First, get a business license online at the Washington State Department of Revenue. You’ll choose your business structure and can use their ‘wizard’ to aid your choice. You’ll get a UBI number and can then register any ‘trade names’ aka ‘doing business as (DBA)’ names that you’d like to use separate from your name (if a sole prop) or your LLC or Corp name. For example, I’m ‘doing business as’ Better Tomorrow Financial, a trade name I registered with Washington state.
Once you’ve received your LLC/corporation formation docs from the state (not required if you’re a sole prop), get an Employer Identification Number (EIN) from the IRS. It costs nothing, and will be required if you need to create a workplace retirement plan (i.e: a solo 401k) or if you hire employees in the future. It’s also useful to use when you open an business accounts like a business bank account. (I use and recommend Novo.co*. Use this link to open an account and deposit $100 and you’ll get $40.)
If you’re in the food or retail business, you’ll want to get a Washington state DOR reseller’s permit as well in order to buy food at wholesale without paying sales tax (since you’re going to collect that from your customers upon your retail sales.)
What business structure should I choose?
- Sole Proprietorship: The simplest & cheapest thing, a sole proprietorship, may be the best thing for you if you believe that you 1) won’t have employees, 2) will own 100% of the business yourself (no partners or co-owners), and 3) will not be taking out any loans for the business. You could always start that way to create an LLC later.
- LLCs or Professional LLCs (PLLCs): If you’ll have employees, other owners, or plan to take out loans in the LLC’s name alone (and not your own personal name or guarantee), you will likely want to start with an LLC (or if you’re doing it up big, a C-Corp, but talk to an accountant and lawyer on that first.) LLC’s give legal protections that are useful if you have co-owners or employees or if you take on debt that is only in the LLC’s name. (You could form a Partnership if you have multiple owners, but an LLC would likely be much better due to the legal protections linked above, and it’s only a couple hundred bucks more in Washington state to form one.)
- S-Corps: If you’ll have ‘passive’ owners or have profits that accumulate to the business separate from your efforts as an employee of the business, an S-Corp might be a more tax efficient way to set up the business since shareholders on an S-corp (or an LLC that chooses to be taxed as an S-corp) don’t have to pay payroll taxes on their profits like employees do. However, don’t think that you can simple have a 100%-owned S-corp, pay yourself nothing in wages and skip out on payroll taxes. The IRS has already thought of that and mandates you pay yourself a reasonable wage.
What tax election should I choose?
- Sole props and partnerships are taxed as the individuals that own them. I.e.: if you’re a sole prop you just include your income on your own tax return. If you own a partnership 50-50, you each include your portion on your personal tax returns.
- LLCs are taxed by default either as a sole proprietorship (for one owner) or partnership (multiple owners.) They can also elect S-corp taxation, or even C-corp taxation if it would be more beneficial for the owner(s).
- Corporations can either be taxed as S-corp ‘pass through’ entities or as separate ‘C-corp’ entities.
Talk to your tax accountant about this, but for most people just starting out with relatively low incomes or who plan to take out all profits out of the business as they go for their own personal use, it will be most financially beneficial to be taxed as a pass-through entity (so NOT a C-corp.) Filing taxes as an individual is also much simpler than filing as a corporation.
Your tax accountant can help you with this decision, but as an overly-simplified example, the corporate tax rate is 21% in 2022, and long-term capital gains & qualified dividends are taxed at 15% for most people, so you’re looking at a corporate tax rate of at least 36% when you put those together. Personal tax rates don’t reach that high until you’re making at least $523 K as a single person or over $600 K as a married couple.
(Optional) Set up a website and email
- Register a domain name and create a web site and purchase hosting services through someone like Blue Host. You can buy your domain from the same place you buy web hosting, which is convenient. Creating a wordpress.org site via your web host is a good way to easily build a site.
- I do NOT recommend using wordpress.com as your host. They make it easy to get started, but don’t support many of the basic web hosting tools you’ll need when you start taking your website more seriously, and make it REALLY hard to migrate to a new host by not giving you access to all your website files, etc.
- Decide if you want to pay for separate business email/office suite of software. I use and highly recommend Google’s Workspace office suite. It comes with one business email address as well as ‘aliases’ that can forward to that address, as well as a separate business set up for all the Google office tools like gmail, Google docs, Google Drive (with 2 terabytes of storage!)
- You certainly could use a free @gmail.com account as well as free office tools offered by Google, but for ~$150/year it’s worth looking more professional and getting your own domain’s services.
- Register your business with Google Maps so you can manage your listing there.
Open up a business bank account if you’re an LLC or corporation
This is useful both for separating your business from your personal finances, and it’s sometimes required for certain things you might do as a business. I use and recommend Novo.co* ($40 referral bonus for you if you deposit $100 using that link) because it’s free, all-online, and has decent tech features like letting you build and send invoices and a solid app. They also try to upsell you to ‘partner’ services like payment processing from Stripe, which is ok, but you can ignore these if you don’t need ’em. On the cons, they don’t have a convenient ACH payment web method for your clients to use, which would be really nice…
If you didn’t form a separate business entity, you can just earmark a personal account for your business transactions to keep things separate (recommended.)
Have clients pay you at your business checking account and pay your business expenses from there using a debit card linked to the account to make your tax filing and accounting easier.
Keep track of all of your business expenses and your income
You’ll need these to pay your Federal and local income taxes. Read up on what you can deduct from your Federal taxes and file on your own, or hire an accountant to help you.
Pay your taxes
Don’t forget to pay quarterly estimated income tax payments to the IRS both for your ~15% of wages social security & medicare taxes and for income taxes. If your state levies an income tax, see if you need to pay estimated taxes to them as well. Washington state in 2022 had no income tax.
In Washington state, you will owe the B&O excise tax IF you make revenue (NOT profits!) of over ~$35,000 in a year, and you should file regardless at the end of the year.
Save on taxes with a workplace retirement plan
Read this to set up a workplace retirement plan.
In Washington state, it only takes an hour or so and a few bucks to get stated creating your business entity, so legitimize that side hustle and create your own business today!
If you hire employees, there are a LOT of hoops you’ll need to jump through which I won’t be covering here, but you can get a flavor of what you’ll need to do here (DOR) and here (SBA). Because of the huge overhead pain of hiring just a single employee and setting up payroll, writing and following employee policies, etc, I plan to get by with contract labor for as long as possible if and when I need some extra help in my business. There are so many services you can use to outsource or automate tasks which are a lot easier and cheaper than hiring people, so look into tech solutions to save you time as well.
*Disclosure: The Novo.co link above is a referral link. If you use it you’ll get $40 and so will I IF you deposit $100 in your account and leave it there for 30 days, per these terms from Novo: https://www.novo.co/legal/novo-referral-program