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Business module: running a legal small business

Part of Business & Economics (1.0 credit). This module teaches the rules every U.S. small business deals with. The rules vary by state, county, and city, so each lesson ends with a job: look up your own state’s official page and record what you find.

1. Registration, licenses, and permits (they vary by state)

• Structure: sole proprietorship (the default if you do not register anything else), partnership, LLC, or corporation. Owners of sole proprietorships and partnerships are personally liable for business debts; an LLC or corporation generally limits that.
• Most LLCs and corporations register with the state, usually the Secretary of State. The SBA says total state registration cost is usually under $300, but fees vary by state and structure.
• A "doing business as" (DBA) or trade name may need county, city, or state registration.
• Licenses and permits come from federal, state, county, and city agencies, depending on what you do. Food, construction, plumbing, retail, and vending are commonly regulated. Many licenses expire and must be renewed.
• An EIN (federal tax ID) is free from the IRS. Never pay a website to get one.

Your state job: use the SBA guide (sba.gov: apply for licenses and permits) to find your state’s registration office. Record the fee for your structure, any local business license, and how often it must be renewed.

2. Sales tax vs. use tax

• Sales tax is collected by the seller from the buyer at the time of sale and sent to the state (and sometimes the city or county). Most states have a sales tax; a handful do not.
• Use tax is owed by the buyer when sales tax was not collected on a taxable item used in the state, for example equipment bought from an out-of-state seller who charged no tax.
• You usually need a seller’s permit (also called a sales tax permit or license) from your state’s revenue department before you make taxable sales.
• Since South Dakota v. Wayfair (2018), states can require out-of-state online sellers to collect sales tax once they pass the state’s sales threshold.

Example: you sell a $40 item where the combined rate is 7%. Tax = 40 × 0.07 = $2.80, so the customer pays $42.80, and the $2.80 belongs to the state, not to you.

3. Resale certificates

A business buying goods to resell can often give the supplier a resale (exemption) certificate and skip paying sales tax, because the final customer will pay it. Using one for personal or business-use items is illegal. Keep a copy of every certificate you accept or give.

4. Deposits

• Customer deposits (for example, 50% before a custom order) are money you owe back in goods or services. Record them as a liability until the job is done.
• Put your deposit and refund terms in writing on the order or invoice.
• Security deposits you pay (on a rented space or utilities) are assets. Track them so you get them back.
• Keep business deposits in a separate business bank account.

5. Estimated tax and self-employment tax

• Self-employment (SE) tax is Social Security and Medicare for people who work for themselves: 15.3% (12.4% Social Security plus 2.9% Medicare) of net earnings, figured on Schedule SE. You must file it if your net self-employment earnings are $400 or more, at any age.
• Estimated tax: no employer withholds tax for you, so self-employed people usually pay quarterly with IRS Form 1040-ES (generally mid-April, mid-June, mid-September, and mid-January).
• State income tax rules differ, and some states have no income tax.

Example (simplified): net earnings of $2,000 from a lawn business. SE tax is figured on 92.35% of net earnings: 2,000 × 0.9235 × 0.153 ≈ $282.59. Income tax may also apply. Set aside part of every payment.

Source: IRS: self-employment tax.

6. Insurance

• General liability: covers injuries or damage to others.
• Product liability: for businesses that make or sell products.
• Professional liability: covers errors in services.
• Commercial property: covers your equipment and space.
• Home-based business rider: a homeowner’s policy often does not cover business equipment or customer injuries unless you add a rider.
• Commercial auto: a personal auto policy may not cover business driving.
• Businesses with employees must carry workers’ compensation and unemployment insurance, under rules that vary by state.

7. Bookkeeping

• Record every sale and expense with a date, amount, category, and receipt. Profit = revenue − expenses.
• Keep business and personal money separate (open a business account once you have an EIN or DBA).
• Track the sales tax you collected separately. It is not your income.
• Reconcile against bank statements every month, and keep records for at least the period the IRS can audit (generally 3 years; longer in some cases).

Module project

For a pretend (or real) small business in your state, make a one-page compliance checklist. Include the structure, registration office and fee, licenses, whether you need a seller’s permit, the sales tax rate, the insurance you would buy, and a 4-quarter estimated tax calendar. Then keep a one-month ledger.