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What’s the difference between a business and a hobby? A business exists to make money, while a hobby is just for fun.Other than making money, there isn’t much else you must do to make your business “official.” However, there are different types of business structures and registrations that could have financial, legal, or tax benefits. The right type for your business will depend on your goals and resources.
Here are some of the most common structures for small businesses:
Sole proprietorship is the simplest business structure and simply means that you are the only owner of an unincorporated business. As the sole owner or proprietor, you will pay personal income tax on any profits from the business. All profits from the business belong to you, and so do all debts and expenses. There is very little government regulation of sole proprietorships and in most states, you do not need to file any paperwork or pay any fees to operate as a sole proprietor.
DBA stands for “doing business as” and allows you to operate your business under a name other than your personal name. For example, you could file a DBA for “Furry Paws Pet Care” instead of using your own name to refer to your business. The rules and fees for filing a DBA will vary by the state, county, or city that your business is located in, so check your local government websites for more information.
LLC stands for “limited liability company” and is a way to separate your business from your personal life. Registering an LLC creates a legal entity that exists separately from you and any other owners of the business, who are known as members. As a member of an LLC, you are not personally responsible for any of the debts or liabilities of the business. For example, in the unlikely event that your business is sued, in most cases, your home, car, or personal bank accounts cannot be taken away to pay for the claims brought in the lawsuit. Many small businesses start as sole proprietorships but later choose to form an LLC as the business grows.
Business bank account
Regardless of whether you operate as a sole proprietor or LLC, you need to have a separate bank account for your business. This will keep you from using revenue from your business to pay for unrelated personal expenses. Instead, you should put money from your business account into your personal bank account as a salary or owner draw. Then you can use that money to pay for your personal bills and purchases. If you have an LLC, you will need to be especially careful to separate business and personal records and funds.
Legal and tax regulations differ between sole proprietorships and LLCs, and across different levels of government, so make sure you consult a reputable business attorney, accountant, and/or tax professional to determine the best choices for your business.