Thursday, December 2, 2010

Inc. Llc. Sole Proprietor or What?

To avoid legal repercussions from sharing my vast and extensive knowledge of IRS code I shall be general in description and I must admit my "extensive" knowledge just barely gets me to the nearest H&R Block each year.

So you have decided to join the ranks of Vendor Extraordinaire and don't know how to get all legal? Right? If so, keep reading.

More often than not you will need several licenses to start vending:

  1. Health Department (this gets your cart certified) See the training section of for videos on getting this part done.
  2. State Tax ID
  3. Fed ID
  4. County business license
  5. City business license
Now don't panic, you may not need all of these. You will need to get your cart certified/ licensed/inspected with the State Health Department. Next you can contact the local Chamber of Commerce or go directly to the City/County building or even the local Business Tax Office. They will be able to tell you if you need a County License or a City License or permit. Some areas just have a vendor permit. Either way, they can help you out. Hint: Most states have a section right online explaining how to do business in your state.

All states have sales tax, but some states don't charge this on food, so simply contact the Department of Revenue for your state, this is not to be confused with the Internal Revenue Service. The Dep. of Rev. will be able to get you a "resale id", this allows you to purchase goods for your business "tax free" (only items that you are reselling would qualify for tax exemption). Most states require you pay taxes that you have collected during the previous month. Example:

You purchase 3000 hot dogs at Vienna Beef and don't pay tax because you show them your resale id.
You sell, 2400 hot dogs in October, then comes November. You typically send in collected taxes for last months sales the following month, usually by the 20th. Lets say your sales tax in your state is 10%, you
sold 2400 hot dogs at 2.00 each, this would appear as you owe the state $480. 2400 X 2.00 = $4800 and 10% of $4800 is $480. If you sold those $2.00 hot dogs and collected an extra 10% then yes, you would have collected $480 extra dollars for the state. But most hot doggers, include tax in whatever price
they are charging. So in reality, you would have charged $1.82 per hot dog and collected 10 percent sales
tax, for a total of $2.00 per dog. So you sold 2400 hot dogs, and you owe the collected sales tax to the
state, this is .18 cents per hot dog sold. So $432 in collected sales tax.

Ok, I think that should be clear as mud now. So lets move on...

Depending on your states tax codes and rules, will probably determine whether or not you need to incorporate as in Inc. or to go with an LLC or other. So please talk with an accountant to get some real educated advice there.

If your accountant says that you need to be incorporated for bigger benefits and write-offs, then you will be advised to get a Fed ID. This is just another tax id. Except in this case, you don't collect from a customer a certain amount above the selling price. This tax is business tax, its tax on the income of the business. Don't panic, it's not much and their are many write-off's available to decrease the actual tax load. Sometimes meaning you pay little to no taxes. Be happy though, paying taxes means you are successful enough to meet the requirement. This helps everyone, (as long as the politicians are spending it wisely). :)

Now you can avoid a Fed ID if your accountant advises, or let's say you don't have much funds to start, you can't afford to get incorporated along with the other costs of getting going. Well then, you may want to consider licensing with the state as a Sole Proprietor. This means no extra Fed ID, I say extra, because if you have a social security number, you already have a Fed ID. Instead of the income showing under a corporate entity, it is shown as your personal income from self employment, this has benefits and negatives, but it's how many of us start out and you can easily change into a corporation at anytime.

As a sole proprietor, when you go to get your local business license (county or city permit) you would register as Your Name, doing business as: Mildred's Mouth Watering Dogs, or the name of your choice. If you chose to get a corporation formed, it would be just simply the corporate name: Mildred's Mouth Watering Dogs, Inc.

Either way, you will want to get a State resale Id, this allows you the privilege of doing business in your state. Note: some states don't charge tax on food so you may not even need it.

See how simple?

Bottom line: Talk with an accountant, some banks offer a free service and the State will always help you for free, but an accountant will always look out for your best interest (usually).

Important Note: No one expects to get hurt, have a debilitating injury or disease, but Social Security Disability is there for just that reason. Hang with me, this is real important and most accountants will not share this info with you, however, I feel that it should be mandatory. Most accountants do their jobs so good, that they can show enough expenses, use every legal loophole created to help businesses grow that you may have to pay zero taxes. I'm talking Federal Income Taxes or State income taxes, not sales tax. You may be excited after he or she is done preparing your year end tax return and you owe nothing, not one red cent, not even FICA. BEWARE: FICA, this is your social security payment. Let's say 5 years from now, you have a stroke, or you are debilitated and are unable to work. You would quickly contact the Social Security Administration and file for disability, right? Well, here's how that works, contrary to popular opinion, most of us think that Social Security is what you get when you reach eligible age or you or debilitated and can no longer work. Well if you didn't pay in, you get nothing. It's like car insurance, if you pay for insurance this month and get in a wreck they pay, but if you paid insurance for last month but didn't this month, then this month if in an accident, no insurance. Luckily, social security disability is not so strict, they require you to have worked and paid in for 20 periods during the last 40 periods, so half the time. (a period is 3 months) So if you run a cart for 5 years and get hurt and need disability, they will look at your pay history. They will go back 10 years. If you had 4 years of employment and paid FICA taxes then and none in the last 5 years vending, you will receive nothing. No disability benefits. But lets say, you paid in just 1 years worth of FICA taxes during the last 5 while vending and you paid in the previous 4 years while working somewhere else, then as long as you paid in for 20 periods, no matter if they are separated by times of non payment, you would be eligible.
So the moral of the story: Pay FICA taxes.

Disclaimer: I am not an accountant, this in no way should be considered legal or tax advice. Please consult a professional accountant licensed in your state before making any decisions regarding taxes and licensing.


  1. Thanks for the nut-shell version. It really is easy to understand and clarifies so much!