Resale 101: Taxes and Incorporation

One major step in the process of setting up a business is figuring out your tax obligations. Although the regulatory framework is fairly similar across the United States, this can be a complex matter as different types of businesses may have different requirements. The registration process and tax obligations may also vary from state to state and even from one city to another.

Sales Taxes and Exemptions

Almost every state in the United States (as well as the District of Columbia) charges some form of sales tax on tangible goods, with the exception of Delaware, Montana, Oregon, New Hampshire, and Alaska. However, in all other states, resellers can apply for a sales tax exemption (also known as a resale certificate) on merchandise they are buying to be resold. Depending on the state, there may be other exemptions as well. The process and requirements to apply for these exemptions will vary from state to state, where the base taxes themselves vary from 2.9-10.5%. So it is important that you check with your state authorities to learn how you can register for a resale certificate in your state. We have put together a guide to each state that issues a resale certificate here:

Note that these guides are an introduction to the relevant processes in your state, and are accurate only as of the time they were written. For the latest information and up-to-date contact details, make sure you check the links to your local authority, included in all of these articles.

The legal requirements and procedures for registering and using a sales tax exemption certificate vary from state to state. It is important that you become familiar with these and comply with all legal obligations. We advise you consult an attorney, a business advisor, your chamber of commerce or the local revenue authority.

Depending on the state, you are likely to have to select a business and ownership structure, such as sole proprietor, Limited Liability Company, partnership, or corporation.

Incorporation

You also need to set up your legal business entity, in order to pay the correct taxes and organize liability. These are the most common business structures for small businesses:

Sole Proprietorship

A sole proprietorship is a business with only one employee: the business owner. As there is no difference between business owner and business, all business income is treated as personal income. By the same token, the business owner is personally liable for all obligations and debts of the business. As a sole proprietor, you can trade under your own name, but you have the option to choose a different name for your business, if you wish.

Sole proprietorships are particularly suitable for new and inexperienced business owners, as they require less paperwork and fewer costs to set up. This business structure also gives you full control over the business. That’s why, according to the Small Business Administration, sole proprietorships are good options for lower-risk businesses. However, you need to bear in mind that financial institutions may hesitate to finance sole proprietor businesses, unless significant collateral is provided.

Limited Partnerships and Limited Liability Partnerships

Limited partnerships (LP) and limited liability partnerships (LLP) are the two most popular choices for those who plan to form a business with partners.

The partners in an LP have different levels of liability and control. A general partner manages the business, but has unlimited liability. The other partners, however, have limited control, but also limited liability. This allows for the founding partner to retain a measure of control over the business when additional partners join. As new limited partners are added, the general partner continues to manage the business. A partnership agreement can be used to determine the obligations of the different partners. Partners report business income through their personal tax returns. The general partner also needs to pay self-employment taxes.

An LLP, on the other hand, confers limited liability on every partner. Not only are each partner’s personal assets protected from business debts and obligations, each partner is also protected from liabilities that ensue from the actions of the other partners. Control over the business is shared between all the partners, regardless of when they join. As with the LP structure, partners of an LLP are taxed through their personal tax filings.

Limited Liability Company (LLC)

Another business structure that provides business owners with protection for personal liability is the Limited Liability Company. As they are considered self-employed, members of an LLC need to cover their own contribution to Social Security and Medicare. Profits and losses are reported through personal tax returns, as members do not have to face corporate taxes.

A variety of tax options are available to LLCs, depending on whether the LLC has one or more owners. For tax purposes, a one-owner LLC is equivalent to a sole proprietorship. The company does not pay taxes, but any profits must be declared on the owner’s tax return.

Multi-owner LLCs are equivalent to partnerships. No business taxes are due, as profits are taxed through the owners’ personal income tax. But the company still needs to submit an informational tax return to the IRS to show that the partners declared their incomes correctly. For tax purposes, a multi-owner LLC can also avail itself of the option of being treated as a corporation by filing IRS form 8832 and checking the corporate tax treatment box. The benefit of this is that corporate tax rates are lower than than the top three individual income tax rates. This also comes with fringe benefits.

Since they are not deemed employees of the business, LLC partners need to pay self-employment taxes. As a few states charge LLCs additional taxes and fees, you are advised to check with state authorities, your lawyer or your accountant. In some states, an LLC may face dissolution or may have to be transformed into a different structure if a member leaves. However, an agreement between the business owners can regulate this eventuality.

Every business intending on reselling physical goods should be properly registered in their state, and barring the few states without any sales tax, should be properly registered for a sales tax exemption, or resale certificate, in order to not pay unnecessary tax.

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