Time to incorporate?

[Christopher Price]

I've given thought to putting my shop under an LLC for some time now. The reasons I haven't yet are legion, but mainly concern my loathing for paperwork and fees that don't directly contribute to my happiness.

 

However, when trying to buy some supplies from Park Metallurgical today, they told me they don't sell to private individuals for "liability reasons". I was, needless to say, taken aback.

 

 

 

So my question to the mob is, those of you who have done this and run a legitimate business vs. just whanging on steel in the backyard, how hard is it? Where is the line between personal and business stuff? How do you deal with taxes? How much does it really cost?

[David D.]

Andy will have to chime in on this one.. But we recently made Mad Dwarf Workshop on official LLC business.

 

Definitely a bit annoying and time consuming. But also very much worth it in the long run. (as long as your breaking even on profits every year) :/ That's seems to be the kicker.

 

What we've done thus far is simply make a business bank account and all $ transactions related to the shop go to and from it. We keep ALL of our receipts and throw em in a shoe box. literally... haha

And at the end of the year we bring our 2 shoe boxes to our Tax guy and he sorts them out and crunches the numbers for us.

 

It was hard to get everything sorted out this first year because of a lot of odd jobs that hit us all at once (which are still unfinished). And poor documentation in the past didn't help either. But hopefully things will get more systematic and easy to do as time passes.

 

So personally, I'd say if your taking plenty of orders and breaking even on the money you're putting into it, then go for it.

[JimC]

Speaking as someone who did the Sole Proprietor thing for my (since discarded) freelance graphic design business, it doesn't cost more than: time to fill out your quarterly estimated tax paperwork for the State and Fed; if you're selling products you get to do monthly sales tax paperwork and payments; a whole bunch of money for taxes, Social Security, Self Employment Tax; and a good accountant.

 

LLC could be the way to go for a craftsperson who creates objects that could be prone to failure or criminal misuse. LLCs isolate the personal assets of the owner when it comes down to settling legal issues that involve financial assets/property/liability. Look into S-Corps also. What you would probably want to do is form the business that provides that LLC separation between Chris Price and Chris Price Business Entity, but allows for pass-through income. Otherwise you don't end up making money, have to have a board of directors, shareholders, and have to issue dividends rather than cash.

 

Also, whatever you choose, make sure you start a business checking account and keep that income separate from your Family Funds, in order to pay "company" bills and keep accurate track of what money goes to whom. Keep at least 1/2 of that income aside for taxes. You'll be happy you did.

 

Sounds like I've been there before, doesn't it?

[Christopher Price]

This is exactly what I need to hear, and more details would be greatly appreciated. So far, it sounds like I don't have the throughput to justify it yet, but I need to be doing solid research. I'll go google S-corps over the weekend... gotta run off to Scout camp now.

[JimC]

The last time I looked into it, the Fed starts looking at you as a business if you make more than $600 profit on whatever it is that you're making. There is also the issue of Hobbyist versus Business. The Hobbyist is not an entity that makes money, but rather exists to produce something in order to recover the costs of their supplies. A Business exists to recover the costs plus a profit.

 

HOWEVER, as a Hobbyist, you get to enjoy whatever legal ramifications come your way from your product. Your personal property is then subject to seizure in order to cover monetary settlements granted to the person who sues you (if they win).

[JJ Simon]

Chris my Tattoo shop is an S-corp

Any corporation can be set up through something like Legal Zoom but it does take time and money.

An S-corp protects not only your assets but your income by allowing you to pay yourself a small salary with all of the usual taxes (Social Security, Medicare or whatever) but paying yourself the rest of your profit and ONLY PAYING INCOME TAX on it.

I don't think this is what you need for you business.

My wife runs a personal training studio/wellness center and is a Sole Proprietorship but carries Liability insurance.

She only files taxes once a year as opposed to my 4 times a year for both state and federal taxes.

Like Jim said your largest investment is time.

Once you're incorporated you also have to file a personal property return for the equipment your business owns.

I would look into the IRS' Hobbyist rules and then maybe look into some liability insurance.

Just my 2 cents.

Good luck,

JJ

[B. Norris]

Chris,

 

The very best thing that you could do is speak to a Certified Accountant. Preferably, one who is self-employed and handles the taxes of other self-employed people. Most of the time they are happy to give you all the help you need on what kind of business structure to choose and what kinds of records to keep.

 

As far as business structures, there are several different ways to set things up: Sole Proprietorship, Partnership, Joint-Venture, Corporation, and Limited Liability Corporation (LLC.) Anything that has the word Corporation in the title is run by a Board of Governors and while there is less liability with this structure it does come at the price of giving up some amount of control. The lessened liability is because if some dumb yahoo cuts off a finger using the sword he bought from Dice-O-Matic Sword Corp. He can sue the corporation for damages but, not YOU as an individual. A Sole Proprietorship does not have a distinction between YOU as an individual and the business as a separate entity and any suit will affect YOU directly.

 

Again, talk to a CPA. The rules affecting business are complicated, convoluted, and time-consuming to learn. Having a CPA allows you to do what inspires you, without having to spend an innordinate amount of time on something that does not.

 

~Bruce~

[Wild Rose]

The very best thing that you could do is speak to a Certified Accountant.

The best advice given - speaking as an ex accountant........

As for protecting your personal property - being a corporation or an LLC is not always as safe or as good as you might think (in many circumstances "they" can come after your personal property even if a corp or LLC, despite what even the pros advise) - all depends on several factors.........again talk to a CPA or other tax pro in your state........when this kind of question pops up on forums and I often cringe at some of the advice given .......talk to the guys in the know for your state and circumstances, things change and it is based on state to state as wll as the Fed - when working as an accountant I did 3-4 months of continuing education just to keep up with the changes in the laws, both fed and state........

Edited March 20, 2010 by Wild Rose

[dragoncutlery]

if its the only way to get your quenchent go for it as it might have other benifits as well that have been posted above

[B Finnigan]

I had a C corp for seven years for an electronic components business I ran at home via a website. Having a separate entity has many advantages. One is to keep you and your spouses tax bracket form going up. And I also had several occasions that a company would not sell to a single person some product that could mis-used. So it's easy to snow them by telling them you're ######## Inc.

 

The liability protection is a very big reason to separate the assets from your own. It's very easy to keep a corp in paper debt and keep it from showing any profit. You can bankrupt a corporation without it affecting you or your spouse's credit. There so very many little accounting tricks that can be legally used.

 

I didn't find the paper work any more complicated then the first year that I ran the business as a sole proprietor. It's slightly different but not any more challenging. But each state has a lot of rules that can vary.

 

But unless your business carries a measured amount of liability exposure or will make a lot of money it may not be worth it.

 

You can easily get a SP business license and re-sale certificate. That will satisfy most other businesses that you are legit.

[cdent]

I think Chuck B. passed along sound thoughts. It may not be safe to assume liability protection from a corporation and I wouldn't bankrupt a corporation. It may be best to keep personal and business finances distinctly separate, but to get business financing and manage business debt, it would likely be tied into your personal info. Most corporate setups have to zero out financially at the end of the year, but there'll be a bottom line form that has to be included on personal tax returns, or so I'm told.

[hollandbriscoe]

Just an FYI about corporations, you DO NOT have to have a board of director as a corporation, as long as you are the only shareholder you are the board of directors, custodian and head bottle washer.

[B Finnigan]

Bankrupting a corporation does not affect your own personal credit rating unless you guaranteed any loans the corp took out. If that was the case nobody would buy shares of any businesses.

 

I never used my credit when I had a corp and my bank gave it an immediate line of credit. A corp submits a completely separate tax return under an EIN number. They only reporting you would have on your individual return would be any salary you took, bond interest or capital gains from selling shares back to the corp. The whole concept is to completely separate you from a business venture and the associated risks.

[Matt Bower]

In very large part, law is about probabilities -- and one's level of risk aversion. If you adopt a corporate form and someone successfully sues, will you be personally liable? Maybe. (It depends on things like whether you're observing corporate formalities, keeping funds separate, maintaining corporate books and records, and whether the corporation is properly capitalized.) If you don't adopt a corporate form and someone successfully sues, will you be personally liable? Yes.

 

If you're thinking of adopting a corporate form of some sort for purposes of limiting your liability, be aware that the corporate form alone probably isn't enough, especially for a small company. You need to think about liability insurance, including a duty to defend. Otherwise you could end up winning the suit but being personally bankrupted by attorney's fees.

[B Finnigan]

I always kept a very large personal loan with a high interest rate to the corp payable on demand. It was also recorded with a UCC-1 form so I had first claim if there was a bankruptcy. Bankruptcy will stop any civil action against any entity human or corporate. It won't help if there is criminal activity involved nor will it protect the corp from the IRS.

[Matt Bower]

Bankruptcy will stop any civil action against any entity human or corporate. It won't help if there is criminal activity involved nor will it protect the corp from the IRS.

 

Not just criminal activity. Civil judgments for willful or malicious torts aren't dischargeable in bankruptcy. (And of course lots of other stuff isn't dischargeable, but we're talking about judgments.) But your basic point is valid. Still, I wouldn't make bankruptcy one of my first lines of defense.

[B Finnigan]

I considered it to be the last but I had the structure in place to recoup my start up money investment just in case.

 

Having that huge loan with the high interest rate posted publicly is also a deterrent showing there is no "pot of gold" to go after. That and not having any realestate listed as owned by the corp.

[SteveShimanek]

Do an internet search for the book by Henrickson called Cracking The Code for some very interesting reading on tax law (I am not affiliated but i have the book.) Most people have been misled about the nature of the income tax and the information goes a long way in explaining the actual statutes in force and how they apply. EDITED TO ADD: see losthorizons dot com for more info

Edited April 17, 2010 by SteveShimanek