Step 2: What is up with all this Legal Stuff for my Business

When setting up any business, even a blog, where you take in any form of income makes it a viable form of taxable income. So you are responsible for the reporting of that income in whatever legal tax structure you are set up under.

We want to give you a quick course on some of the legal ramifications that can effect the running of your Online Business Reef. So this is all the crazy and not so fun legal stuff you should know.


I remember seeing a friend of mine start a business, which immediately took off, and he ended up making a lot of money in a relatively short amount of time. But the problem was it was all under his personal name. A small thing happened and he got sued and lost everything and I mean everything. Including his personal stuff.

A bankruptcy, several years to brood, he started up a new venture this time with the needed protection. And you probably hear about these stories all the time, so think about protecting yourself from legal troubles and get some peace of mind too.

So if you are serious about starting this business and want to make a good go of it then you need to protect your personal assets from your business liabilities. You do this by setting your business up as a legal entity recognized by your local state and the IRS.


Your social security number is all yours, in other words if you use it for business you are responsible. This is the basis of the sole proprietor and you also incur all the tax burdens including paying your own business and self-employment taxes.
A tax payer identification number is considered a separate entity and provides you legal protection under the corporate shield laws. But remember nothing will protect you from illegal activity. We recommend you get a tax payer identification number and setup your business in a legal entity.


A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.

A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation’s capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.

S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.

A limited liability company is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership. The “owners” of an LLC are referred to as “members.” Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs. Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would. The LLC works under an operating agreement which you can see more information about this from Legal Zoom.

We recommend you seek legal advice before you setup any entity. Also consult a tax consultant to get needed tax advice. Or you can use a legal service like Legal Zoom, which will help you setup your company and take on the legal burden if something goes wrong with the setup process.

The federal government levies four basic types of business taxes:

  • Income tax
  • Self-employment tax
  • Taxes for employers
  • Excise taxes

To learn more about these taxes, visit the Internal Revenue Service’s (IRS) Guide to Business Taxes.

Nearly every state levies a business or corporate income tax. Like federal taxes, your state tax requirement depends on the legal structure of your business.

For example, if your business is an LLC, the LLC is taxed separately from the owners of the business, while sole proprietors report their personal and business income taxes using the same form used to report their business taxes.

Here is a post and a quick guide to tax forms you need to fill out for each type of business entity.


1. Decide your legal business structure.
2. Get a Federal Tax Identification number if you’re going to setup a LLC or Corporation. You can get one at
3. Register your new Entity with your local state division of corporations or use a service like Legal Zoom which will help you through the entire process and save you a lot of time and effort.
4. File for a DBA (doing business as). You can file for multiple DBAs under one corporate entity.
5. Get a state sales tax resale license. Most states charge state sales tax. If your business sells a product or service you may need to collect sales tax for in state sales and report that quarterly or annually. For information on where to go in your state visit the local assistance page of SBA.GOV
6. If you are going to have employees or pay yourself as an employee you may need to get state and federal employer numbers, and workers compensation and unemployment insurance. It is wise to use a payroll service as they are cheap and do all of this for you.
a. PLEASE NOTE: the IRS will want to make sure that you are paying yourself an adequate salary for your business or they may consider it a hobby and disallow your filing. Please consult a tax and legal professional to discuss your tax implications.
7. If you live in a city or county that requires a business license or permit to run a business (even in your home) you should apply for a business license.
These are some other helpful tips to plan for when you are setting up the legality side of your business. With these few extra steps you can save yourself a lot of time later. You don’t have to do all of these but you should be aware of them and how they can affect your business.

Liability Insurance – it is always good to have a policy in place just in case. Even a small policy will not cost a whole lot and will protect you from most lawsuits and accidental damages. Get as much as you can afford and more than you need.

If you are serious about your business you may want to provide for its survival with a succession plan in your will. If you dont have a living trust or living will you may want to consider it. A successful and profitable business can be a valuable asset for your loved ones in the event of your passing.

Checking Account – in order to get a business checking account, and a business debit card you may need a checking account. For this your bank will need a Federal Tax ID number. It is important to have a separate account and not to co-mingle funds between you personally and the business.

Phone Number / Fax – there are a lot of services out there with virtual phone and fax numbers. You can also get a phone answering service for a low monthly fee. Google voice offers a free phone number you can get but you do have to have a phone number for them to port the number to.

Place of Business – where are you going to locate your business? If you plan on having an office outside your home or a home office setup you should consider the costs and tax implications ahead of time. Make sure if you home office that you have a specific and noticeable home office space, especially if you write that space off on your taxes.

Accountant / Taxes – you will need to file taxes for your business. And in most cases business tax returns can be a little more difficult. Even as a sole proprietorship you still need to fill out certain forms to claim your business income. It might be a good idea to think about an accountant or tax preparation firm. They cost a little bit each year but they are worth the cost of not having to deal with the IRS.

Lawyer – you may not need a lawyer but it is always good to at least know about the available legal services in your area. In some cases you may need a lawyer to deal with trademark issues, patent applications and searches, and lawsuits. You also may want to have a website disclaimer and terms of service drafted by legal counsel.

Other – there are a few other things that you may want to be aware of such as payment services like PayPal, merchant credit card accounts, and other ways to receive money for your services.

Go to Step 3 of Setting up the Online Business Reef your Online Business

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