How to Set Up an Affiliate Marketing Business

I know there are a lot of blog posts about how to start an affiliate business, but I am going to concern myself primarily with how to actually start a legal entity and deal with the tax considerations that come with it.

If you are smart then you will treat your affiliate business like a real business and cover all of your bases from a legal perspective. So in order to have a fully functioning business here are the things you will need to consider.

What Type of Legal Entity to Use

The first thing that you want to take into consideration when you start your business is the type of legal entity you want to use. This is important because the type of legal entity that you choose can affect how much you pay in taxes as well as how you protect yourself should somebody choose to sue you.

The three main types of legal entities that apply to an individual or a group of people who are setting up an affiliate marketing business are the sole proprietorship, the LLC (limited liability corporation), and the S-Corporation (Small business corporation).

Self Employment Tax

The government taxes both individuals and employers for your contribution to Social Security and Medicare (even though both will more than likely be bankrupt before you ever pull out a penny). When you are self employed you are taxed once for your personal contribution, and then once again for your employer contribution. The current self-employement tax rate is about 15.3% of your income. Each of the three entities deals with the self-employment tax differently.

Sole Proprietorship

A Sole Proprietorship is just that, a one-man show. It is great because you do not need any formal setup other than saying that you are a sole proprietorship. Everything that you do just gets added to your personal income statement that is associated with your social security number, and taxed at whatever rates are typical at the federal and state levels plus self employment tax.

The downfalls of this particular type of business structure are that it offers no liability for your personal assets. For example, if you are sued for a business action, the court can go after any and all personal assets that you may have in a settlement. This is VERY risky. This particular reason is why I would never recommend using a sole-proprietorship.

LLC

An LLC, aka limited liability company, can either be used in a one man show or a partnership. It has many forms and can be very complex, or it can be crafted to be a very simple business entity. How you are personally taxed depends much on how you structure the LLLC.

There are typically two types of partners in an LLC, there are active and passive partners. If you are a passive partner you have to pay yourself a salary and you are thus subjected to self-employment tax. If you are a passive partner then everything you pull out of the partnership can be paid out as a draw or a dividend, and is not subject to self-employment or payroll taxes. There must be at least one active partner in an LLC at all times. One way to get around this is to set yourself up as an active partner and then set up your spouse as a passive partner (if you have one)

The main draw of setting up an LLC over a sole-proprietorship is that it protects your personal assets should you go out of business or get sued. Once again, if for no other reason, this reason alone should persuade you to set up an LLC. You may not think this is a big deal until you get sued for something silly…it happens! People can be greedy, litigious bastards.

S-Corporation

An S-corp. Is a small business corporation that is very similar to an LLC, the primary difference comes in the fact that you can have more shareholders in an S-Corp. (up to 99) and there is also a little bit of a loophole for getting around the self-employment tax.

With an S-Corp, the IRS allows you to pay yourself a “reasonable” salary, and then take everything else out as a draw or a dividend. For example, if you make $200K from your business every year then you may pay yourself a reasonable salary for a professional in your field, lets say, $50K. That $50K will be subject to payroll and self-employment taxes, but everything else will just be taxed at the marginal income tax rate. It’s pretty nice. Just remember, a “reasonable salary” is a very subjective term, and it is always best to error on the side of conservatism. i.e. $1 is not a reasonable salary.<./p>

Which business type is for you?

There are three types of affiliates that I will mention. For a small affiliate business with one owner, it is probably best to go with a single member LLC, just for the sake of simplicity. For a partnership, it is always best to go with an LLC. If you are a single owner Affiliate business making a sustainable income, it is probably best to go with an S-Corp. because of the tax benefits.

How to Set Up a Business

Setting up a business is actually pretty easy these days and it can be done relatively inexpensively. The following are the steps you must take to set up a business entity.

1. Form an Entity

   Setting up an LLC or an S-Corp can be done one of two ways, go to a licensed professional and pay a lot of money for a very simple document, or go online and draft it up for cheap. If you have very sticky partnership deals and a complex structure to your business then you should probably go to a lawyer to do it, otherwise, the Internet is probably your best option.

   There are places like LegalZoom.com that will set up your business for pretty cheap, but to be honest, most states have an online form to do it for free. Go to your state’s website and see if you can do it there, all you will have to pay for is the licenses, etc. That is what I did when I set up my LLC, and it was only around $100.

2. Get a Tax ID

   When you use a sole proprietorship you are taxed under your Social Security number. However, when you register an LLC or an S-Corp. you will need to get an Employer Identification Number, or EIN. Never pay for this, you can get it for free at IRS.gov

3. Get a business license

   Most states require you to get a business license from your local municipality, sometimes you can get them online, but most times you actually have to go to the city center to apply for one. I got mine for pretty cheap, it was only $60 and it took me under an hour to do it.

4. Get a Bank Account

   While this is not a legal must-have, if you want a place to keep your business’ money then you really need to have a bank account. Most banks require the following:

   • Approved Articles of Incorporation
   • Federal tax payer id…SSN or EIN

Bookkeeping

Here is the quick and dirty on bookkeeping. Get something like quickbooks and keep track of all of your bank statements, credit card statements, and cash receipts. Keep track of all of your expenses and you will not get screwed come tax time.

Better yet, I cannot stress how much bookkeeping sucks. I did it to pay my way through college and I HATE it. It is tedious and time consuming, so the best thing to do will be to outsource it to a bookkeeping company. If you hire a CPA then they will charge you $100’s an hour to do something that a smaller bookkeeping company will do for about $200-$300 a month. A lot of people may tell you that you need a certified public accountant, but unless you are a public company and you need to be audited for accrual based accounting, you need to be audited, you are much better off with a non-certified accountant, it will save you a lot of money. Even still, hiring someone to do your bookkeeping may not be worth it if you are a small company, but as soon as you can afford it…DO IT!

Tax Planning

This is another situation where I would highly recommend consulting a professional. Hiring a tax professional will allow you to legally avoid paying taxes and they will often save you more money than they cost you. Dicking around with your own taxes is only a hassly that will be costly for you in terms of time, frustration, and possible audits and fines if you screw up.

The one thing that I will say about planning for taxes is that you should put away 40% of your profits in a business savings account that you do not touch. Taxes are always more than you expect them to be and if you don’t put away a reasonable amount of your profits into a saving account it will be very difficult to meet your tax requirements.

Good God that was boring, but necessary. If you want to be a success in your business you have to cover your ass legally. The US Court system and the IRS are two institutions you do not want to mess with…regardless of the outcome, you always come out getting effed. So if you cover your bases from the start it will be hassle free and you will be able to actually focus on your business.

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