Do I Need to Register A Business To Make Money With My Website?
This post is part of the Friday Q&A section. Just use the contact form if you want to submit a question.
I’m considering setting up a website. Do I have to register a business before being able to charge for advertising space or other services I might offer? Do I need to pay taxes on that revenue?
First of all keep in mind that I am not a lawyer (i.e., the content below should not be taken as legal advice), and that regulations will vary from country to country and even from state to state within your county. That being said, here is how it works generally around the world.
You don’t need to create a business entity to be able to make money with your website. You can operate it as a sole proprietorship, which means that there is no legal separation between yourself and your business. This type of business won’t require a formal registration, because all the profits you’ll earn with it are automatically associated with your person. The clear advantage of this model is that it is easy to setup. The disadvantage if that the owner has full liability over the business, which means that his personal assets can be used to pay eventual business debts.
The interesting thing is that with a sole proprietorship (in some countries) you can still get a business name, known as “doing business as” in the US, and “trading as” in the UK. This won’t create a legal entity for your business, but will allow you to use that name officially. For example, you should be able to create a checking bank account under your business name. The fees for such a registration should be pretty low (i.e., $50).
Which brings us to the second question. Do you need to pay taxes on the revenues generated from your website? The answer is “yes,” unless your website makes less than $400 yearly, in which case it could be considered a hobby (in the US at least). If you are earning more than $400 yearly you’ll need to pay self-employment taxes (because your sole proprietorship business is not a separate legal entity).
The good news is that on most countries you only pay taxes on your profits (i.e., revenues minus expenses), so if you have a lot of related expenses your tax burden will be small.
How much tax do you need to pay? It varies from country to country. In the US it is 15,3%.
Depending on how much your websites are making you should also consider creating a limited liability company to hold them, but that is topic for another post.
15 Responses to “Do I Need to Register A Business To Make Money With My Website?”
Personally, I protect myself by using the LLC format for my companies, where I live, it costs $125 to start one, and $200per year to file with the state (varies from state to state) and it protects me personally.
Jack | Online Marketing Blog
You really do because many if not all affiliate programs will ask for your tax id number to pay you out.
Another point if you are really serious about your project. Incorporating early will get you some credibility in terms of getting bank loans in the future. Usually banks look for two years of finance records to give loans for the business.
As a tax accountant, I can’t resist pointing out that income less than $400 would still be subject to regular income tax–it just wouldn’t be subject to SE tax.
Check with your county clerk about business license. Additionally most of the other business you work with online will require a valid business name.
Healthy Lifestye HQ
“The disadvantage if that the owner has full liability over the business, which means that his personal assets can be used to pay eventual business debts.”
That is bad if your going to have a lot of debt. A simple blog with hosting would be pretty cheap.
I would think that making money through website is more similar to freelance distributors, rather than small business owner. But then, that will depend on what you want to sell through your website.
Maybe you have the intention to sell home-made toilet rolls, then it’s better to set up a business entity.
I’m not a tax advisor but I thought I should add that the 15.3% is for self-employment tax only (i.e., social security/medicare). You will most likely find yourself paying federal and state income taxes as well. The federal tax rate can be as high as 35%, state tax rates vary. Some have no income tax at all.
Unfortunately, figuring out how much in taxes you’ll need to pay is not as easy as just adding up your various tax rates. Your taxable income from other sources, including your spouse’s income, plays a part. You only need to pay self-employment taxes on combined wages up to a certain point ($106,800 in 2009). Complicating matters even more, you can write-off half of your self-employment taxes.
If you’re in a high income bracket already, you could find yourself paying 50% or more of your self-employment income in various taxes. You may also need to pay estimated taxes, which is why it’s usually best to consult with your tax preparer before getting started.
Christina Aguilera Karaoke
I doubt you need to register a business to make money on your website. All you need is a payment service and go on from there.
All advice here seems valuable and correct to me, (again, only personal opinion) but I would like to add two thoughts I feel most people ought to keep in mind.
First, the liability issue is often overblown. You start a web site. You do something illegal. You might get sued. Whether or not you have an LLC or S-Corp, you _still_ may be held personally responsible. Yes, a corporation theoretically provides some protection but in many states and countries it is completely possible to “pierce the corporate veil” when there is wrong doing … so don’t saddle yourself with corporate hassles unnecessarily. Just forming a cheap LLC may or may not provide you with the protection that many Internet Gurus “think” it will … to properly make this decision you would be well advised to pay the money that a competent attorney in your state/country will charge … It could be a very cheap investment in the long run.
Two. In the US everyone seems to shriek in horror at the 15% self employment tax bite. But as one of the older folk ’round here (I’ll be 65 this September, Lord willing), consider this … although you feel it will never happen, _if_ you are lucky, you too will be old some day, and today, a majority of Americans have no assured pension in their future except Social Security Retirement Annuity. (How’s your IRA working out for you, as just one sad example?)
This can vary from a few hundred to a few thousand per month, based heavily on your income in each working year of your life … so make sure you weigh the true, lifetime cost of that 15.3 % SE tax .. personally, I had a lot of years with low or no Social security earnings because I worked outside the Social Security system. But now those years have come home to roost (very small month Social Security checks) and I am happily earning _and_ paying SE tax on those earnings, to eventually increase my SS annuity. To me that SE tax is not an expense, but an excellent investment with a good, government insured ROI.
Each person’s life and goals are different, but bear in mind there is a ‘cost’ involved in avoiding SE tax somewhere down the line … if you are lucky enough to reach your “golden years”, that is.
I use an LLC as well for my home business so I can separate it from my other business. It is always a good idea.
Most blog owners didn’t register their business so why bother. But if you’re serious with your blog business, might as well make all legal for you’ll never know what might this cause in future like for instance if you want to apply for a loan.
If your goal is to earn more than $400/year, you don’t just need a “fictitious name” (Doing business as…). You will also need a business license. Check your city’s website for information on how to obtain one and the cost involved.
My city offers refunds if you don’t make much money. Find out what the rules are where you live.
I also recommend consulting with a local CPA or EA to set up books and accounts for your new business. It can save you money in the long run by making it easy for you or your representative to figure out your tax deductions related to the business.
Thanks for the info. Many website owners dont know how and when they should make a company so as to be legal.
Website Development Course
If you run your website like you would a business then to be proactive and register yourself as a business would be a good idea.
However if your website is more of a personal nature and the money that you get wasn’t generated with the sole intent of generating yourself and income you could probably get away with not registering as a business.
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