Make Your Business “Official”

espite the necessary research and paperwork, becoming an “official” home business may not be as difficult as most artists think — and it can bring definite advantages.

From a tax standpoint, it’s generally to an artist’s advantage to officially register as a business. You can take deductions on your “business” that you wouldn’t be able to take for a “hobby.” (The IRS considers your venture a hobby if you don’t make a profit in two out of five years.) Mileage, materials, business-related phone expenses, utilities and equipment are all deductible, and you can even deduct the portion of your home from which you work, provided it’s a well-defined space used solely for business. The price for these deductions is the time it takes to keep good books.

As mentioned in last month’s Business Basics column, artists looking to set up a business can find assistance at their local Small Business Development Office. Every state has one, their services are free, and they can help make sure all your bases are covered.

Steps in Setting Up Business

Set up your books. Establish a bookkeeping system and a business checking account. Without good bookkeeping, you’ll be hard pressed to demonstrate the ongoing existence of your business (especially if you need to apply for a bank loan).

Business registration. Register the name of the business with your Secretary of State. If you’re selling at retail shows in a state that imposes a sales tax, you’ll need to get a sales tax number.

In some states, certain services are also taxed, so be sure to find out exactly what is and isn’t covered. Your state office of taxation can answer these questions. You should receive your sales tax ID number within a month of applying.

Business license. Obtain a business license through the town clerk (some areas call it the “codes enforcement office” or “building inspector”) in the place where you reside or have your business. Most home-business permits are processed within a few weeks of application. You may have to show that your home business will not be disruptive to the neighborhood due to noise or traffic.

Labor commission registration. If you employ workers in a manufacturing operation, you must register with the Labor Commission through the Department of Labor.

Employee Identification Number. Also, if you have employees or if your business name is different from your own, you must get an Employee Identification Number (EIN) from the IRS. If your name appears in your business and you have no employees, the IRS allows you to use your social security number for business purposes.

However, business experts suggest applying for an EIN, anyway, because it reflects an established business with the IRS or when applying for loans. Usually businesses receive their number within three weeks of sending in the application.

Zoning for a “home business”

Use permit. A special-use permit may be required for home-based businesses in areas zoned as residential. Contact your local zoning board for information. Generally, the zoning (or planning) office is located at the city or town hall in your community.

Most areas within town or city limits are zoned commercial or residential, though some rural areas are not zoned at all. Though laws vary locally, most residential zoning allows for a “home occupation,” that is, running a business from home.

But, you may need zoning approval if you have full-time employees or you want to build a separate studio on residential property. When woodworker Craig Nutt decided to move his studio from commercial space in Alabama to a residential property in Tennessee, he made an offer on the property contingent on zoning approval. He then successfully got approval through a hearing with the local Zoning Board of Appeals.

Going “above board” to build his studio involved a great deal of time and some money, but Nutt says that it is worth the trouble. “When we were first looking to move here, we found that a lot of artists had to keep [their businesses] secret,” he explains, “and they couldn’t put a studio tour together because they were afraid of being found out.”

Artists running a business without the proper paperwork could face a hefty fine when and if they are found out. Nutt says the fine in his state for operating a business without a license is $50 per day.

Also, whether you’re collecting sales tax or not, your state can still collect it from you, based on its estimation of your sales. Over the course of just one year off the books, such fines could easily total thousands of dollars.

The chances of getting caught may be slight, but the repercussions make it a costly gamble. And, after all, it can be difficult to grow a business when no one knows it is there.

The material in this article is adapted from previous issues of The Crafts Report.