Starting your own clothing business is an exciting venture and a big commitment. Whether you’ve decided to sell your clothes online or in a retail shop, you’ll need to get the right licenses and permits for your business. It’s also important to make smart decisions for your business tax structure and what type of entity you will file as. This will help ensure your company is following the appropriate legal requirements from the get-go.
To help you get a head start on the requirements for starting your own clothing business, we’ve outlined a list of where you should start.
1. Choose Your Business Entity
Choosing the business entity that best fits your business typically comes down to asset protection, financing, tax issues and how all of those factor into the business you’d like to own. Potential business entities include:
Sole Proprietorship: As a sole proprietor, you are the one person responsible for all of your company’s profits and debts. You would be your own boss and have complete control, but also complete liability. This type of entity doesn’t offer the separation or protection of personal and business assets.
Partnership: This type of entity is owned by two or more individuals. In a general partnership everything is shared equally; in a limited partnership, one partner has control of operations, while the other person contributes financially and receives part of the profit. This type of entity is ideal for anyone who wants to go into business with a family member, friend or business partner. Note that partners will share profits and losses, make decisions together and both be held liable for the decisions made.
Limited Liability Company (LLC): This entity is like a hybrid structure that allows owners to limit their personal liabilities while benefiting from the tax and flexibility perks of a sole proprietorship. Owners are protected from personal liability for the debts of the business, as long as it’s proven that they haven't acted in illegal, unethical or irresponsible ways when carrying out the activities of the business. Your personal and company assets are separated, and your profits and losses are not taxed at the corporate level — only "passed through" to your personal tax return.
Corporation: This is an entity separate from its owners that has its own legal rights. For example, corporations can be sued, sue others, buy and sell property and sell their rights of ownership in the form of stocks. There are five types of corporations: S Corps, C Corps, B Corps, closed corporations and Nonprofit Corporations.
2. File Appropriate Paperwork for Your Business Entity
The type of business entity you choose will determine where you file the appropriate paperwork and what you're required to file at the county or state level. For example, a sole proprietor does not need to register. A general partnership or "Doing Business As" (DBA) would register with the county, and other entities register with the state. Don’t forget to register with your city, if applicable — many cities require you to register to do business within their limits.
3. Obtain Federal and State Employer ID Numbers
It’s likely that you will need a Federal Employer ID Number (EIN) if you choose to operate as a corporation or partnership, or if you have employees. You will also need an EIN to register for various permits, including a garment/apparel certificate (see below).
4. Obtain a Permit to Sell Goods and Collect Tax
Since you are starting a clothing business and your business will sell goods, there will be tax associated with your products. You will need a “seller’s permit,” “certificate of authority,” or something similar that permits you to sell clothes. These permits will allow you to buy raw materials to make the clothes (such as fabric) without having to pay a sales tax. It will also allow you to collect sales tax on the clothes you’re selling to your customers. This tax is then paid to the state or local government.
5. Obtain a Garment/Apparel Registration Certificate
Lastly, if you live in California, New York or New Jersey, and you engage in any part of the manufacturing process of making a garment, you are required to register with the state. "Engagement" includes cutting, sewing, finishing, assembling, pressing or preparing the garments. This certificate is also required for any vendor you decide to use for any of these services. You'll need to obtain this certificate before engaging in business.
If you are in a state not listed above but work with one of those three states requiring registration, you may also need to register with that specific state. It’s best to do your research regarding this certificate to be positive you understand if it’s needed or not.
This post gives you a high-level idea of where to start, but this list includes just a few permits, licenses and requirements for a clothing business. There may be many other types of permits and licenses you need to look into in your area before starting your business.
If you're not sure where to start, Incfile's Business License Research package is a great resource. Their experts can provide you the information you need on which licenses and permits are required, and even take care of the paperwork on your behalf.