Business Licenses Often Overlooked – You Need Them

Business Licenses Often Overlooked – You Need Them

Every city, town and state has a variety of rules to regulate businesses operating within their bounds.

For instance, I live in the City of Angels. Within a 5 or 6-mile radius, in parts of Los Angeles (LA), you can be working in 5 or more distinct cities – West Hollywood, Beverly Hills, Santa Monica, Culver City, Malibu, and the City of Los Angeles – each with unique business license requirements. Have your cities and towns grown as complicated as ours?

Some people like to avoid the higher licensing costs in LA or other high-cost cities by establishing an address at a mail-box service with a street address (not a Post Office box) in a nearby area with lower business tax rates.

Unclear On The Concept

People think that by setting up business addresses in mail boxes, or by incorporating in tax-free states, they can avoid paying the higher taxes in their city, county or state.

There are two things wrong this concept.

1) You are not doing the work inside that box or at that mailing address. The work is being done where you live, at your office or shop – or at your clients’/customers’ locations when delivering products or services. You really do have to register your business where the business activity is taking place.

2) The extra cost of those offsite, or out of state, registrations add up to more than you save on the taxes.

For instance, here are things to take into account when registering your business in Nevada, Delaware or Wyoming to totally avoid taxes in your state or town.

  • You need a mailing address in the state of registration, to receive your mail. All of it –ALL the bills, contracts, samples, catalogs, supplies, everything. Depending on the volume of mail you get, you pay between $10 and $50 per month for the service.
  • Then you must pay to have all those things re-shipped to you by the mailbox service. Perhaps another $25 or so per month? Or per week?
  • Naturally, there’s the delay in receiving the mail, especially important correspondence. Some of which might be time-sensitive – like a new client needing something done quickly or needing a proposal. Yes, some people still send things by mail. You might actually lose business or lose the opportunity to take a time-based discount. (This has happened to people I know.) Worse, you could be getting IRS or state tax correspondence that require responses within a short time frame. Missing those deadlines can cause penalties and additional taxes – needlessly.
    • You could pay your mailbox service to scan/fax correspondence to you when it arrives. That will carry a customized cost.
  • You must pay for either a toll-free phone number, or a phone number using the area code of the state where you claim to be based. Either way, everything becomes a long-distance or paid call, costing from $10-$100s extra per month. Although, it’s not a bad idea to have a toll-free number, regardless of where you are located.

There may be other costs to keep your state from being able to prove you’re not doing any business in your state. But it’s so easy to slip-up. You can easily be caught through your blog posts, Tweets, Facebook entries or other social media activities.

Bottom line? Once your business is proven to have been run from your state of residence (domicile), you will have wasted all the fees to establish your business in the wrong state or location. You’ll have to re-file as a foreign LLC or corporation in your home state – and pay all taxes, fees, etc., perhaps with penalties for the years before getting caught.

Wise advice – set up your business where you live and work.

Often Overlooked Licenses, Permits, etc.

People in certain trades and professions generally know about their own licensing requirements. What are the most common things that are overlooked? And how will you get caught?

  • Office in home – Some areas require a separate registration when you run a business from home. They may require a fee, and/or an inspection of the business in the home. There might be zoning issues to prevent your kind of business from being run in a residential area. Or, you might live in a community where the rules don’t permit you to run a business in your own home. (Have you read your CC&Rs lately?) You can get caught by the address on your website or the address on your Schedule C. IRS is sharing Schedule C information with ever more cities and states.
  • Sales taxes – IRS and your state are just starting to catch people who run businesses without registering for sales tax permits. That new 1099-K form is alerting the authorities to businesses with over $600 in revenues. 1099-Ks are issued to folks who get paid via PayPal, credit cards, or other third-party systems.
    • If you’re shipping tangible goods (things, not downloads) within your state, you need to register with your sales tax authority.
    • If you’re shipping more than specific amounts into another state, you have something called “nexus.” That means a tax presence in the other state. You may have to register with that state’s tax authority, even though you never set foot there. You need to track your sales by state to determine if you have to start reporting in another state. You can look up the state limits in this chart.
    • Don’t worry, I’ve been told that there aren’t more than 50,000 – 70.000 distinct taxing agencies and levels to take into account. (No, I am not kidding – you are going to need software for this.)
  • Payroll taxes – That person working for you in your office is not a freelancer. S/he should be on payroll. In fact, take a look at your virtual workers. Are they working only for you? Or are they in business for themselves? Some of your virtual assistants may also be regarded as employees for tax purposes. It’s really awkward when those people are out of state. But at least look at the workers within your own state to see if they meet the definition of an employee. IRS’s Form 8919 encourages folks getting a 1099-MISC or 1099-NEC to rat out their ‘employers in order to reduce their own tax bite. Incidentally, do you think you should have been putting your workers on payroll and want to come clean? IRS has a special amnesty program for you, called the Voluntary Worker Classification Settlement Program (VCSP). It might be worth your while to discuss this with your tax pro.
  • Other licenses – There are a myriad of other licenses that might affect your business. Liquor licenses, health department, excise tax registrations for a variety of things – trucks, tobacco, fuels, etc. To get a comprehensive list that specifically affects your business, your industry and your location, consider using  BusinessLicenses.com . It will search all the relevant databases to give you a list of your required filings.
  • Have a question? Contact Eva Rosenberg.

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TaxMama® has decades of experience in many areas of taxation, with intimate knowledge of the vagaries of many, many industries. She provides free tax guidance to tax professionals and the public. A Dow Jones journalist and columnist/blogger on several corporate and Accounting websites. Provides a special series of courses to tax professionals, called the Tax Practice Series, to teach tax pros to represent clients before the IRS (and their states). Teaches the only comprehensive tax course online to those wanting to pass the IRS’ Special Enrollment Examination (aka the Enrolled Agent Exam or EA exam).

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