Step 8 Complete Your Legal Legwork

Judy Proudfoot, Proudfoot Wearable Art

"To find out what I needed to do legally, I spent a lot of time talking to other crafters about what they did to get started in their businesses," says Judy Proudfoot, 45, who has been designing and selling handpainted T-shirts and other clothing items at craft shows and shops since May, 1995. Working out of her Alexandria, Minnesota, home, Proudfoot uses a unique watercolor method with acrylic paints to create wearable works of art.

For entrepreneurs like Judy Proudfoot, who sell clothing items at both retail (to customers) and wholesale (to shop owners), state sales tax certificates and resale tax certificates are especially important. Anytime a clothing item is sold to the public in a state that collects sales tax, the seller is responsible for collecting and submitting the applicable sales tax to the state. The state sales tax certificate enables these accurate transactions to occur. However, when selling a clothing item wholesale to a shop owner, no sales tax is charged, because it is the shop's responsibility to collect the tax from the ultimate customer.

For example, if a fabric store sells a bolt of cloth to a customer, sales tax must be collected and paid to the state; if that same bolt of cloth is sold, at wholesale, to a manufacturer of children's outfits, the sales tax will be collected when those outfits are finally sold at retail to the public.

The resale tax certificate protects the entrepreneur from having to pay sales tax to the state for such transactions. It also shields the entrepreneur from having to pay sales tax to any supplier from whom raw materials are originally purchased.

In terms of legal legwork, Proudfoot says she had it relatively easy when she was first starting out. "As a sole proprietor, I was able to use my Social Security number rather than get an EIN. I didn't need to register my business name because it contained my legal name. I didn't have any zoning problems because customers would not be coming to my home.

"There are significant advantages to having a private, homebased business," Proudfoot explains. "There are just a lot of things you don't have to deal with."

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This article was originally published in the January 1997 print edition of Entrepreneur with the headline: Step 8 Complete Your Legal Legwork.

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