Soap is piling up in your kitchen, spare bedroom and what used to be, your sewing room. Friends and family are constantly wanting soap and maybe they’re starting to purchase some. You’ve decided to turn your hobby into a business. Let’s talk about setting up your soap business.
One you decide to sell your soap, you will need to setup your business. Here are some basics.
I am not an attorney, nor am I an accountant. The tips below are guidelines to help you learn what is needed to start your soap business. Be sure to consult with an attorney/tax professional when it comes to questions about which business structure to form, how to handle your accounting and for help with tax liability.
Decide on a Business Name
What will you call your business? Once you select a business name, check to see if the website domain is available. If the domain is taken, then you’ll probably need to pick another name.
Perform some Internet searches to see if anybody is using the name in business. You don’t want to choose a name that someone else is using.
Search through the USPTO trademark database to see if anyone has or is in the process of trademarking the name.
Get the URL. You don’t have to build your website right away, but you want to own the domain before someone else grabs it.
Set it up on all of the popular social media sites such as Facebook, Twitter, Instagram…etc. Again, you don’t have to start using it right away, but you want to procure them so that someone else doesn’t swoop in and take them.
Choose Your Business Structure
You first need to determine the legal structure of your business. You’ll have a few options, which come with various tax and legal implications. Two structures that I recommend when starting out are Sole Proprietorship and Limited Liability Company. There is also General Partnership, Limited Liability Partnership, S-Corporation and C-Corporation. I’ve only established my business as a Sole Proprietorship and a Limited Liability Company so I will discuss those. Before you setup your business, do your research at www.sba.gov or consult an expert, such as a lawyer or accountant, to help you decide on the right legal structure to fit your circumstances.
In a sole proprietorship, you own the company and are solely responsible for assets and liabilities. Many people going from hobby to business start out as sole proprietors. Your taxes are filed on your personal income tax filing with no distinction between you and the business. You do not have to take any action to form a sole proprietorship; if you are actively selling soap, bringing in money and acting in business activities, you are already a sole proprietor.
Although you don’t need to register your business, you do need to obtain any necessary licenses or permits required by your state and city. Your local www.sba.gov website will have more information on what is required.
Typically a sole proprietorship’s legal name is your legal name (e.g. Amanda Aaron). If your business will have another name (e.g. Lovin’ Soap Studio), then you will need to register a DBA (doing business as) also referred to as a fictitious name or assumed business name. You will need to register a DBA in order to open a bank account and do business, write and receive checks under your fictitious name.
There is no distinction between you and your business. You report your income and expenses as part of your personal tax return on a Schedule C tax form.
Be aware that if you operate as a sole proprietor, you are personally responsible for your company’s liabilities, including debts and legal claims filed against you, putting your personal assets at risk.
Limited Liability Company
In a limited liability company, your taxes are filed on your personal income tax filing with no distinction between you and the business. As the name suggests, you are protected from personal liability for debts or legal claims filed against you, but your personal assets are usually exempt.
To set up your LLC, you must file articles of organization with your state. Requirements vary by state, so check out your local www.sba.gov website for filing links and more information.
A LLC’s legal name is the name you used when setting up your LLC (e.g. Lovin’ Soap Studio). You won’t need to register a DBA unless you will be doing business under another name besides your original filing name, (e.g. if I published books and wanted to use Lovin’ Soap Publishing, I could file a DBA for that under Lovin’ Soap Studio).
There is no distinction between you and your business if you have filed as a single-member LLC without electing corporate taxation. You report your income and expenses as part of your personal tax return on a Schedule C tax form.
Get an EIN (Employer Identification Number)
A federal employer identification number, or EIN, is a nine-digit number the IRS assigns to businesses for tax filing and reporting purposes. You will also need it if you plan to have employees.
- LLC – Requires that you get an EIN.
- Sole Proprietor – It isn’t required that you get an EIN, but it is recommended. You can simply use your social security number when doing business, but to help protect your SSN, get an EIN.
A bank might require an EIN to open up a business account for your new business. Get an EIN before you visit your bank.
Open a Bank Account
You’ll need a bank account to put your business money into and to pay expenses out of. Do not mingle personal money and business money. This can create an accounting nightmare.
Open both a checking and savings account. A savings account is great for squirreling away money set aside to pay taxes.
State Licenses and Registrations
Check your state website to see if your state requires licenses (business license) or for you to register your business in any way (such as for state taxes).
Do a Google search for something like setting up business in (your state).
Requirements will vary state by state. Here are requirements for Missouri.
Decide How You’ll Collect Payments
You’ll need to decide how people will pay you. Will you accept cash, checks, credit/debit cards? Here are some common payment processors that you can choose from.
Both Square and Paypal come with handy readers that you can use at craft fairs and shows. You can also connect your online shopping cart to both Square and Paypal to accept payments online.
Beyond the two above, there are numerous companies that offer payment processing. Be sure to compare rates and percentages when shopping around.
As a business you will need to track your income and expenses. You can do this by using a spreadsheet or you can use a software program for accounting such as QuickBooks.
Because entire books are written on accounting (and I highly recommend that you read some), I’m not going to go into detail in this basic blog post. I recommend that you hire the help of an accountant or take accounting classes to get you started if you don’t have any knowledge of accounting. Many cities have small business classes at community centers and colleges that you could take.
Every dollar that you collect needs to be accounted for and every expense needs to be recorded, as expenses reduce your taxable income. Taxes will need to be paid on your income based on your business structure. An accountant can help determine which tax documents need to be filed (there are usually both state and federal) and when.
I highly recommend getting accounting software to help you keep track of income and expenses. I personally use Quickbooks Online, but there are several to choose from.
Other money-based services that might be helpful.
- Shoeboxed -Scan & organize receipts to track expenses
Collect and Pay Sales Tax
You will be responsible for collecting income tax on product sales that you make. Check your state’s website for the rate that you are supposed to collect and information on how to pay it.
- At craft fairs & shows – You can add your tax rate to your square app to add the correct sales tax to each sale.
- On your website – You can setup sales tax in your shopping cart to add the correct sales tax to each sale.
Most states have an online payment system to allow you to pay sales tax. If you aren’t making much, your state might have you pay sales tax annually. If you make a certain amount (varies by state) then your state might have you pay quarterly (or more). Do a Google search for how to pay sales tax in (your state) and you’ll find your state site. As an example, here is Missouri’s site.
Save for Uncle Sam
You’ll need to pay taxes on any money earned through your business (assuming you make a profit). Don’t get caught at tax time with no money for Uncle Sam. Since you opened a savings account, put money aside as you bring in income. You can set a standard percentage and really try to stick to it. I always overshoot this and save 20% of my business income.
Insurance for Soapmakers
If you want to sell your products, I highly recommend that you get insurance. Because we live in a litigious society, you want to make sure that you are protected in case your products damage something or injure someone.
Many craft fairs, farmer’s markets and retail stores require insurance if you want to sell your products.
This should get you started! Once you are set up for business you’ll need to brand your business, decide on packaging, setup a website, price your products…etc. We’ll have posts in the near future on these topics…so stay tuned!
Starting a soap business can be an overwhelming experience! Go through this list piece by piece and you’ll soon be up and running.