Regulation · Startup Law

If you are going to charge people(customer) when developing your business model - do you need to register your Startup at Revenue and Custom to pay taxes?

Ezequiel Anibal CoFounder Sswap & MSc at Henley Business School

July 6th, 2019

There is this concept of fail fast and fail cheaply by trying to sell as early as possible to prove that your potential customers are willing to pay for your products or services. However, am concerned that I need to register the company in order to start charging people; but I want to avoid all the paperwork before making sure that people are actually paying for services am offering.

What are your suggestions?

Paul Garcia marketing exec & business advisor

July 7th, 2019

If you are selling services/products, you are obligated to register as a business in your state (in the United States), though the business might be a sole proprietorship or single member LLC. You are obligated to collect sales tax in any state on any product/service that is taxable. And you are required to report any business income to the state and federal government.

Proof of purchase is a good testing method, but you need more than the initial purchase to draw conclusions about whether these are customers you want, customers that will stay, or customers that will be happy.

The cost to register a business is anywhere from about $200 to $700 depending on which state you live in, and usually can be completed in less than an hour. I've done it multiple times. So "all the paperwork" is often only one or two sheets of paper, really very little. That's a TINY investment for your business and often gives you two years with the state to figure the rest of everything out before you are obligated to renew or end the business license. The purpose of incorporating (aside from regulatory) is also to limit liability for you personally for things your company does.

Even if the service you're offering is your own direct labor (such as being a painter), there are benefits to being an official business and not an individual.

My other suggestion is that once you register your business, you immediately open a business banking account and begin keeping all business transactions, including credit card transactions, separate from your personal funds. Write a personal check to your business account when you need to, but don't co-mingle funds.

There are other ways to test your assumptions about whether and how much people are willing to pay for your service other than actually selling them a sample.