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Got a solid WiFi connection and a dream? If you follow a lot of #entrepreneurship Instagram accounts, you might think that’s all you need to start your own business but the reality is a wee bit more complicated.
It’s true that running an online business comes with a certain level of freedom and flexibility. You can work with who you want when you want, wherever you want. However, there are still a number of legal and financial moves you have to make before your business is legit.
Lucky for you, we’ve created this handy checklist to walk you through the process of starting an online business. We also reached out to some of our Patreon creators to get their trusted tips and tricks. Let’s dive in, shall we?
There’s more than one type of business and when you go out on your own, you need to decide whether you’ll operate as a sole proprietorship, limited liability company or corporation. A sole proprietorship is the simplest and most common type of business structure. An individual or married couple can operate as one and you don’t have to file any paperwork to set one up. However, sole proprietors are responsible for the business’ debts, losess and liabilities. In other words, if your company was sued, all your personal assets would be on the line, as well as your business assets.
A limited liability company (LLC) offers more protection from liability (hence the name) than a sole proprietorship. Compared to corporations, LLC’s are generally more flexible and require less record-keeping, making them a nice ‘middle ground’ option.
For example, writer and Patreon creator Annabelle Hawthorne chose to set up an LLC to protect her intellectual property and privacy. “Starting an LLC is surprisingly easy, and websites that boast a ten-minute turnaround are not wrong,” says Annabelle.
Setting up a corporation is ideal for entrepreneurs who plan to raise money from outside investors or go public in the future, as the more formalized structure gives investors more insight into how the company is run.
If you choose to form an LLC or corporation, you’ll need to file paperwork with the state. For most small business owners, filing formation documents in the state you reside in is the most efficient option as you’ll avoid the extra hassle and fees associated with hiring an out-of-state registered agent.
That being said, there are potential benefits to incorporating in a different state, since each state has different fees, taxes, and legal systems. There are also downsides, as some banks won’t let you open a business account if you don’t reside in that state. At the end of the day, every business has different needs, so make sure you do your research to find the best option for you.
What’s in a name? Quite a lot, when you think about it. Picking a unique name doesn’t just help you stand out from the crowd, it can also help you market your business and avoid trademark or copyright infringement issues.
Once you come up with a shortlist of potential names, run them through Google to see if any similarly named businesses pop up. You can also search trademarked names at the U.S. Patent and Trademark Office website, and most states allow you to search registered business names online.
Once you decide on a name, you should protect it by registering it with the right agencies. There are different ways to register your business name so make sure you set aside some time to weigh your options. You should also register your domain name and secure those social media handles ASAP. To check if a domain is available, simply type it into the address bar of your Internet browser and see if an existing website appears.
This is the part that can be the most overwhelming to new entrepreneurs, so let’s break it down. First things first, you should get a federal tax ID number. The fastest way to do this is to apply for one online on the Internal Revenue Service website. If you’re a sole proprietor or a single-member LLC, you can opt to use your Social Security number instead.
The next thing you should do is open a separate business bank account from your personal bank account. This might seem obvious, but if you’re a sole proprietor, you don’t technically need separate bank accounts – you just need to keep track of which transactions are personal or for your business.
However, this process can be quite tedious and separating your finances makes it a lot easier and faster. Patreon creator Jonathon Stalls experienced this all firsthand and is now a big proponent of separating your finances. “As your creative business expands, the complexity of your clutter and your stress around finances will only increase,” he says.
Oh, taxes. You know you gotta pay them but when and how much? Well, first let’s establish that all businesses—except partnerships—must file an annual income tax return (partnerships file an information return).
But there are a lot of other factors that affect how much tax businesses have to pay. If you’re selling products or services online, you’ll probably have to collect and pay sales tax. If you have employees or own property through your business, there are specific taxes associated with those factors as well. Tax rules and regulations also vary from state to state so your best bet is to contact your state’s taxation department and/or an accountant to find out what you need to pay.
When it comes to paying your taxes, corporations are the only type of business that pay what many people think of as “business taxes”. Income generated from partnerships, LLC's, and sole proprietor businesses is taxed as personal income, so owners of these businesses can pay their taxes once a year on their personal tax returns.
You can also make estimated tax payments on a quarterly basis like Jonathon, which could be helpful if you don’t really like accounting, but also don’t want that future tax payment hanging over your head for the whole year.
“For the first year, I thought I could manually [handle my accounting] or I would be fine with the big lump sum tax payment,” says Jonathon. However, he “suppressed all accounting related needs to the deepest and darkest corners of [his] brain” for the year and his massive tax bill left him scraping by for months.
To avoid this situation, you can set up automatic estimated tax payments on your own or get an accountant to help you.
Now that all the financial and legal stuff is out of the way, let’s focus on building your online presence.
First up, your website. To get it up and running, you’ll need to purchase web hosting, which you might have already done when you registered your domain. Hosting essentially gives your website a place to live on the Internet.
Nowadays, there are so many options if you want to set up a website yourself. But depending on the type of business you’re running, you might consider hiring a professional web designer or web developer to do this for you.
Next up, is your social media. For most creative professionals, social media is a great tool to show off your work and engage with your target customers. Before you start posting content on social media or your website, spend a little time thinking about how to best use these tools to build your brand. A marketing plan is a great place to start.
Lastly, you’ll want to consider if there are any other online platforms that would help you market and grow your business. For example, if you’re a freelance writer, publishing content on Medium can help you build an audience. If you already have an established audience, creating a Patreon page can help you build a deeper relationship with your fans and earn recurring revenue at the same time.
And that’s it! Okay fine, there’s a lot to consider here but as you can see, the process for setting up an online business is pretty straightforward. Just make sure to devote some time to find the best option for you and your specific business’ needs.