The BizFilings blog covering business tips and trends.
Business Licenses You Need and Trust
Published on Apr 25, 2012
Check out 'Business Licenses You Need and Trust' at 'Time to Start Up,' the small business blog by BizFilings.
By Eva Rosenberg, EA
In a tax roundtable discussion recently, I advised a tax pro that her client needs a business license to be self-employed. She mentioned that the client lives and works in Los Angeles County, which doesn’t issue business licenses.
Within a 5 or 6-mile radius, in parts of Los Angeles, you can be working in 6 distinct cities - West Hollywood, Beverly Hills, Santa Monica, Culver City, and the City of Los Angeles – each with unique business license requirements. Have your cities and towns grown as complicated as ours?
Some people like to avoid the higher licensing costs in LA or other high-cost cities by establishing an address at a mail-box service with a street address (not a Post Office box) in a nearby area with lower business tax rates.
Therein lies the problem. People think that by setting up business addresses in mail boxes, or by incorporating in tax-free states, they can avoid taxes in their city, county or state.
There are two things wrong this concept.
1) You are not doing the work inside that box or at that mailing address. The work is being done where you live, at your office or shop - or at your clients’/customers’ locations when delivering products or services. You really must register your business where the business is taking place.
2) The extra cost of those offsite, or out of state, registrations add up to more than you save on the taxes.
For instance, here are things you must avoid or do when registered in Nevada, Delaware or Wyoming to totally avoid taxes in your state or town.
You need a mailing address in the state of registration, to receive your mail. All of it – the bills, contracts, samples, catalogs, supplies, everything. Depending on the volume of mail you get, you pay between $10 and $50 per month for the service.
Then you must pay to have all those things re-shipped to you by the mailbox service. Perhaps another $25 or so per month?
Naturally, there’s the delay in receiving the mail, especially important correspondence. Some of which might be time-sensitive – like a new client needing something done quickly, or needing a proposal. Yes, some people still send things by mail. You might actually lose business, or lose the opportunity to take a time-based discount. (This has happened to people I know.)
You could pay your service to scan/fax correspondence to you when it arrives. That’s a costly labor-intensive service.
Either a toll-free phone number, or a phone number using the area code of the state where you claim to be based. Either way, everything becomes a long-distance or paid call, costing from $10-$100s extra per month.
There may be other costs to keep your state from being able to prove you’re not doing any business in your state. But it’s so easy to slip-up. You can easily be caught through your blog posts, Tweets or Facebook entries.
Bottom line? Once your business is proven to have been run from your state of residence (domicile), you will have wasted all the fees to establish your business in the wrong state or location. You’ll have to re-file as a foreign LLC or corporation in your home state – and pay all taxes, fees, etc., perhaps with penalties for the years before getting caught.
Wise advice - set up your business where you live and work.
Overlooked Licenses, Permits, etc.
People in certain trades and professions generally know about their own licensing requirements. What are the most common things that are overlooked? And how will you get caught?
Office in home – Some areas require a separate registration when you run a business from home. They may require a fee, and/or an inspection of the business in the home. There might be zoning issues to prevent your kind of business from being run in a residential area. You can get caught by the address on your website or the address on your Schedule C. IRS is sharing Schedule C information with ever more cities and states.
Sales taxes – IRS and your state are just starting to catch people who run businesses without registering for sales tax permits. That new 1099-K form is alerting the authorities to businesses with over $20,000 in revenues and over 200 transactions, who get paid via PayPal, credit cards, or other third-party systems. If you’re shipping tangible goods (things, not downloads) within your state, you need to register with your sales tax authority.
Payroll taxes – That person working for you in your office is not a freelancer. S/he should be on payroll. In fact, take a look at your virtual workers. Are they working only for you? Or are they in business for themselves? Some of your virtual assistants may also be regarded as employees for tax purposes. It’s really awkward when those people are out of state. But at least look at the workers within your own state to see if they meet the definition of an employee. IRS’s new Form 8919 encourages folks getting a 1099-MISC to rat out their ‘employers’ in order to reduce their own tax bite. Incidentally, do you think you should have been putting your workers on payroll and want to come clean? IRS has a special amnesty program for you, called the Voluntary Worker Classification Settlement Program (VCSP). It might be worth your while to discuss this with your tax pro.
Other licenses – There are a myriad of other licenses that might affect your business. Liquor licenses, health department, excise tax registrations for a variety of things – trucks, tobacco, fuels, etc. You can look up the state-by-state requirements at BankRate.com. Or get a comprehensive list that affects your business, your industry and your location, consider using BizFilings’ Business License Application Package. It will search all the relevant databases to give you a list of your required filings.