Merchant DefinitionWhat Does It Actually Mean to Be “In Business”?

Are There Requirements Merchants Must Meet to Be Officially Classified as a Business? Does It Matter?

Have you ever thought about going into business for yourself? Opening a cafe, perhaps or a mechanic shop? It sounds fantastic in the abstract. When you start looking at specifics, though, you’ll probably have plenty of questions.

What does it mean to be a merchant? If you go to a farmer’s market tomorrow with a basket of fruit from your backyard and a mobile credit card reader, are you a merchant? Or, do you need to have a legal entity, employees on payroll, and complex accounting software before things really count?

In this article, we break down how to qualify as a merchant by examining the types of entities you can choose from and discussing the tax obligations that you’ll have.

What is a Merchant?

Merchant

[noun]/mər • CHənt/

A merchant is a business entity that sells goods or services, either directly to consumers or to other businesses.

In the broadest sense, a merchant can be any person or business that sells or trades goods or services for profit. A merchant may operate online, in the brick-and-mortar space, or a combination of the two. Essentially, if you take payments for goods and services, you can call yourself a merchant.

Merchant Business Entity Types and Tax Consequences

You don’t need a business entity to be a merchant. If you sell things for profit, you’re automatically in business as a sole proprietor. Technically, that would also include someone who sells an unwanted couch on eBay. But for our purposes, we’re going to focus on entities who sell on an ongoing basis.

Being a sole proprietor is the simplest form of merchant. As an unincorporated entity, you don’t have to file any paperwork, and you can use your social security number (SSN) to do business.

As a best practice, however, you should consider separating your personal and business legal and financial obligations. You’ll want to establish a legal entity, which is like a box you use to put your business-related things in. Types of for-profit entity types include:

Merchant Status & Other Tax Obligations

By default, corporations are taxed as a C corporation, which is double-taxed: both the shareholders and the corporation itself are taxed separately. Conversely, you can elect to file for S corporation status. This allows profits and losses to flow directly onto your personal tax return, avoiding double taxation.

Partnership arrangements, whether unincorporated or incorporated, are pass-through in nature. This means that profits and losses are not taxed at the partnership level. The same holds true for LLC businesses.

As a merchant, you’ll also be responsible for collecting and remitting sales taxes. These will differ at the city, county, and state levels. Certain items, such as cigarettes, also involve federal taxes.

Some states exempt certain professional services from these taxes, but if you sell physical goods, you should be prepared to collect and remit sales taxes. Many eCommerce platforms, like Shopify, for instance, offer sales tax solutions as add-on arrangements. Opting to sell through a merchant of record like Amazon or Etsy may allow you to automate sales tax collection.

The merchant of record is a provider that allows businesses to accept credit cards without having a merchant account. Its sole purpose is to hold credit card payments from your customers until the transactions can be cleared. A merchant without a merchant account is limited to accepting cash transactions only. Partnering with a merchant of record essentially hands over these chores to a third party, who will also be responsible for things like data security.

Next Chapter

Merchant Responsibilities

Read More