states, which basically means having a physical presence, that business may need to also obtain state tax numbers in other states. Nexus can come from having employees working in other states or products shipping from warehouses in other states. This can include drop shipped products too but is dependent on the state and vendor.What is an EIN?An Employer Identification Number (EIN), also known as a Federal Employer Identification Number or FEIN, is a unique nine-digit number issued by the IRS (Internal Revenue Service). An EIN is similar to a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN) that identifies certain businesses. Any small business that pays employees or is a partnership or corporation is required to obtain an EIN. LLCs that elect to be taxed as a partnership or corporation is also required to get an EIN. EINs can be obtained from the IRS at no cost from the IRS website. Also, here is more information about applying for an EIN.Not all business entities need an EIN. A sole proprietor or single-member LLC with no employees can obtain an EIN but are not required to do so. Instead, they can just use the owner’s Social Security Number. In this instance, the EIN is more for tax purposes and won’t mean much until preparing year-end income tax returns.Companies will use the EIN when filing income tax withholdings and employment tax returns. Banks will often require a new business to have an EIN before opening a business bank account. In addition, the EIN is used when applying for loans or credit cards, applying for business licenses and to accept credit cards.Depending on the state your business is in, business entity, what you are selling and if you have employees you may need one, both or none of these numbers. Check out our guide for starting a business for the requirement for each state. Ask us your Question! .
Question – I am starting a business selling handmade items at craft fairs and flea markets, in addition to online with Etsy. Can you tell me if I need a tax id number or EIN?Our Answer – First off, people sometimes confuse a tax id number (sometimes referred to as a taxpayer identification number) and EIN (known as an Employer Identification Number or Federal Employer Identification Number) as being the same thing, when in fact they are not. The tax id number refers typically to the registration with the state’s tax office, usually named the Department of Revenue or something similar. The tax id number (sometimes called a resale certificate or sales tax permit) is usually needed for a business that collects sales tax or has employees, however, some states require all businesses to register for one. Sales tax is typically collected for tangible personal property (such as crafts at craft fairs) and some services. To check for each state’s requirements check out the guide for starting a business for your state. There is usually no cost to get a resale license / sales tax id in most statesWhen selling products online you may have some additional sales tax liability to consider. Currently, in most states, the business is responsible in collecting sales taxes from customers living in the state the products were shipped. This is called having sales tax nexus and can also require a merchant that ships product through multiple warehouses (such as through the Fulfillment by Amazon program or drop shipped products) to collect sales taxes from customers living in the same state as the warehouse. In the past, out-of-state customers were not required to be charged sales tax in many states, but this is changing after the recent ruling that states can require merchants to collect sales tax from out-of-state customers. Be sure to check with your state taxing body for current information. The first item is called sales tax nexus. Next, the EIN is a unique number (much like a social security number for an individual) that is used to identify a business. This number is assigned through the IRS (Internal Revenue Service). An EIN is required for some business entities including the partnership, corporation and some LLCs. The EIN is also needed for sole proprietorships and some LLCs (Limited Liability Company). A sole proprietorship (or single-member LLC) would simply use the social security number of the owner. There is no cost to get an EIN and can be done from the IRS website. Here is more information about applying for an EIN.Depending on the state, a business may need one, both or none of these numbers. In this instance, if you form a sole proprietorship or single-member LLC business entity with no employees, you won’t need an EIN but if you are in a state that charges sales tax or a state that requires one, you will need to register for a tax id number. If you have more questions check out our article about the difference between state tax numbers and EINs. Ask us your Question! .
Question – If I file for an LLC as a single member, can I still acquire an EIN number?Our Response – In some cases a single-member LLC (or a sole proprietorship) will be required to register for an EIN. An EIN is not needed for a sole proprietorship or single-member LLC electing to be taxed like a sole proprietorship AND has no employees. An LLC that elects to be taxed as a sole proprietorship AND has employees OR a single-member LLC the elects to be taxed as a corporation will need an EIN.Applying for an EIN takes about 5 minutes. See more information on how to apply for an EIN. Ask us your Question! .