It's time to transition from side hustle to LEGITMATE business. Prepare your business to file taxes and start building your business credit to apply for loans to help your business grow.
"Too legit! Too legit to.... not have an EIN and D-U-N-S number especially if you are a creative entrepreneur!"
Okay, so maybe the song lyrics are a bit different but you get the point. Being a creative entrepreneur means you are using your knowledge of something and turning that skill into income. What could have started up as a side hustle or freelance job is now becoming a real business. So why not run it as such? Part of adding to the economic growth, as our 45th President loves to focus on is experiencing the tax benefits of being an entrepreneur. I understand that the word "tax" might make some people uneasy but here's a wake up call. If you run a business in America, at some point you will have to pay #UncleSam. There are ways to make that process easier like, registering your business. This time around we'll be discussing the real reasons for having an employer identification number (EINs), two common business structures for small business owners, and how to effectively establish business credit. Let's get straight to it!
**Official Agency Disclaimer: The information being shared is based on background knowledge and personal experiences only. Please refer to well equipped financial professionals who can further assist you with any financial inquiries.**
What EINs are really for. Many people are under the impression that you have to be a big corporation to have an EIN. This is far from the truth and depends on what plans you have to grow your business. Depending on the type of business you establish or obtain you may be required to get it, so check out this free resource from the IRS website and see if you do.
If you discover that having an EIN isn't a requirement for your business, either way you should still consider getting one. Here's why. This nine digit number works like a social security number does for an individual, and allows you to separate your personal life and finances from your business. It's used by the IRS to identify your business for taxes purposes only and makes accounting and bookkeeping much more simple when tax season comes around. It's also used to open up a business bank account, apply for loans, hire employees, and more. I know giving some thought towards your legal structure may not be at the top of your priority list now, but having an EIN is something you are going to want to have in the beginning for your business. Applying for one is free and easy through the IRS website. Be sure to link up with your accountant on tax day to avoid any penalties.
Sole Proprietorship vs. Limited Liability Company (LLC)
Creative entrepreneurs who conduct business solely as themselves with no employees are not required to get an EIN. Your business will just be considered as what's called a "sole proprietorship". Being a sole proprietor means that you alone accept responsibility for all business liabilities, which can also be subjected to your personal finances and even lawsuits should something happen to one of your customers. There is no personal asset protection when your legal structure is that of a sole proprietor and you are also still required to file taxes for your business by using your personal social security number if you do not have an EIN. Be cautious with this option, because certain expenses you claim to have for your business without an EIN on your personal tax returns can open doors to being audited by the IRS.
Merging your personal life with your business is a risk you will have to evaluate for yourself. If you decide that you rather separate them both by obtaining an EIN, typically most small businesses register themselves as a limited liability company (LLCs). LLCs set boundaries between your personal life and business and provides some extra perks corporations have access to. Having an EIN under this structure makes your business solely responsible for its own debts and obligations removing access to your personal finances. It also comes with the ability to receive tax write-offs (lowering the amount of taxable income you have during tax time) that reduces the necessary costs of doing business such as salaries, rent, having a home office, production costs, equipments and more. This is one of the many tax benefits of obtaining an EIN. There are other business structures to select from and to explore more options check out "Starting a Small Business" from the IRS website to see which structure better suits you.
Business Credit: The D-U-N-S Way.
Now that you have a better understanding of the purpose of having an EIN and compared two common business structures for small businesses, let's talk about building business credit. First, we need to address a common misconception entrepreneurs tend to have regarding this final point. Prior to launching my business and reading articles from financial professionals, I was enlightened by the information I was exposed to. Your EIN does not magically generate a perfect business credit score when you apply and receive one.. Remember, it is issued by the IRS for tax purposes only and typically lenders will still use your personal SSN to make their credit decisions. Don't be discouraged because there is a way around this. Contrary to what most resources on the internet imply, just like how you need to establish your credit in your personal life, you need to do the same with your business. This is can be done more effectively by obtaining a free Dun & Bradstreet D-U-N-S number. Click the link to learn more!
Having a D-U-N-S Number helps establish credibility with lenders, and expedites applications for loans and contracts. It assures accuracy and can be used to request your business credit report that shows your company's payment history; and other information that can be used to help validate your company's creditworthiness as a customer. The Dun & Bradstreet company has some pretty helpful and down to earth representatives who can give you more insight and even tell you that articles like this (yes mine) will not be enough to guide you through the entire credit building journey. They cater to different levels of girl boss and men and because of that I was able to review a few strategies of effective ways to start building Luna's credit. Heads up! It's going to be an investment you will have to make for your business, so be sure you are clear on your intentions for generating credit before you dive right in.
To conclude, understanding the purpose of having an EIN, setting up your business structure and building credit more efficiently for your business in the beginning are things you want to consider as you grow. If you need some help with roadmapping and registering, don't hesitate to ask for more steps on how you can get the direction you are looking for!