Emily M. sent me the following email:

Well, so I have been doing research for the small, home based business that I want to start (photography). Silly me…I was thinking …get a business license, post a fictitious business statement, let my tax guy know I have a business now, and voila! But no such luck…looks like I need liability insurance, I need extra signatures from the fire department and building and planning on my license…sheesh, I am going to be mobile right now…I am NOT having clients come to my apartment…is there more stuff I need to do before I am able to be up and running?

First off, congrats on taking the leap with your photography biz! Isn’t it a shame that these exciting start-up days are sullied with these pesky bureaucratic details?

Well, the good news is that in most cases, the legal and bureaucratic red tape isn’t as bad as you may fear. What makes it so confusing is that none of the offices in question can give you the big picture — one government office can tell you the forms you need to file with them, but (depending on the competence level of the individual you happen to be dealing with) you won’t usually be able to learn about all the other requirements that may apply to your business, or in which order you should tackle them. I liken the process to putting together a puzzle, but you don’t know how many pieces it has or what it should look like when finished.

So here’s a quick(ish) overview of the Big Picture of the start-up bureaucracy. And as you read through this, keep in mind that these are truly just pesky details. Other tasks like defining and learning about your market, developing a streamlined, systematized way of providing your services, and getting your financial management systems in place are much more critical to your success.

Step 1: File organizational documents with the secretary of state or similar filing office (not necessary for sole proprietors or general partnerships, just business entities with limited liability).

If you just start doing business without explicitly creating a legal entity, then technically you’d be considered a sole proprietor (or if you had one or more collaborators, you’d be considered a partnership). Besides tax implications (basically, just that your biz profits/losses are taxed to you personally), there is an important liability concern: If someone sues you, or your business otherwise lands in financial hot water, creditors can go after your personal assets. If, on the other hand, you file papers with your state to create an LLC or a corporation, the business will be separate from you personally and your personal assets will be protected. LLCs are simpler and cheaper to start than corporations so they’re the most popular way to go these days.

To get forms and info on the process of creating an LLC or corporation, contact your state office that handles these filings, often the secretary of state, public regulation commission, or something similar. Nolo has tons of great resources on LLCs, corporations and more, including books and software.

Step 2: Obtain a federal employer identification number (FEIN).

An FEIN is like a social security number for your business: It identifies the biz to the IRS. For sole proprietorships and partnerships, getting an FEIN should be your first bureaucratic start-up task, mainly because you can get one before you’ve registered with any other agency or filled out any other forms. For corporations, LLCs, or limited partnerships, you need to create your business entity first, as described in the previous step. Without doing so, there won’t be any business entity in existence to apply for the FEIN. The easiest way to get your FEIN is to download Form SS-4 from the IRS’s website, fill it out, then call the phone number listed on the SS-4 form. You will relay your information to the IRS representative, who will then give you your FEIN over the phone.

Step 3: Register your fictitious business name (FBN) with your county or state.

(Emily, you mentioned already handling this task, but for the sake of providing a complete Big Picture, allow me to explain FBNs.) A business name that doesn’t contain the legal names of the owners (for sole proprietorships or general partnerships) or that doesn’t match the company’s LLC or corporate name on file with the state, is called a fictitious business name (FBN). If you use a fictitious business name, you’ll typically have to register it with your state or county. So if Emily Mensch used her legal name in the business name — as in “Emily Mensch Photography” or even “Mensch Photography” she shouldn’t have to register an FBN. But if she named her business “Portraits Pro,” “Top Shots” or anything that didn’t include her last name, she’d need to register the name.

Registration is typically done at the county level, though it’s sometimes done with the state. Contact your county clerk’s office to find out its requirements and fees. Besides filing the paperwork and paying the necessary fees, in many states you’ll need to publish your FBN statement in an approved newspaper in the county where you filed it. Contact your county clerk or state agency for details and a list of acceptable publications.

Step 4: Obtain a local tax registration certificate (also known as a business license).

Most cities (or counties, if you live in a rural area) require all businesses (including home businesses) to register with the local tax collector, regardless of business type, structure, size or name. Depending on your city or county, there may be different names for the process: tax registration, business tax application, business license application or tax certification, for example. In a nutshell, getting a tax certificate is your local government’s way of charging a fee and/or other taxes upon your business. The office that handles local tax registration is sometimes called a tax registration office, tax collector, or city treasurer. Contact your local office for details on handling this registration.

And please, join me in my crusade to stop calling this bit of bureaucracy a “business license.” True licenses are generally administered at the state level, as discussed below, and have to do with ensuring businesses are competent at certain activities like haircutting, locksmithing or general contracting. Local tax registration has nothing to do with that sort of licensing.

Step 5: Obtain a permit to sell retail goods and collect state sales tax.

In most states, any business — whether it’s a sole proprietorship, partnership, LLC, corporation, or any other type — must have a seller’s permit if it sells any tangible goods to the public. Tangible goods are things you can touch, such as furniture, clothing, or food. Businesses that sell only services, such as a color consultant or tax preparer, are often (but not always) exempt from the seller’s permit requirement. (Here in New Mexico, services are subject to gross receipts taxes, which are basically sales taxes under a different name. Grrr.) In a nutshell, a seller’s permit will allow your business to collect sales taxes from customers to cover any sales tax that you’ll owe to the state, which is generally calculated as a percentage of your taxable sales. You’ll typically pay any taxes you owe at year end, semiannually, quarterly or monthly. The general rule is that the higher your sales volume, the more often you’ll owe your payment.

To obtain a seller’s permit, contact the agency in your state that governs sales taxes, which may or may not be the same agency that deals with income taxes. The process of obtaining a seller’s permit typically consists of submitting a simple application form and, sometimes, paying a fee.

Step 6: Obtain specialized vocation-related licenses or environmental permits if necessary.

OK, as I mentioned above, registering your business with your city isn’t really the same as getting a business license. True licenses and permits are required of certain businesses for certain activities, sometimes for certain locations. Some business activities are prohibited until you obtain a license or permit to engage in them, and some business locations require special approval from the local planning department. Figuring out what permits or licenses you might need can be confusing as there are literally hundreds of independent agencies from the local to the federal level that regulate various businesses. So here’s a quick overview of who typically regulates what:

  • Local business regulations usually deal with the physical location of the business and the safety of the premises and equipment. City zoning laws regulate which activities are allowed in particular locations. Assuming your business has met zoning requirements, it still might need to be approved by other city agencies, such as the fire or police departments, the building inspector, or the department of public health. You’ll typically learn about what requirements apply to your business when you complete the local tax registration process.
  • State regulations often focus on how you conduct your business. If there’s a risk that poor handling of your business activities might harm the public, chances are good that a state license is required. For instance, your state wants to make sure that your cosmetologists are competent, your bartenders know when to cut someone off, and that your carpenters do safe work. Your state regulates these business activities through licensing. The business owner and certain employees (the ones performing the activity) often need to take a class, pass a test, and pay a fee to obtain the license. If you aren’t sure what licenses might apply to your business, check your state website to see if it has a small business assistance office or “one-stop-shop” for small business start-up information. Also check the websites for your state’s tax agency or secretary of state, both of which tend to offer this type of information.
  • The federal government doesn’t regulate small businesses as heavily as local and state offices, but you may need a federal permit or license to engage in certain activities such as manufacturing drugs or meat products (Food and Drug Administration), alcohol or tobacco products (Bureau of Alcohol, Tobacco and Firearms), or providing investment advice or counseling (Securities and Exchange Commission).

Last, Emily, you mentioned needing liability insurance. While liability insurance is often a good idea for businesses, it’s usually not a legal requirement. In practice, however, some big clients might require that your business have a certain amount of liability insurance, so that might be a consideration. And insurance can certainly help you avoid financial disaster stemming from unexpected calamities. But instead of focusing on insurance, my advice is to focus on risk management, which is the practice of actively addressing, managing and reducing the risks to your business. Insurance may be a part of your risk management strategy, but it’s only a part.

You’ve already done some risk management by clarifying that clients won’t come to your apartment. Good job! Now take that further and think about the risks that could happen in the field: A bride may injure herself by tripping over your camera bag at her wedding; a child may pull over a hot studio light, getting cut or burned. Think about how to minimize your risks, and purchase insurance as necessary to protect you from the risks that remain. Talking to a good insurance broker who knows your field can be a good way to account for things you may not have considered — but also remember to ask a lot of questions and to use your best judgment about what insurance you really need. There’s no way to eliminate risk, even if you spend a fortune on wide-ranging insurance policies.

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