Mighty Bargain Hunter

Making money with an eBay Store, Part 3: Starting and minding your business

Stumble it! Tip it! Facebook it! | 08/16/07

(This post is part of a series on Making Money with an eBay Store. The Introduction and table of contents to the series is here.)

In the Introduction I mentioned some of the good things about starting a side business, especially the peace of mind that mastery of one’s financial life can bring. One avenue I’ve started to take is my eBay store. If you don’t know whether you actually need or want an eBay store for your side business, check out Part 2.

Now, since it’s not a side hobby or a side money-laundering operation, but instead a side business, there is some prep work to do before selling stuff, and other maintenance work aside from selling stuff that needs to be done. In this post I’ll share what I should have done sooner to start up the business that my eBay Store falls under (as well as another business I’m involved in) so that things will run more smoothly for you.

Letting the appropriate powers-that-be know about your side business before you open for business

The key word here is before. Trust me! It makes your business run so much more smoothly at the beginning if you get registered at federal, state, and local levels before you start selling. This was one big mistake I made with a partnership I’m involved in. When it came time to file our first year’s taxes, I realized a week before that we were actually a partnership and that we needed to file pass-through returns instead of just claiming profits and losses on our 1040 Schedule Cs. It was months before that one piece actually got sorted out. That, and we should have registered for sales and use tax from the day we began, so we were paying penalties on months of filing we didn’t do. So, again, trust me when I say you want to get your ducks in a row with the governing bodies before you open your doors.

• What type of business entity will you form? (NOTE: This is not personalized business advice in any way. Please consult an attorney to address your specific needs.) If it’s just you, a sole proprietorship may be fine. If you’re doing this with someone else, a partnership of some kind is necessary. General partnerships are the easier, and cheaper, ones to set up, but any loss or liability that the partnership suffers passes through to the general partners’ finances, which can be devastating. A limited partnership or limited liability company (LLC) is more expensive to set up and a little more work to maintain, but under some circumstances it can shield your personal assets, like your house, if something catastrophic happens.
• Get an employer identification number (EIN). A sole proprietorship does not need one; the EIN is the sole proprietor’s SSN. Otherwise, a new business generally needs one to identify itself for federal tax purposes. This IRS link explains when a new business needs an EIN and how to apply for one online.
• Register with your state’s or commonwealth’s corporation commission. The state you do business in probably wants to tax your net profits so that it can keep the roads paved and keep the state police employed so that you don’t drive too fast on those nicely paved roads. This means applying to do business in the state, paying the appropriate licensing fees, and registering to pay the appropriate taxes for your business. Most states worth their salt will have some publications that help you through the procedure or at least point you to someone who might be able to point you in the right direction. Virginia’s guide for new businesses is here. Live in Maryland, Texas, or Idaho? No problem — they have resources too. Live in one of the other forty-six states? Just google “doing business in <your state>” and I bet that you’ll get a good link on the first page. (Be sure to substitute “<your state>” with … well … your state.)
• Register with your city or county government. Government at this level assesses more taxes, and more importantly, gives the thumbs-up or thumbs-down on your business venture. There are zoning considerations to address. You may be able to run a home-based business, but not store your merchandise there. You may be able to have customers come directly to your residence, or you might not. If you’re a partnership or corporation, you may have to register a fictitious name form with your local government (we did). That fictitious name has to be unique, so you need to have it registered with the state. But registering with the state before going to the local level means that you haven’t had your business approved at the local level yet. There is the chance that you could do one of these steps and have to start over again because of a road-block in the other step. Fun, fun, fun. It happens, though. Oh, and the local government may assess license fees based on your income, and get other fees if you want to have signage or other business-type accoutrements. Since there are 1.7 gazillion local governments in the US, a good place to start for you would be your local Chamber of Commerce, which you can find in the phone book.

Above all, if you don’t know, ask. The folks I’ve talked to with questions are generally willing to help once I make it clear that I want to do things correctly or that I want to fix things, which I’ve had to do a few times. This includes people at the local level, at the state level — and especially the IRS.

Starting off on the right financial foot

I doubt there are many businesspeople who enjoy bookkeeping — unless, of course, you are a bookkeeper. Keeping good records and the right records from the start also makes things run a lot more smoothly. After three years in business with a friend, we’re just starting to get this down. Tax time still has an element of “tracks time” because we’re tracking down things. At our local Costco at the concession stand, there’s a sign that says “C.A.Y.G.” I asked one of the employees what that meant, and it means “Clean As You Go.” For the business owner it probably should be “R.A.Y.G.” or “Record As You Go.”

Here are the big things to set up ASAP after you’re all registered and ready to open your doors:

• Get a business checking account. A personal checking account like you might have at your credit union or bank is not good enough. In fact, if the CEO of our credit union found out that people were using a personal account for business, even if it was used only for business, he’d close it. A checking account explcitly designated as a business account at a local bank is extremely important. There may be no interest paid on money in the account, but for getting the money out fast and being able to talk to a person about your account, it’s hard to beat. Money can be transferred into and out of the account easily enough, either to PayPal or a high-yield business account like the ING Business Savings Account.
• Get a business PayPal account. Since eBay owns PayPal, best get set up there, because eBay Stores thrive on PayPal payments. They live and breathe on PayPal payments. Link the PayPal account to your business account (and maybe to a high-yield business savings account) so that you can shuffle money out to either place. One tip here: I don’t recommend keeping a lot of money in your PayPal account. Not necessarily because it can get hacked (though it can) but because if there’s a complaint against your account, the assets are frozen in it. It seems to be easier to get PayPal to freeze your assets than your bank, so if you get payments, withdraw them to your checking account or your savings account.
• Get a business credit card? Going into debt in a business is just as bad as going into debt personally, so I don’t know if I’d do an across-the-board recommendation to get a business credit card. Aside from the prospect of going into debt, there are a couple of advantages. First, you can pay for stuff instantly through PayPal merchants (or eBay sellers) that accept credit card payments. Paying instantly without a credit card requires you to have a PayPal balance, which I don’t recommend, and transferring money in from another account takes a few days. Second, some of these cards have nice sign-up bonuses and will waive the first year’s annual fee. The Discover® Business Card is a good one. (The Business Gold Rewards Card has an annual fee that is waived for the first year; the Discover® Business Card has no annual fee.)
• Learn about how to keep records for tax purposes. The IRS is helpful here. It tells you how to keep records so that they’ll believe you if you’re audited. It also tells you about all of the business deductions you can take. The Small Business and Self-Employed One-Stop Resource page is here.
• Organize your office and set up your system. Folders for receipts, invoices, tax forms, employment forms. For online businesses like eBay Stores, printing out invoices, packing slips, etc., gives an extra measure of security and robustness to recordkeeping. If your hard drive crashes with all of your records, and your backup crashes, too, you’re not high and dry.
• Get small business software? There’s nothing wrong with getting software for recordkeeping, but a free spreadsheet application like the Calc application in OpenOffice.org will work, too. You can play around with this yourself, but some financial software comes with a lot of bells and whistles that might distract you from the real purpose of the software, which is to record what you bring in and what you spend as you go. If OO isn’t enough, then by all means go for Quicken Home & Business 2007.

A good start to your business, but not the end

This post only scratched the surface, and again, I can’t possibly give advice that applies directly to your situation. Learning about filing requirements, recordkeeping, and business finance is an ongoing process. Laws change, especially tax laws. It’s generally up to business owners to keep up with the changes. There are all kinds of books on starting a business available, and a bunch are specific to eBay businesses.

If you have a question about starting up a business, I’ve gone through the process a couple of times, and I can offer my opinions. Feel free to leave a comment on this post and I’ll try to answer it. I do encourage you to use the resources in your geographic location, because they’ll be able to give you the most specific answers.

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