| When you're setting up your eBay business, you first need to decide what type of structure you want your business to have. The different types of businesses ”sole proprietorship, partnership, and corporation ”each have their pros and cons, and you should seriously evaluate which structure is best for your individual situation. "Mike Sez"  | I am not a lawyer, nor am I an accountant . For that reason, you should take the information in this chapter as general in nature, and consult a professional for more specific legal and tax- related advice. |
Sole Proprietorship Most eBay businesses are set up as sole proprietorships. In this type of structure, you are your business ”and vice versa. A sole proprietorship is the easiest type of business to form, and the easiest to manage on an ongoing basis. You don't have to file any papers of incorporation, nor do you need to pay payroll taxes and the like. You file income tax for the business under your own name , using your social security number as your tax identification number; you'll file and pay this tax as quarterly estimates (described in the "Dealing with Taxes" section, later in this chapter), but the paperwork burden is minimal, compared to other forms of businesses.  | For more information about the legalities of starting a small business, check out the Small Business Association's BusinessLaw) Web site (www.businesslaw.gov ) , the Small Business section of the Nolo site (www.nolo.com), or the Entrepreneur's Help Page (www.tannedfeet.com). Another good source of information is your local secretary of state's office or Web site, which should have all the forms you need to get started. |
On the downside, the owner of a sole proprietorship is personally responsible for the debts and legal obligations of the business. That means if the business owes money, you're on the hook for it ”and if your business gets sued, you end up in court . Registering as a sole proprietorship is relatively easy and relatively cheap. You can probably handle all the paperwork yourself ”although using an accountant or attorney isn't a bad idea. Your business can share your name, or you can do business under an assumed name or dba (doing business as). To do this legally, you'll need to file a fictitious name affidavit in the county in which you do business. If you choose to open a bank account under your business name, you'll need to present this fictitious name affidavit. Partnership A partnership is like a sole proprietorship, but with more than one owner. The two or more partners have to contractually agree as to who is responsible for what, and how to share the business's profits or losses. You'll definitely want to draw up formal partnership papers, which means bringing in a lawyer. Legal registration is similar to that of a sole proprietorship. "Mike Sez" | | One of the most effective ways to ruin a good friendship is to go into partnership together. Even the best friendships are tested in the stressful environment of running a day-to-day business. |
In a partnership, all partners are held personally liable for losses and other obligations. This also means that one partner is liable for the other's actions; if your partner runs up a huge debt or is sued, you can be held responsible. In addition, breaking up or selling a partnership is often problematic . If one partner wants to quit, the other one(s) have to buy out his share ”and valuing a business at the breaking point is seldom quick or easy. A partnership has to file a tax return and must have a Federal Employer Identification Number (EIN), although the business itself pays no income tax. The individual partners report the company's income on their personal tax returns. Corporation Almost all large businesses are incorporated. Small businesses can also incorporate , although for many it's more trouble than it's worth. One of the main advantages of incorporating your business is that it separates you personally from the business entity. That means that your personal liability is reduced if the business falls into debt or gets sued ”in theory. In practice, however, lenders will often require the owners of small corporations to sign personal guarantees , which pretty much obviates that purported advantage. Another advantage is that if you eventually have to hire one or more employees to help you run your eBay business, you can set up health insurance and retirement plans for your company's employees . In addition, if you ever decide to get out of the business, it's easier to sell a corporation than it is to sell other forms of businesses. Corporations can also sell stock, so if you have dreams of going big time, this is the way to start. There may also be tax advantages of incorporating; consult your accountant for details. A corporation must have a Federal EIN, and must pay tax on all income. In addition, any dividends paid to stockholders (that includes you) are subject to personal income tax. You can minimize the corporate tax burden by taking all the profit out of your corporation, typically in the form of a big year-end bonus to yourself, so that the business has no net profit. "Mike Sez" | | I can only speak for myself here, but I've found that whatever slight advantages incorporation might offer to a small business are more than offset by the increased paperwork. For most small eBay businesses, sole proprietorship is probably the way to go. |
The most popular type of small corporation is the subchapter S corporation . This type of incorporated business is the simplest to set up, and the profits of such businesses aren't subject to corporate taxes. (You're still subject to personal income taxes, of course.) A subchapter S incorporation also enables you to offset any business losses against your personal income. If you have additional investors in your business, you might want to consider filing as a limited liability corporation ( LLC ) . In an LLC, the business's income and losses are shared by all investors, although investors are subject to limited liability (hence the name) for the corporations debts and obligations. Whichever type of corporation you decide to set up, be prepared to deal with a lot of fees and paperwork. You'll probably need an attorney or accountant to handle the details for you. | 