Curious if anyone has tips (what to do, what to avoid) when it comes to registering your business for tax purposes. Now that I’ve started selling more products/services I’d like the ability to offset expenses and my day job income (and maybe also my Asmbly membership costs).
Any structures to go for or avoid (LLC vs S-Corp?). Something to do on your own (e.g. ZenBusiness or through a CPA?)
I recognize that this is free advise on a public forum so I won’t hold you to anything (he says after reading a disclaimer at the top of every email response from lawyer friends) - I’d rather get more feedback and to arrive at my own strategy than crickets…
I asked ChatGPT:
what should I do or avoid when it comes to registering your business for tax purposes in Texas. Now that I’ve started selling more products/services I’d like the ability to offset expenses and my day job income. Any structures to go for or avoid (LLC vs S-Corp?). Something to do on your own (e.g. ZenBusiness or through a CPA?) (and I added some stuff at the end):
When registering your business for tax purposes in Texas, there are several considerations to keep in mind. Here are some recommendations:
Choose the right business structure: The two common options for small businesses are Limited Liability Company (LLC) and S-Corporation (S-Corp). Both have their advantages and disadvantages. An LLC provides liability protection and is relatively easier to set up and maintain. An S-Corp may provide potential tax savings through the distribution of profits. It is advisable to consult with a CPA or tax professional to determine which structure is most suitable for your specific situation.
Research state and federal tax requirements: Familiarize yourself with the tax obligations for businesses in Texas and at the federal level. Visit the Texas Comptroller of Public Accounts website and the Internal Revenue Service (IRS) website to learn about the necessary forms, deadlines, and tax rates.
Obtain an Employer Identification Number (EIN): An EIN is required for most businesses and serves as a unique identifier for tax purposes. You can apply for an EIN online through the IRS website.
Register with the Texas Comptroller: Register your business with the Texas Comptroller’s office to collect and remit sales taxes if applicable to your products or services. You can register online or by mail.
Maintain accurate records: Keep detailed records of your business income, expenses, and sales tax information. This will make it easier to file your taxes and claim deductions.
Consider hiring a CPA or tax professional: While it’s possible to handle your business taxes on your own, hiring a CPA or tax professional can provide valuable expertise and ensure compliance with all tax regulations. They can help you optimize your tax strategy and take advantage of available deductions and credits.
Research business tax deductions: Familiarize yourself with the tax deductions and credits available to your business. This can include deductions for business-related expenses such as supplies, equipment, advertising, and travel expenses. Understanding these deductions can help you offset your taxable income and reduce your tax liability.
Stay updated on tax law changes: Tax laws and regulations can change over time, so it’s important to stay informed. Subscribe to newsletters, follow relevant publications or websites, and consult with professionals to stay up to date with any changes that may impact your business.
Regarding whether to use a service like ZenBusiness or work with a CPA, it depends on your comfort level and the complexity of your business. ZenBusiness and similar services can be cost-effective options for basic registration and compliance tasks. However, if your business is more complex or if you want personalized tax advice and ongoing support, working with a CPA is generally recommended.
Remember, this information is not intended as legal or financial advice, and it’s always a good idea to consult with a qualified professional who can provide guidance based on your specific circumstances.
Personally:
Be wary of many services that offer to set this up, usually for a cost of $100’s of dollars! The assumed name Certificate filing fee is I think $50!
I believe an LLC or sole proprietorship will serve your purposes.
Register your DBA (Doing Business As) assumed name certificate with the Texas Secretary of State (SOS). You will need to be sure your business name does not infringe on someone else’s business identity. That may take a few passes and be reviewed by the SOS offices.
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Texas set up a system to charge a dollar each for searches for ANYTHING like a business name search. There might (?) be a small charge to set this up.
Employer Identification Number (EIN) is free from the IRS. You may need an EIN to set up a separate bank account for your business
You don’t need to report sales taxes until your sales reach a certain volume. Check with a bookkeeper or CPA or ChatGPT.
ChatGPT brings up a point others may run into. Searching for services or anything on Google will open you up to other businesses being notified of what you are looking for and so you’re always getting spammy search results on Google in the future. I have found that searching for answers to questions on ChatGPT presents data that is easier to read without the spam. There are always caveats ChatGPT identifies - data out of date for instance.
I’ve gottent ChatGPT responses like the one above a number of times - noncommittal blah blah blah. Answers are only as good as your questions. take any ONE response above and dig deeper and you will get more useful information faster and less money.
If your main goal is to write off your expenses, an S corp or LLC is neither necessarily nor sufficient. You simply need to file a schedule C form as a sole proprietor at tax time. The “business” version of turbotax or similar has this feature, or you can do it yourself for free. There are requirements for what can be written off, so it might be worth speaking with a CPA if you need clarity in that respect.
An LLC can provide a few benefits in and of itself, but not actually the ones most people assume. An LLC doesn’t provide blanket protection from liability, you personally can still be found liable for something going wrong if you are the person running the business day to day, and are found to be negligent. For example, if one of your employees gets hurt, or if a customer is injured by a faulty product, you personally could still be found liable.
An LLC does provide these benefits. It is a separate legal entity that can own things, like valuable equipment. It is also a separate legal entity that can take on debt. If you never sign a personal guarantee, this actually does protect your personal assets in the event of bankruptcy. Unfortunately, unless your LLC has significant value or a large amount of equipment or real-estate to use as collateral, most banks will require a personal guarantee for any significant loans. This may not be the case for other forms of investments, though. An LLC also protects the interests of silent partners who are owners but not involved in day to day operations, as it separates their personal liabilities.
Disclaimer: not a lawyer but this was the unofficial legal advice given to me by a lawyer.
I’d say ChatGPT didn’t add much of value. Unfortunately, it’s basically just gonna spit out boiler plate advice ripped from useless articles that have been floating around for decades. Asking it for advice usually isn’t the best approach. You could instead, for example, ask it to explain the nuanced differences between S corps, C corps, and LLCs, but that really is in the weeds in this discussion. The amount of money we are probably talking about doesn’t really justify worrying about incorporating in the first place.
FWIW back when I had 1099 income on the regular, my accountant advised that registering an LLC was a waste of time and money. If you’re just worried about deducting expenses, you can file Schedule C as a sole proprietor without any additional business paperwork. Keeping a separate checking account makes it easier to keep track of business-related cash flow but isn’t strictly necessary.
Filing taxes as a real business gets you some savings by paying yourself dividends instead of salary, which could matter if you’re really starting to rake it in
There may be some liability ramifications if you’re selling physical things to the public, but I’d think your insurance agent would be happy to include “business activity” coverage in a personal umbrella policy if it’s really just a side gig and you’re worried about that sort of thing.
One thing to be aware of when filing schedule C, is that there’s a (soft) limit to how many years in a row you can show a business loss before the IRS starts poking around at “hobby declared as a business”. I’ve heard the rule of thumb is three consecutive loss-making years before you start getting the bad kind of attention from humorless guys in bad suits.
I’m a former lawyer so I can’t say much as it could be construed as advice, but I’ll direct you to the TX Governor’s Small Business Handbook (link). It contains a lot of really good information.
Hanna
I’d agree with you… It’s boiler plate blah blah blah. But it does raise the ISSUES one might want to consider when speaking to a professional or fail to consider altogether unless reminded… Oh! yeah.
I’ve been doing a lot of research on this, and if you are sort of a “tech startup”, you’re probably better going directly to a Delaware C corp right at the beginning.
There’s a lot of IP, stock, employment, etc. issues right now with the whole “remote work” thing, and it seems like a full Delaware C corp is really the only entity that has a body of law that handles it all.
Of course, if you’re making kitchen cabinets in Austin, none of that matters.
I used Mari Ramirez years ago for a small business LLC, but I can’t tell if she is still active. My general recommendation would be to pay for a CPA to handle this stuff and provide advice. If it is a profitable small business then your time is likely better spent making money, not handling the books.
Maybe they can help set it all up in software that will let you handle the day to day accounting, and they can just handle filing taxes and yearly stuff, or nothing at all after the initial setup.
