If your goal is to make money online or work from home via the internet, think of this endeavor as a business from the start.
It can take a while to research your responsibilities, verify your information, link bank accounts and get financially set up. Better to be established long before the first transaction occurs.
I’m not an accountant, a lawyer or tax expert. This is not financial or legal advice, just my experience doing business in the US. Also, there are affiliate links in this post. Read my full disclosure here.
1. Keep records of everything…from the beginning
From the receipt you get after setting up your site, to the first few dollars you receive from Google AdSense or Amazon, make sure you keep track of every dime you spend and make.
Be slightly obsessive! It may seem like drudgery, but you’ll be glad you did, especially at tax time.
Track non-cash items too, like products you are given, conference swag, Swagbucks and similar things. These are all taxable (see below).
I keep track of receipts, account information, invoices, tax info, copies of emails, etc. If I make a phone call about my business, I jot a note about that conversation (date, time, with whom I spoke, questions I asked, answers they gave me, etc.).
2. Check the laws and regulations where you are
Contact your town, county and/or state about laws regarding running your own online business. Are you allowed to run an online business from home? What are the requirements for you to do so?
If you’re in the US, a good resource is the Small Business Administration for your state.
3. Determine if you’ll need to charge sales tax on products you sell
If you plan to sell products (ebooks, ecourses, tangible goods, etc.) your state may require you to charge sales tax (mine does). Make sure you check on this before you launch your first product.
To find out whether or not you’ll have to charge sales tax, find your state here. I made 3 phone calls and asked 3 different people (on purpose) to make sure I got the same information. If you have to collect sales tax, be sure to enter the tax rate information into your sales platform where you’re selling your product (like Ejunkie).
And be sure you know the right procedure to file the sales tax appropriately. Make a note on your calendar reminding yourself to file.
4. Establish your business
You might need to register your business in some form (again, check with the SBA or your local Chamber of Commerce or city hall). You may have to file a DBA (Doing Business As). You might choose to operate as a sole proprietor, an LLC, or you might choose to become incorporated (Inc.).
As for a business name (other than your own), I suggest you do a search with your county/state first so that you don’t use a name that’s already taken. I would also try to match it to an available domain name as well.
As for the type of business you choose (sole proprietorship, LLC, etc.), this is up to you. I know many bloggers and small online business owners who choose to operate as a sole proprietor, many who go the LLC route and some who are incorporated. The main benefit of an LLC (or corporation) is that if anyone sues you, your personal assets are more protected than they are if you’re a sole proprietor. However, there are costs associated with becoming an LLC which are prohibitive for many. Ask an accountant or lawyer to help you decide.
Fun sidenote: I called in to the Dave Ramsey Show with this question as a blogger. Dave’s thought was that unless you’re blogging about something someone might sue you over (he gave the example of controversial weight loss methods, etc.) or you have substantial assets, a sole proprietorship is fine.
5. Get a business address
You’ll be asked for a business address in many places, so having an address to use other than your home address is a good idea. You don’t want your personal information floating around unnecessarily.
You can apply for a P.O. Box online (my personal choice). The price depends on the box size and length of contract but it’s pretty reasonable (less than $100 a year where I am). A UPS Store (or similar) is another option.
Make sure your business address is a physical location where you can collect mail. If you plan on building an email list (a must-have these days), by law, you’ll need to include this address in each email.
Warning: I’ve heard some bloggers and online business owners say they made up a business address because they don’t want to spend the money or go through the hassle. It’s just a bad idea.
6. Get an EIN
An EIN (it stands for Employer Identification Number) is a unique identifying number for your business, much like an individual’s Social Security Number. You do not have to have employees to obtain an EIN.
It’s not always required, but having an EIN will eliminate you having to use your own Social Security Number on business related documents. Here’s a chart to know when you definitely need an EIN. You can apply for one easily (and free) and get it here.
Extra tip: If you applied for an EIN after you started your business, go back through your business accounts and change your SSN to your EIN.
7. Get a business bank account
All the advice I’ve gotten on this subject is the same: keep your personal and business accounts separate.
As a sole proprietor, I’ve used the 360 Checking® Account from Capital One 360 (formerly an Electric Orange checking account from ING Direct) for many years. It’s an online account which means you can’t go to a brick & mortar branch, but there are no fees.
Everything related to my business goes through this account. It is linked to our personal checking account so transferring a monthly “self paycheck” is a cinch.
8. Set up a PayPal Account
Many money transactions online involve PayPal to one extent or another. That’s why it’s important to have your own PayPal account.
You’ll have to decide which type of account you need. I recommend at least a Premier account (you might consider a Business account if there are others who need access). All types are free to open.
The sooner you sign up with PayPal the better because it takes time to verify your accounts. And the longer you are a “verified member” the better — you look more trustworthy.
A few tips about PayPal:
- Make sure you link your PayPal account to your business checking account.
- PayPal has been known to freeze funds arbitrarily, so I never keep more than $50 or so in my PayPal account. As soon as I reach that threshold, I transfer to my linked business checking account.
- If you run an affiliate program (i.e. pay others who promote your products), I highly recommend using the Mass Payment feature if possible. It’s a huge time-saver when it’s time to pay your affiliates. Contact PayPal if you encounter any problems during setup.
- You can get a PayPal debit card and use it like you would a normal debit card if it’s convenient.
9. Dealing with income tax
In addition to keeping track of everything you spend and receive, set aside a percentage of all income for income taxes. You can get a general idea of what percentage you should save by figuring out your projected tax bracket. Here’s a helpful calculator. You can use the money you set aside to pay your quarterly estimated taxes. Be conservative in your estimate so you aren’t surprised by a huge tax amount you hadn’t prepared for during the year.
When you’re ready to do your taxes, I offer some further tax tips here.
10. Decide how you’ll spend your money first
When you start making income online, it’s easy to be dazzled by the numbers and forget that much of that income is already earmarked. I suggest you make a list of your expenses related to your income so you are prepared. These might be:
- Income taxes – I immediately sock away all income for income taxes, right off the top (see above to figure out how much you need to set aside.
- Affiliate payments – I always make sure I have enough money in my PayPal account to pay my affiliates.
- PayPal fees – These are automatically deducted from each transaction so it’s unlikely you have to manually tuck them away, but it’s good to keep in mind that money is being taken here too.
- Other expenses & fees – You may have to pay for things like hosting, domain registration, your email service provider, contractors (assistants, designers, etc.) and more.
- Tithe & retirement – Depending on your situation & preference, you might also take some off the top for things like tithe or retirement.
As you can see, once all is said and done, a small portion of income is actually freed up to invest back in the business or pay yourself.
11. Stop money leaks
I regularly review what I spend in the business. I’m particularly interested in stopping any money leaks, like hosting for a site I’m not writing at any more, premium subscriptions that I’m not taking advantage of, services I’m no longer using, etc.