O/T: Attn. small business owners! Need advice...

Been doing freelance design work for about a decade now. Just moved my butt to California and have been thinkin' that it's time to go legitimate and get a business license (or something more official AT LEAST).

The "5-year plan" (10, 15, whatever) is as follows:

Up until now, my clients have been cash payers and/or work for parts trade. Would like things to be more official for tax and legal reasons. Also hoping the projects will be exclusive to the automotive and/or bike industry in the future with a little mix of misc. design work. In addition I would like to take it to the level of doing some of the fab work for odds and ends that a customer may need, either by farming it out (to a HAMBer of course!) or doing the work myself. Oh yeah, I work out of my home, but if I get into fab work, eventually I would like a small shop space to work out if funds will allow.

So my questions for you small business pros (and specifically California business owners) are:

1) Since I'll be working from home moonlighting for the extra bucks, should I even bother with a business license? If so, what kind and what should I consider? LLC?? IF NOT... how do I handle legal and tax related issues related to the work?

2) What are the tax benefits related to owning a small company and what advantages would I have as a small business owner?

3) Any other tips or advice? Literature sources on the topic? General direction I should go??

Sorry if these seem like elementary questions. I went to school for something entirely different, but have always been interested in owning my own small business, part time or full time. Would like to learn the ropes. I know there are a lot of small business owners here though, and since my desired focus has always been related to hot rod and chopper stuff I thought it might be at least a LITTLE on-topic.

I appreciate advice and/or tips. Whatever you can offer.

Cheers!
Scooter

 

My dad owns the company I work for and it is small, he got it incorporated for a lot of reasons, but we also talk about branching out and starting a new business on the side. I think here it costs something like $75 to incorporate and register your business name. It will help if you do have legal problems to separate the business from yourself some. That way the business is liable for so-and-so and hopefully not you and your family, Although in this sue-happy world.. it doesn't guarantee anything.

Taxes will be more complicated, but at the same time, you can buy supplies and equipment pre-tax.

 

These are the type of things I was thinking as well. I feel it's a cheap investment for at least SOME protection as well as providing some type of tax shelter. Also, the bit about buying equipment and other expenses is also a concern. Computer equipment is required to do my job as well as misc. travel time associated with a project, consulting time (time is money), fab tools (once to that stage), etc. Also, if I need to farm something out for a job, that would be added expenses as well.

 

My wife has had a business for over 8 years, and I joined up with her 3 years ago. Never want to go back to the real world again! My advice is to incorporate or do an LLC also. Remove the liability from you personally.

One thing my dad told me once was as a small business, you can do anything a big company can do. Here's an example: We go to dinner as a family, and because my wife and I work for the same company, we often pay thru the company as we discuss business during the meal.

Another example - we bought a vehicle through our company. We can write off parts of a vacation as long as one of us makes a sales call. All of these are ways to save money or pay for things pre-tax.

You have to be careful and keep0 good records, but if you can find a good accountant, he/she will help you with all of this.

Taxes are the biggest reason to do all of this. On paper I make squat, but in reality, I enjoy the benefits of the company, so I really make more money than I pay taxes on at the end of the year.

 

One bit of caution about " ... making squat" - at least up here in Canada - is;
Tax deductions equaling the "profits of the company" - or income - is allowed for a certain length of time. (this is for a "start-up" business)
Then the tax department expects that you will eventually have,
"A REASONABLE expectation of profit", otherwise they can pull an audit - this can include previous years as well - to see if you REALLY were trying to run a LEGIT business or just "beating" the taxes.

Your best friend if your legit; is a GOOD accountant.

 

All these things are ALSO reasons I had wondered/thought about! I have used the HELL out of my personal vehicle to do side-work related things in the past. I probably add an extra 2000 miles a year to my odometer. Would be nice to write off the milage and/or part of the payment! Spent a lot of money one software and computer crap as well. Really just had it with not being able to write stuff off.

Figured I would hire someone each tax season to handle the details of the paperwork related to the taxes. I'm horrible with taxes.

 

If you're going to buy things wholesale, you'd need a sellers permit from the board of equalization. You'de need to do a DBA with the city you're in first.

Get an accountant as a buffer, plus you can write things off like that new paint job on your ride when you put your company logo on it.

If you are going to make under 10g's a year, I'd say not to bother. There's a lot more I suppose, benn running my own thing almost 4 years now, it's great.

 

Would this apply if you were going to be an "authorized dealer" for a certain product? Is this what you're referring to? Or do just mean if you need parts for a customers request than you would need a permit in order to get wholesale prices? So a business license isn't enough to get wholesale pricing... or that's at the discression of the company selling the parts??

What's a DBA and who the hell is the board of equalization?? Those are new terms to me.

 

Best protect yourself from legal actions against you first. Check online about incorporating, etc. But, you should get a local business license and do a posting in newspaper for "fictitious business name".Business license may activate inspections, depending on exact type of business you run. Most of all get business insurance. You can not rely on home owner or renters insurance to cover things if you have a loss due to business activities. Plus, if a customer ever has cause to take action against you for some reason you will have added protection. How are your neighbors about running a business out of your place? The less you have visible from the street the better. Lots involved, even if you are not making much right now.

 

I did design consulting work for years...the tax benefits are iffy. The rules governing home office deductions are very specific about what constitutes a "home office". I didn't see clients at my home so I never bothered with the H.O. deduction. Also H.O. deductions are a red flag for the IRS. If you are a consultant working from home or on-site at a client's business you have limited expenses so there is little to write off legally. Computers, software, office supples, insurance, were the biggies I could legally take. Mileage can be another iffy area. Not all car expenses are deductible, I took it but I wasn't really supposed to. And remember that you'll have to double pay your social security taxes.
But the thing about taxes is you can deduct anything you want...it's just that if you're audited and you can't back them up or they're disallowed then you're in trouble.
I took the plunge this year and went back to the corporate lifestyle...job came along that was too good to pass up. Do i miss my old schedule? Yes, every single day. But I look at my bottom line and it takes SOME of the sting out of it.

 

This book is a good starting place, Its called "Small Time Operator" by Kamoroff. Lotsa how-to for your initial set-up, and the answers to many of your questions:
http://www.amazon.com/Small-Time-Operator-Business-Trouble/dp/0917510224

 

I'm making an assumption that you weren't reporting the income associated with those deductions... otherwise (via schedule C) you could have deducted all that on your personal return (net with the income) and likely paid taxes on the profit of what you were doing. my rule of thumb: you better be reporting enough income to support the lifestyle/payment books that you have.

 

Our internet and swap meet insulation sales business has grown to the point that we figured that we better get on the up and up with Uncle Sam. One of the bigest perks is all of the things we can deduct at IRS time now that we couldnt before. Also since we have an office in our home we can deduct a percentage of our utility bills, insurance, etc... as a business expense. You can really get creative when tax time comes around.

 

First off, good on ya! It's a big move, and while it sucks at times, it's a great kick start to living...
I'd definitely advise that you register a business name, and get a tax ID.... The benefits are great the first year (you can write off at least one major expense -- computer, etc), and just play it safe with what you're trying to deduct,metc. Set up two accounts at the bank for your business: One for income/expenses, and another strictly for taxes.
DO NOT do any work without some form of contract, or expect to chase payment... Check out the Graphic Arts Guild for some great info and advice... and pick up a copy of their Pricing and Ethical Guidelines -- very sound advice, both legal and creative-wise.

 

I'd walk carefully... don't blurt out the fact that you've been doing business for years. I know of people who had to pay substantial sales taxes that they never collected while doing business "off the record".

As far as the local and state governments are concerned you're just starting up. Zoning may be a factor as well.

As far as "not making squat" consider what happens down the road at retirement time. I knew a guy who showed a tiny income (wink, nod) for years than went to sell out and retire. Well .... who wants to buy a business that pays poverty wages? And guess what, his Social security benefits sucked; just a couple hundred dollars a month. So his nest egg ( the business) was worthless, he had small savings and pathetic social security.

I suppose he could have told potential buyers that he was a habitual liar and tax fraud but... not a good idea.

Not dissing anyone, just food for thought

 

I've owned several LLCs in Florida and would suggest you go that way. Lots of benefits to the small business owner without the double taxation that you get into with a corporation. One huge benefit to owning a business that is car related is that you can get away with writing off a lot of parts, paint etc. Don't go overboard though. And don't try to write off a lot of "business dinners" unless you are in some sort of sales. The IRS pays close attention to things like that. And as was said before, don't do the "home office" thing either. As far as computer equipment, software, tools, and damn near anything else that you can apply to the business is a pretty good write off.

But the best reason that I see for going legit is just that. Your a legitamit business. You can grow from there. Once you start seeing tax benefits you can keep investing in your business. You can also take on more work if you decide to as well because you'll be able to hire employees.

The biggest help for me has been Turbotax soft ware for business. It goes through your entire Schedule C write-offs one at a time. It's a no brainer. I don't even use an accountant anymore. But you might want to the first year if your not comfortable with tax preperation.

Good luck

 

All I can tell you is I hope you like Roller Coasters, because it's not a smooth ride running a business. I've been at this business for 24 years and the roller coaster continues. There are advantages to doing everything legal and forming a corp., but you also open a whole new can of worms as far as inspectors and city workers who have nothing better to do than harass you. And they can make your life miserable(makes them feel powerfull).
But the taxes are a nightmare. Property Taxes, personal property taxes, income tax, and as mentioned double ss taxes, plus when you get employees you get to pay half of there's too. Sometimes it makes you want to get off the roller coaster and move to the Merry Go Round (regular job). Not for the faint at heart. Good Luck Jim

 

yes get a business liscence, for legal purposes and for customer peace of mind. they seem to respond better when you do work for them the first time if you are legitimate. also as far as the tax benefits go if you work out of your house and have ahome office you can write off 10-15% of the house bills depending on the size of your business. we have owned a business for about 12 years, and opened a secong 6 years ago, and a third this past year. The first business has just went corporate for tax purposes and it just seemed fitting to do so. people say dont do the home office thing, we have had one ever since we opened the first business and nothing has ever went wrong with the IRS or anything. Just run a honest business and you wont have a problem. This is a killer all these businesses are family businesses nobody but family works for us. Me and my brother Moonlight on the side for extra money, just turn it in to the IRs that you made the money.

Like Ive said as long as you run a honest business and keep all your info reguarding legal issues, monitary issues, and basicly everything except the paper you wipe your ass on you will be fine. people say we are lucky that nothing has happened becasue IRS attacks small business everyday, and we constantly get the we steal money but we havent gotten caught. over 12 years and 3 businesses i dont think its luck.

The only thing youy have to worry about is people say any of the following. He/She only has that business becasue the sued someone, or won the lottery, or sued someone who won the lottlery or that kinda crap. people will try to bring you down in any way possible if they dont have what you have. Just a little advice.

 

Great replies here!! Thanks a ton!! I will check out all the resources mentioned above as well.

As for my intentions, this is more of a "hobby business" than something I expect to make millions off of and support myself with. I enjoy the design work I do, enjoy helping people with their projects (even helped out a couple HAMBers!) and would like to be able to grow a little, have something to write off here and there related to the business and continue to enjoy what I'm doing. Hard to enjoy being in business when you spend more supporting the business than what you actually make. At this point, I've profitted nothing and have no benefits other than the joy of the work, the people I've helped and the connections and friends I've made along the way. That in itself has been worth it, but in the end, I'm a busy guy with more things going on than ever and in order for me to keep doing what I enjoy, I have to be able to start doing things more like a legitimate business. Plus, when working with people, I want them to feel comfortable that I know what I'm doing and that payment isn't questionable.

Some great advice here. I have a lot to learn, but I think for the type of stuff I'm doing it will/should be cookie cutter set-up. I will HAVE to have a home office for the time being. Can't afford an office space and I don't really need one for that matter just sitting behind a computer. An office space would only consist of a computer, fax, printer, a phone and maybe a couple filing cabinets. No reason to get an office for that. Although, a PO box would probably be a good idea, I'm thinking.

Any fab work will be small and just in the garage and for that matter won't be for a long time down the road, but it would also be cool to do some limited run after-market parts for cars and/or bikes.

Thanks again guys. If anyone has anything to add, keep it coming. Would really like to hear your experiences if you would like to share.

 

If you have not been reporting your income from your not-yet-a-business, then you are getting as much tax advantage as you can....but it's also against the law. Making it legit means you'll have to pay taxes if you actually make money, but you get to write off all that money you spent on "stuff".

I never liked the fact that when I do make money, I get to pay almost half of it as taxes (since my wife's job is our primary income). Thinking about this too much made me get pretty lazy. But if your business is your sole source of income, and you're not making a lot, you won't pay nearly so much of it as (income) tax.

If you have a room in your house dedicated to ONLY work, then it might be easier to do the home office thing. If not it's probably more work to figure out the details than it's worth. if you're working out of your living space then it's not likely you can legitimately take the deduction.

I don't know how things work in CA, but here in AZ I just needed to get a state tax license (transaction privelige tax), so I can pay sales tax, and since I've never been in the city I don't have to deal with the city business permit. Also if you are thinking about hiring someone as opposed to farming out jobs, then you will get into a big can of worms with employment taxes, insurance, inspections, etc. sounds like you don't plan on having any employees, which is a good way to go....although you can't get rich without them....

 

Incorporate. Even if its just your name, do it, it saves a bunch of headaches.

Also, reguarding the write-off dinners, etc. the IRS is getting really perticular about those kinda of things - thanks big abusing businesses for this one - so check it out first.

HB is pretty nice concerning licenses and such, at least with my business (out of city office but work in city). But if you want a shop, go into Orange...great people and Fire dept and city have a kinda no questions asked policy!

 

Before you jump into an LLC, consider an 'S' Corporation. Put yourself on the payroll with a small salary. As an officer of the corporation, you get to pull dividends out at your discretion with a minimal tax hit. At the end of the year, any income tax that the Corporation owes is delegated to the owners of the company (you). Anyway, get yourself one of those kits from OfficeMax/Depot, sign up for QuickBooks Online, get a company checking account, find an accountant and/or bookkeeper, and you're in business!

 

I'm partners in a "small business"-25 employees,pretty big payroll, lots of expenses. Honestly (so to speak) the only real way to do it is the legal way. You DO NOT want to mess with the IRS or even your state tax people. They have no sense of humor. Unless you are dealing with very small individual transactions:
Get an accountant,get an attorney to set things up. An LLC is probably the way to go-but maybe not.
No one likes taxes. But we do like good highways,public safety, tap water you can drink safely almost anywhere and the freedom to complain about our taxes and the government. You have to pay for that somehow. Years ago, my then boss complained about how he had to send 25K into the government for his tax bill. I offered to trade him paychecks on the spot. He wouldn't do it, but he did stop bitching.

Good luck.

Check with your local Small Business Development Council. They offer free advice and can help you set up a business plan, find advisers, get grants,etc.
Keep very good records, both of what you bring in-and who paid you, and what you spend. You may need them to collect from a deadbeat customer or to prove your point with Uncle Sam. No business person ever kept records that were too thorough.
Pay taxes on what you earn. If there's a doubt about whether or not you can claim something,pay the tax. It's way cheaper than an audit,or back taxes and interest and once you get the Feds sniffing-you are in their sights for a long time.

 

I started and incorporated my professional business in January this year. My first step was to find a good lawyer and a good accountant. It has made things go very smooth and let me focus on building my business and client relationships instead business regulations and taxes.

Mike

 

This might sound like a goofy question coming from a CPA, but since a lot of you have stated it was your first step to find a good accountant, can you tell me what you most appreciate or look for in an accountant? Are there things you expected him/her to do that they didn't? sorry to throw it even further off topic....

 

I have a small side line/business did everything legal got audited had to pay $22,000 taxes on equipment and supplies. They said that my deductions were legal to use if I made a profit but because I was in the red it was disallowed and the didn't see me making a profit.So I'm retiring and operate my shop full time

 

MORE great info!

jmn444... not of THIS topic... BTT for you and for this topic. Hearing a lot of different answers, but all good ones. Like the idea of finding my Local Small Business Dev. Council. May some direct advising can be obtained.

OR... is there a "small business for dummies" book?

 

My business is an S-corp. I dont remember the particular benifits that make it better, but I was talked into it. I pay myself just what I need for personal living expenses, and everything else like parts, tools, supplies, fuel, travel, some utilities, goes through the business. That way you only get taxed on what you pay yourself, But I do have to have unemployment insurance, and send in taxes every 3 months.

 

New week... for grins lets bump this back up for any new thoughts.

 

As far as your business not showing a profit, I think there is a 5 year limit... then they may start looking at you... Like someone else said, "Just like the big businesses do" dissolve that company and open a new one.

Incoporation is good.

Let's say you put together a color catalog for someone, then you have a printshop print up 5000 of them... the client then decides, for whatever reason, not to pay (... that's not the right red, I wanted RED red!). Now you have 5000 pieces of kindling and a big print shop bill. Legal action would cost too much and take too long (they aren't going to go past 90 days), at least only the business gets hit, not you personally. I've had a few close calls going without incorporating, but I've been REALLY lucky. I don't do big stuff anymore.