A group of crafters, makers and artisans met at Blue Buddha Boutique to learn about taxes for small businesses. CPA Dawn Milani of Milani & Associates presented an overview of the differences between sole proprietorships, S- and C-corprations and LLCs, which sounds kind of dry, but Dawn did a great job at keeping us engaged. Plus we had a lot of questions!
Dawn has extensive experience assisting business owners to start and develop businesses. She has provided them with assistance in various areas, including accounting, business planning, marketing, and technology. Prior to founding Milani & Associates, Dawn was Director of a Small Business Development Center. As Director, she was responsible for developing programs and strategies to assist entrepreneurs and business owners across industries to start and manage a business. Her expertise was quite apparent as she took a room of struggling business owners through the basics.
In case you weren’t able to make it here is a review of the information she gave, but I would like to state I am not an accountant or an attorney. If you have any questions contact an accountant or an attorney. In fact, you can reach Dawn email@example.com or by phone at (773) 506-6500.
Most of the attendees were just starting out and needed the basics, while some were in the growth stage and needed information about LLC’s (Limited Liability Company) or S-Corp s (S corporation- so named after subchapter S of chapter 1 of the Internal Revenue Code). One maker stated “I’m trying to stay out of prison”. My takeaway from the evening was: as long as you were not fraudulently with deliberate intent trying to avoid paying taxes, then you’d stay out of prison, but the IRS would probably fine you for your mistakes.
Here are the different types of taxes and legal structures:
- Sole Proprietor – This is just you and your business. Together you are one legal entity. You file your taxes using a 1040 and a Schedule C.
- Partnership – people who go into business together. They will file a 1065 tax return.
- Single Member LLC – This gives you limited liability protection. Basically as a sole proprietor if you get sued then your personal assets can be targeted. If you have an LLC then only the business assets are at risk.
- Multi-Member LLC (MM LLC) – pretty much the partnership version of an LLC. It protects the partners’ personal assets.
- S-corp – is a corporation held by shareholders and can be held by a shareholder of one. File a 1120S tax return.
Now that you know what you want to be, how do you get started?
- Sole Proprietor or Single Member LLC - you can do business in your name. If you choose to have a business name then you must register with cook county a DBA (doing business as).
- MM LLC – must register with the Illinois Secretary of State. You should have Articles of Organization if a multi-member LLC. Dawn recommends having an attorney write up your LLC agreement and have your accountant review it.
- S-Corp – also registers with the Illinois Secretary of State and needs to have bylaws. Like the LLC you should have an attorney write up your bylaws and have your accountant review it.
Each of these entities needs to have a FEIN (Federal Employee Identification Number).
You also will need an Illinois Business Tax ID from the Illinois Department of Revenue.
If you will have employees you need to register with IDES (Illinois Department of Employment Security).
If you pay independent contractors you will need to give them a 1099 at the end of the year. As a general rule, this is for anyone that you pay $600 or more throughout the course of the year for services (including rent). The exception to this is if they are an incorporated business you do not need to issue a 1099. Dawn recommends giving everyone you work with a W9 so you have their information on hand.
You have to pay sales tax on any products that you sell. Dawn recommends registering with and using My Tax Illinois. If you are doing an out-of-state show, then you need to collect that states sales tax rate on the items you sell and pay the sales tax in that state. Some craft shows do assist with this process, but not all the craft shows are as savvy.
So, there you have it a very brief overview on taxes for small businesses. I would highly recommend reaching out to Dawn if you have additional questions or if you still are not sure where to start.