Disclaimer: I am not an attorney, financial adviser, or an accountant. The information provided here is mainly commentary. I encourage you to do your own research and seek the advice of qualified and licensed professionals.
Some people run “under the table” when operating a small business. What I mean, is that they don’t advertise their small business and rely on word of mouth. They run on a cash only basis and they don’t report their earnings to the IRS or the state government if required. Some people that run businesses under the table might be able to get away with it for a long time.
At some point, if the business owner operates long enough, he or she will be caught and reported. The obvious advantages of operating a business under the table is that business owner chooses to evade the red tape of obtaining business licenses, forming a legal business structure, getting insurance, collecting federal taxes, and Social Security taxes from employees, etc. So people that don’t want to go through all these hassles and headaches may choose to evade the system. They save themselves lots of upfront costs and time in the beginning.
Obviously there are both advantages and disadvantages to running a business this way. One disadvantage to operating a business under the radar is that if the local government finds out, the business can be shut down. On top of that, the government has the authority to levy fines against a business owner operating without the proper license. It is a minor inconvenience to have to go through the trouble of obtaining a license from your city, county, and or state. At the same time, a business license does not cost much and it will go a long way towards protecting the business owner from inquiries by the police, code enforcement officers, or other government officials.
Another disadvantage that I see with operating a business under the radar is that you forfeit tax benefits. There so many tax deductions available to business owners that would reduce a businesses tax bill. A few that I can think of off the top of my head are the Keogh plan and the SEP-IRA. Both of these are tax-deferred retirement plans for business owners. They both allow the business owner to contribute more money to the each plan, per year than the traditional IRA.
Receiving tax deductions from the IRS or state government entails filing business tax returns and keeping very meticulous records. Business owners have to know where all of the money is flowing to and from in the business. Business owners are wise to keep good records in the event of an audit, also.
What about liabilities? Depending upon the type of business that you run, you may need to obtain liability insurance to cover your business and your property. Most reputable insurance companies will want proof that you are operating a legitimate business before providing coverage. The last thing that any business needs is a lawsuit or some sort of catastrophe that threatens to deplete the business’s financial resources.
Many cities, counties, or states will require businesses to collect sales tax from customers for products sold and services rendered. Of course, this depends upon what the local ordinances and laws are in the state where business is headquartered. Also, business owners need proof of income at some point in order to obtain credit. What if you want to purchase a home or a car? What about renting an apartment or applying for a credit card? These things all require some sort of proof of income. A business owner operating under the table, won’t have enough proof or documentation to get credit.
You probably don’t need to form a legitimate business if you are engaged in a hobby and aren’t making much of any money at all. It all really depends partly on the type of business and what the laws are in your jurisdiction. Some types of businesses do not require a license and may not be regulated by the state or local government where the business is located. You will have to determine for yourself whether the risks of operating a small business under the table are worth the reward.
© Copyright 2013 Susan Broadbelt