Small buisiness question

W

Whoever Wherever

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Nov 17, 2006
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At what point is it important/legaly required to become an actual business with license and tax ID? I have sold a few knives to friends but now have a few stores willing to give me display case space. Is there a number of knives that would make me a knife maker or is this just a hoby that makes me a few dollars that get reinvested anyways? I know that small scale firearm makers are able to use a tax exemption provided that they make under a certain number of guns a year. My understanding is that this was to help small craftsmen stay in business. Is there any such leeway for knife makers. If I start to sell knives in these stores with even limited sucess I will certainly talk to a tax attorney but at this point I am just wondering if I need a business license before I place any knives in the stores in the first place. Thanks for any input. The business licensing department was not helpfull in this matter. I know that the profits from the knives are extra income as far as the IRS is concerned, just not shure about when you are considered a business.
 
Jim
I am not sure about the busniess end. If I was considering it I would form an LLC for liabilty protection. Leaglzoom.com is a place to start looking http://www.legalzoom.com/pricing/llc_pack_b-a.html. Alaska looks to be $250
The way I understand it is that it protects your personal/family assets from litigation (i am open to correction) The LLC could rent shop time from you to make knives protecting your equipment as well.That sounds complicated though. Hope this does not confuse things
Tom
 
I just began to talk to my accountant about this. The things I know so far are:

- Save receipts! Hobby expenses are deductible.
- If you sell in your state, you should have a tax ID and collect and pay sales tax.
- If you go to another state for a show, you should have a tax ID and collect and pay taxes for that state.

I'll be talking to my accountant more about forming an LLC later in the year before I do my first show.

-d
 
Hobby expenses are limited to hobby income. Business expenses are not. However, IRS would like businesses to show a profit at some point. I am leaving many of the exceptions out, but I think you get the point.

Local & State laws vary. Where I am, you need a license/permit to have a garage sale. Sales tax should always be collected and the forms completed unless there is a specific exception granted by law.

I have found the Secretary of State's office to be the most helpful (at least in the southern states). Some even have a business package that they will send you with a step by step guide to starting a business.

There are two issues here.
1. Obeying the laws.
2. Paying the least income taxes.

Whether you are a hobby or a business, you have to obey the local sales laws, but you can always overpay your income taxes.

Jim
 
Thanks for the answers. I am lucky that in Alaska there is no sales tax so thats one worry I dont have to touch. We also dont pay state taxes on our wages but I'm not shure how thats translates to owning your own business. I had thought once I formed a company that creating it as an LLC would be a smart move, so I will look into that for shure. I'll try and get in touch with the secratary of states office for more info.
 
I have 25 years bookkeeping experience and have dabbled at the small business issues in the past. I also have some extra education regarding business entities and how they are treated.

LLC -- limited liability corporation. Check the corporation laws for your state but you should be able to set up as a sub-chapter C, where all income is a pass through to the stockholders and the corporation doesn't pay income tax, only state corporation taxes (franchise tax in Texas.) Sales tax -- if you sell anything at a profit, you need to collect sales tax, but I believe Alaska is one of the five without state sales tax, although you may have some local sales taxes you have to deal with. Incorporating does help to shield you from liability issues, but more importantly, it helps in credit/delinquency issues. If you are any legal entity other than sole proprietor or general partnership, should some liability or delinquency/bankruptcy issue occur, the creditors cannot come after the individual (or their estate if deceased) for any debt or personal liability incurred by the corporation. When signing credit applications, you need to be certain you sign as an officer of the corporation, not as an individual. And never, absolutely never, sign a personal guarantee for the corporation (or for any individual for that matter.) That would totally eliminate the protection of the corporate entity and make you as an individual liable for any debt (and possibly injury if signing a waiver of liability for the store.)

Hope this helps. Something I've been thinking about lately, trying to prepare for the future. If you knew my son personally, you'd understand better. (And after dealing with my parent's estate issues lately, my future destiny is becoming more important. Don't want to depend on him the way my parent's had to depend on me.) What can you expect from some young buck anyway -- they know more than the rest of us, or so they think. :-)

Mary
 
Thanks Mary, my wife and I are Starting a LLC so all info is a big plus to us. Wanna do it right the first time around.

P.S.
You know youngun's are never to old to whup up on, being your his mom and all.:D
 
States have different requirements. You need to check with your state to meet those.

As far as I understand it (which may be wrong) for the feds if you don't have any employes and don't incorporate as a business (or form a partnership) as long as you report the income on your federal tax return you are good. If you incorporate or hire employes the feds require a tax ID. If you don't incorporate then if someone decides to sue all of your assets can be at risk (a big reason for the LLC form of the corporation).

It may be worthwhile to talk to a lawyer who specialized in buainess affairs.

ron
 
I think Ms. Mary made some good points. An s-corp can be more favorable for some folks. I'd second getting good legal and accounting help, at least to set it up.
Good luck to all in the process, Craig
 
And when I was explaining the reason for forming the LLC to my son, he brought up a good point, considering you are knifemakers. If you make and sell a knife, and someone uses it as, say a prybar, and the blade breaks off and schrapnel flies in smart guy's eye, smart guy may decide to sue for damages. If smart guy uses it to prove a point to his brother-in-law, who may bleed more than he should from an artery, the brother-in-law's family may be hard pressed to sue you for negligent homicide, since you made a deadly weapon. Sue Schrade, Leatherman, Winchester, Old Timer, etc, first, as they have tried to do with the gun makers.

Either way, limiting your liability against smart guy (Here's your sign) is never a bad idea. It's really not a matter of tax issues as much as liability against damages. It shouldn't cost a lot to do it, but definitely consult with an attorney on these issues and try to do it as cheaply as possible. You also might want to check with your insurance agent (they don't charge for their time) and ask if you need general liability insurance. If you don't incorporate and plan to do this a lot, that may be your other option.

As for young one, he's an only child and almost a foot taller than me. But I know the tickle spots (being short does have it's advantages) and he likes my cooking, so he'll behave about as good as any other guy his age. But he is a guy so I can't expect much from any one in that group!

Mary
 
If yall need any more help from my mother on this matter or any advice in regards to book keeping or something, let me know and I will pass it on to her or you can email her at mac951dd@yahoo.com. She has her CBA (Credit Business Assoc.), CBF (Credit Business Financial), and her CCE (can't remember this one). She is also a credit manager and has been doing it for as long as I can remember.

I saw what she wrote about me and the rest of us guys in general and I gave her a funny look about it and she just smiled and walked away. I need to get her back for that tho. :D
 
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