How to Turn Your Internet Marketing Business into a REAL Business

For most people (myself included), internet marketing begins as a side project. You work on your websites and whatnot on weekends and after you get home from your “9 to 5″ job.  At first, you don’t earn a lot, but if you stick with it, you slowly but surely begin generating real income.

Some people hit it big very quickly and others fade out just as quickly as they faded in.  If you stick with it, you will eventually reach a point where you have to begin treating your internet marketing activities as a real business.

Today, I’m going to show you exactly how to do that.

A Quick Disclaimer

As you know, I’m a CPA by trade, so I have a fair amount of education and experience when it comes to things like business, taxes, etc.  Despite this fact, it’s nearly impossible to give advice that applies to all people.  Therefore, although I will be making suggestions in this article, you should not take any of it as “official” tax or legal advice.  You’re always better off consulting with a CPA one-on-one so that you can get advice that applies to your specific situation.

In addition, some of the information below will be legal in nature - I am not a lawyer.  If you are facing legal questions or uncertainty, you should consult with an attorney and not solely rely on what I’ve written here.

One final note - any tax or legal information I present below is intended for U.S. residents/citizens (as this is where my knowledge base resides).  If you live/work in another country, some of this may not apply to you.  Either way though, the general principles should be fairly universal.

Why You Should Care About This

When it comes to the administrative side of business – accounting, taxes, business structure, etc. – a lot of people like to turn their heads the other way.  After all, you want to focus on making money and growing the business, not dealing with annoying paperwork.

When you’re small and just starting out, this attitude is okay.  It’s not ideal, but you won’t likely get yourself into too much trouble.  As you grow, however, transactions become more frequent, and things can become more complex.

Not only do you need to be aware of your legal requirements, such as filing taxes, but as a business owner, you want to have a firm grasp on your company’s financial health.  If you aren’t properly keeping track of everything, you could be missing opportunities (or failing to identify problems).  Even if you hire someone to take care of all of this, it still behooves you to understand it.

First Things First: Maintain Good Records

Before you run off to come up with a clever company name, you need to set up the foundation for your business’s activity.  All of that begins with good record keeping.  Without this, you’re going to be lost, especially when it comes to taxes.

When you keep track of and organize all the transactions of your business, preparing your tax forms becomes much easier.  Furthermore, you can evaluate the different segments of your business effectively.  Is website X profitable?  What are my biggest costs?  Are there areas where I can reduce costs and improve profitability?  All of the answers can be found in the numbers, but without them, you can easily miss a lot of things.

You’re may be thinking, “Well, Eric, this is easy for you.  You’re an accountant.  I’m terrible with numbers.”  You’re right, this is easier for me, but that doesn’t mean it’s impossible for you.

There are no ninja accounting tricks to learn.  It’s really as simple as this: When you receive a payment, you record it as income.  When you spend money on something related to your business, record an expense (and make sure to classify properly it so you remember what it was for).  

Where to Maintain Your Accounting Records

How and where you do this recording can vary.  Here are some options:

  • Outright.com  – I list this first because it’s free.  Outright allows you to maintain your accounting records online, and it’s fairly simple to use.  I’d recommend this for businesses that are just starting out and don’t require anything too complex.
  • Microsoft Excel (or other spreadsheet software) – I’ve seen a lot of very small businesses or freelancers use Excel to maintain their accounting records.  It works, as Excel is pretty versatile, but if you’re not organized, this isn’t going to force you to be organized.  It’s easy for a spreadsheet to get messy, and if you’re not careful, you can inadvertently screw up your records.
  • QuickBooks – For small businesses with growing complexity, QuickBooks seems to be the default choice.  It’s not cheap, and it takes some learning, but it’s powerful.  You can generate different types of financial reports, handle payroll (if you ever hire people), create invoices, and a lot more.  Basically, you can manage the entire financial side of your business, even if it gets complex.  This is what I have my clients use in most cases.

Taxes: They Suck, But We’d Be Fools to Ignore Them

Taxes are always a hot topic.  They’re a necessary evil.  And as much as I hate to admit it, the complexity of the U.S. tax system is one of the reasons I have extremely high job security.

This is probably one of the only areas of life that affects almost everyone, yet few people have a complete understanding of it as it pertains to them and their businesses.  I’m an experienced CPA, and there is a LOT about taxes that I still don’t completely know and have to learn.

It would literally take me hundreds of hours to write a guide that covers everything you need to know about taxes, but I wanted to hit on some key points and dispel some myths that may be floating around out there.

Common Myths About Taxes

  • Myth: If I’m making money online, the government doesn’t see it, so I don’t need to report the income on my tax return.
    • Fact: I’m not sure how many people actually believe this, but I do think many people feel they can get away without reporting online income.  The fact of the matter is, it’s income, just like your W-2 from your day job.  You are legally required to report it and pay tax on it (if applicable).  Many companies, like Google, will issue you a Form 1099-MISC for the income you earned (on AdSense, for example).  This is also being reported to the government.
  • Myth: If I’m working from home, I can just deduct everything related to my home expenses and argue that it’s all related to my business.
    • Fact: The home office deduction is actually an area that the IRS highly scrutinizes, and it’s one deduction that will increase your chances of being audited (so you should definitely make sure to do it right).  In general, you can only deduct expenses that specifically relate to your business operations.  If you have a home office that is exclusively used for work, you can deduct a portion of your general home expenses (such as rent or utilities) based on the % of total square feet your home office uses.  Read more here, from the IRS.
  • Myth: I don’t make enough money to be audited, so I don’t need to worry about properly reporting income. The IRS has bigger fish to fry.
    • Fact: It is true that higher income individuals and businesses have a higher chance of being audited, because logically, the IRS stands to gain more by finding a mistake.  However, that doesn’t mean everyone else is in the clear.  In 2011, if you filed an individual tax return and reported business activity (on Schedule C), the audit rate for those who earned between $25,000 and $100,000 was 2.9%. For total income under $25,000, the rate was 1.3%.  There are a lot more statistics that you can find in the IRS’s report here (see page 22).

Other Important Points

  • As soon as things begin to get complicated, I highly recommend hiring a CPA to take care of your taxes (and I’m not just saying that because I am one).  It’s not worth the stress of doing it yourself if you don’t have a full understanding of what you’re doing. CPA’s don’t have to be expensive – to prepare a basic tax return for someone with self-employment income (like an internet marketer) could cost as little as $150.  And this expense is tax deductible.
  • Pay estimated taxes quarterly if you’re making a significant amount of money from your internet marketing activities.  What’s considered significant? It depends, but I would say if you’re pulling in at least a few hundred dollars per month in addition to your day job, you should be paying estimated taxes each quarter to avoid penalties and interest when you actually file your tax return.  You can read the guidelines for estimated taxes here.
  • I recently wrote a guest post at Murlu.com, which you can read here.  Basically, I answered several questions about taxes as they apply to freelancers and other individuals who have their own businesses (which all applies to internet marketers).

Formally Organizing Your Business: The Final Step to Make Your Business “Official”

Once you’re up and running, keeping good accounting records, and making sure you have your tax filing obligations under control, you should strongly consider formally organizing your business into a legal entity.

There are several entity choices (and I’m not going to go into all of them), but the most common choice is the LLC (Limited Liability Company).

When you’re the only owner of the business (i.e. you have no partners), you and the LLC are viewed as one and the same, from a tax perspective.  In other words, even with the LLC, you will still be reporting your income and expenses on Schedule C, within your Form 1040.

Why create an LLC then?  Here are some benefits:

  • Your liability is limited (gee, I wonder where they got the name from) – Provided you maintain your LLC as a separate entity from yourself (i.e. it has its own bank account, you don’t mix together personal funds with business funds, etc.), anyone who sues you can’t come after your personal assets.  They can only go after the assets of the business.  Remember, I’m not a lawyer, so this is just a very general explanation of “limited liability.”
  • Use your LLC’s tax ID for tax reporting purposes instead of your Social Security number.  Do you ever get a little bit uncomfortable when you have to provide your name, SSN, and other very sensitive information to various websites?  Sites like Google AdSense are likely safe, but there are more questionable ones out there that have affiliate programs that require your tax information.  If you have an LLC, you can simply provide the LLC’s information instead of your own.
  • Bonus reason: If you’ve been banned from Google AdSense, you are allowed to set up a new account if it’s for a separate legal entity (i.e. your LLC).

How to Set Up an LLC

To set up an LLC, I used LegalZoom (aff link).  It was really easy and took about 15 minutes.

They will walk you through all the steps, but here are some key things to be prepared for:

1) You will need a business name.  Whatever you choose, make sure you’re willing to stick with it, because you won’t be able to easily change it.

2) LegalZoom has a few different packages – go with the Economy one.  It’s a bit less expensive, and contains the essentials.

3) Once your LLC has officially been created (it takes several days), make sure to apply for an EIN with the IRS if you went with the Economy package.  Because LegalZoom doesn’t do this for you in the Economy package, you have to do it yourself. It’s very easy and you can apply for it online in about 5 minutes here:  http://www.irs.gov/businesses/small/article/0,,id=102767,00.html (click APPLY ONLINE NOW).

4) It’s easiest to set up the LLC in the state you reside.  Otherwise, you have to pay LegalZoom to be your “registered agent” in the state you choose, if it’s one where you don’t live (or don’t know someone there who can be your “registered agent”).  There are benefits to organizing in certain states (Nevada and Delaware are very popular for legal reasons), but that’s beyond the scope of this article.

5) If you have questions, just ask. They have support representatives ready and willing to help you through the process.  It seems complicated, but once you finish, you’ll be surprised at how easy and simple it is.

A Few Last Notes

Once you’ve done everything above, you should set up a bank account for your business.  It’s important to keep your business funds separate from your personal ones.  Yes, you can transfer money in and out as necessary, but you should keep track of these transfers.

In general, when you receive income related to the business, it should go into the business bank account.  When you incur expenses, it should come out of the business account. This will make it a lot easier to manage your accounting as well (because personal and business transactions are not mixed together).

Whew – this post is finally over! I know I threw a lot at you here, so please feel free to ask questions in the comments or send me an e-mail.  I’d be happy to help as best as I can.

Also, if you found this article to be a valuable resource, I’d greatly appreciate you sharing it on Facebook, Twitter, and wherever else you like to share things.  Thanks! :)

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23 Responses to “How to Turn Your Internet Marketing Business into a REAL Business”

  1. Eric, this is a very nice and comprehensive post for someone looking to get things to the next level.

    Many like to start “right”, although starting is more important (one can always go back and establish the required pillars).

    I believe once a person decides their business (whichever kind) is “real” and goes through the processes laid out in this article, it further reinforces their actions and provides a psychological shift in mindset as well.

    Personally, I recommend outsourcing many of these tasks as a business matures and becomes profitable over time. That said, blindly outsourcing would be a shame.

    A business owner must invest the time to learn about the various components of business, especially tax, an area which like you said most people do not really truly fully understand.
    Sunil l Expediting Wealth Through Extra Income recently posted… My Top 5 Internet Marketing Strategies for Niche Websites

    [Reply]

    Eric G. Reply:

    Great points, Sunil, and thanks for commenting.

    I totally agree with the psychological shift – once you feel like you’ve actually created something “real”, you may feel more motivated to work hard and grow your business further.

    This won’t happen for everyone, but it’s an added benefit of taking the plunge and actually making your business “official.”

    [Reply]

  2. This is a great post! Just a hypothetical question I’m hoping you can help with. Say you’re making a full time income online and you don’t have another job, how do you go about paying yourself? Would you transfer money from you business acct to your personal acct and consider it an expense?

    [Reply]

    Eric G. Reply:

    Hi Jennifer,

    For me to answer this question correctly, I’d need a bit more information. If you are just working as an individual (i.e. sole proprietor), you can simply transfer money from your business account to your personal account (assuming you have two separate accounts).

    If you have an LLC, it pretty much works the same way, except that for your record keeping, you would record the transfer as a “distribution” (instead of an expense). There’s no tax impact of paying yourself in this manner.

    Things get a bit more complicated when we’re talking about paying yourself out of an S corporation (an entity type I didn’t discuss in my article) or if you have a partnership with other people.

    If you have any clarifying questions, please do ask!

    [Reply]

  3. Nice guide to clue a person in on what it takes to run a real business. I shared it on my Two Page Mini Business Plan facebook page. I work mostly with left-brained financial advisors. You would think they would run their practice like a business, but they don’t. Being able to run reports and “see” how profitable you are is key to continued business success. Thanks, Suzanne
    Suzanne recently posted… 3 Ways to Make your Practice Work for YOU So That YOU Can Create the Life You Want

    [Reply]

    Eric G. Reply:

    Thanks for the comment, Suzanne, and for sharing this post. It’s amazing how many people are afraid to really dig into the numbers when it comes to their own businesses. I think once they finally do it and understand it, however, it’s actually kind of addictive.

    [Reply]

  4. This post is excellent, packed full of great help and tips, I will tell my friend about this, she has just given up her day job to go self-employed blogging, get out of the rat race as she calls it
    Maribel recently posted… Occupy Wall Street & Habakkuk Video

    [Reply]

    Eric G. Reply:

    Thanks for the comment, Maribel! I hope your friend finds it helpful.

    [Reply]

  5. Hi!Thank you for sharing what LLC is and the benefits it can give to my business.I’m new in the world of business but I know I can manage this.

    [Reply]

    Eric G. Reply:

    No problem Sean, happy to provide you with the information!

    [Reply]

  6. You’re experienced and want to teach us some important policy of internet marketing. So, you’re really great.I like you for your excellent step.
    Luke Jonathan recently posted… maxworkoutsreviewed.net

    [Reply]

    Eric G. Reply:

    Thanks Luke.

    [Reply]

  7. Written as a true tax consultant! I also made the decision to start working with a company and started to merge both online and offline income (currently doing internship to become an accountant) together. I’m thrilled to see how it will evolve!

    I was a bit surprised to read that opening a business bank account is one of the last items to do on the list. In my country (Belgium) it is actually the first thing to do.
    Kris recently posted… WordPress: Een 404-pagina doorsturen naar je indexpagina.

    [Reply]

    Eric G. Reply:

    Always happy to hear from an aspiring accountant – best of luck with that career path, it’s a good one!

    The reason opening a business bank account wasn’t #1 on my list was because you generally need to have a business set up here before you can open a bank account in the business’s name.

    [Reply]

  8. The myth about the government that doesn’t see online money is absurd. No matter where you get the money from, you should declare and pay taxes. The last thing you need is to pay penalties
    Cristian Stan recently posted… Best Espresso Machine Reviews

    [Reply]

    Eric G. Reply:

    Agreed, Cristian. If you’re only earning a few dollars, you are probably flying under the radar, but once you earn anything substantial, you’re definitely at risk. As you said though, I believe you should (and you are legally required to) report all income earned online.

    [Reply]

  9. One of the best tips out there when it comes to home business is to have a separate phone line for your business. The last thing you want is to answer a business call in an unprofessional manner. Having a separate phone line for your business is very important.

    Thank you for this post!
    Robert Strong recently posted… Online Business Success – What An Iowan Farmer Taught Me

    [Reply]

    Eric G. Reply:

    Great tip, thanks Robert!

    [Reply]

  10. Great Post Eric!

    Online revenue streams can come from many different sources. For instance, one great tool for building your internet visibility is to write articles. I have written many and in fact have reached Platinum Status at Ezine … I mention this to impress upon your readers that article marketing still works!

    The goal of article marketing is to lead your readers into an ad for your business or service while offering them advice of general interest and usefulness. An authoritative-sounding article with the right keywords (“How To Buy so-and-so,” etc.) will come up in search results when a person is looking to buy.

    Food 4 thought …

    George

    [Reply]

  11. Even if your business is very small, do your best to make it look bigger than it is. Design your website like a professional, or hire someone to do it for you. Present your company seriously and introduce yourself as the CEO. People will be more likely to trust you if you present yourself in a very professional way.

    [Reply]

  12. Hi there, I found the information here about starting a LLC very informative indeed, I was wondering however, is it possible to just work off an EIN number instead of forming the LLC upfront.

    Being in the state of California, (and not wanting to work some angle where I register in Nevada), the annual LLC fee of $800 doesn’t justify me to get one started if I’m only making pocket change in the beginning, but would I be able to do everything else such as create an EIN, open separate business and personal bank accounts, keep records, all without an LLC?

    [Reply]

    Eric G. Reply:

    Yes, you can operate your business as a sole proprietorship. It won’t be a separate legal entity like an LLC, but you can get an EIN and open a separate bank account – both of which should cost you nothing. Feel free to ask any follow-up questions, I’d be happy to answer them.

    [Reply]

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  1. Death and Taxes: What Every Webpreneur Needs To Know - August 27, 2012

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