Should I get my LLC??

Guindesigns

Well-Known Member
Ok right now I'm not making nearly enough knives to say I have a business, as much as I like saying it. I right now can safely say it's a hobby. But not a full fledged business. Should I get my LLC or no. If not how can I sell my knives. I have a Facebook page but I was told that if I sell off that the IRS or the State government can try and shut me down for selling knives and them not getting their piece of the pie. Please I'm worried about getting it and have to pay taxes with me not making enough knives to sell in the first place.Thoughts? Comment?? Advice?
 

Casey Brown

Well-Known Member
So, I did create an LLC. I'm really a beginner and have only been making knives now for a few years. I just created one at the end of last year. I also got an IRS EIN number, and registered with the state for sales tax purposes. The main reason I did create one was to be able to deduct my expenses for gear and supplies for creating the knives. However, there's a catch with that also. You have to make a profit within the third year. The IRS says that if you are only losing money, it's a hobby, not a business. When I set down and totaled up how much I spent in a year for supplies to get initially set up, I was very surprised at how much I had spent. I then did a schedule C on my 1040 tax return to deduct the expenses. The state of Virginia requires monthly sales tax reports, so stay on top of that or there are penalties involved.
 

Uconnhuskies

Well-Known Member
I start by saying I am not a tax attorney...... At a high level you have two separate tax issues to address. Sales tax and income tax. An LLC doesn't address the sales tax issue. You can operate a business without an LLc but still have sales tax implications you have to address. From an income tax perspective, assuming you will be a single owner LLC, you will pay income taxes at your personal rate n your personal fed tax return. The benefit of an LLC comes from limiting your personal exposure to liability from the business, in other words your liability is limited to the money you invested into the business and uninfected monies such as your house are not at risk of you haven't leveraged them for your business. This can be a major benefit, like incorporating would be but their is much less paperwork involved in an LLC vs an INC. Also if you have a partnership in the venture an LLC helps create some of the benefits of an INC with much less administrative work.

Since this is most likely a risk mitigation discussion "your mileage may vary" in how much you value an LLC.
 

KenH

Well-Known Member
The IRS says that if you are only losing money, it's a hobby, not a business
So if it takes me more than 3 yrs to turn a profit it's a hobby and I can't deduct expenses? BUT - do I have to pay IRS income tax on sales? How does that work?
 

Bruce McLeish

Well-Known Member
The taxes that you are paying on sales are state taxes ( in CA those are payed to the franchise tax board). The taxes that the IRS collects are on INCOME.
So if it takes me more than 3 yrs to turn a profit it's a hobby and I can't deduct expenses? BUT - do I have to pay IRS income tax on sales? How does that work?
If I'm correct , you can deduct expenses , you just have to show a profit in year three. If you are going this route , the first expense is lawyer , the second is a CPA. At least that's how it works (or worked 20 years ago) when we had our own business here in CA.
 

KenH

Well-Known Member
Let's forget about sales tax. Also understand I'm not worried about taxes since I seldom sell a knife. Most all I've made are given away to family 'n friends. Just a true hobby for me, seems expensive but cheaper than a bass boat {g}

I hear (read) what you're saying about showing a profit in 3rd year if it's to be a real business. Let's take an example. I sell 10 knives each year for 3 yrs for $120 each, that's $3600 dollars gross sales for 3 yrs. Counting capital costs (grinder, milling machine, lathe, horizontal grinder, disk grinder, SGA, etc) there is going to be a LONG time before actual profit is shown. Let's say each $120 knife sold has $60 of expendables (sandpaper, sanding belts, drill bits, scale, metal, etc) cost, that's $600 profit per year (before capital costs are factored in). Since IRS says I'm required to pay income tax on any income, and since I'm not a business since I can't show a profit in 3 yrs due to capital costs, am I required to pay income on the $1200 knife sale for each year? Remember, I'm not allowed to deduct expenses since I'm a hobby knifemaker.

That all isn't written very clearly, and it shows I've got too much time on my hands today {g}.
 

Bruce McLeish

Well-Known Member
That's why I said CPA. They don't cost much for a consultant as your first step and they will put you on the right track.
 

Casey Brown

Well-Known Member
Yeah, I definitely am using a tax preparer now through a CPA. So, understand that you are allowed to have loses the first two years, where most of the capital costs are incurred. The IRS expects that for a business. Those are written off as loses and can be used to deduct against taxes. Profit and loss are on a yearly basis. So if next year, I do not buy any additional supplies, and I sell a knife, I've made a profit. At least that is the way it has been explained to me. I may be starting out totally wrong, but I do have family members who have businesses, so I did get a lot of advice before coming to this conclusion.
 

BossDog

KnifeDogs.com & USAknifemaker.com Owner
Setting up an LLC and working with a CPA can significantly reduce your taxable income. Significantly.

Most states have an online process to set up a simple LLC. CPA’s cost $100 or more per hour but again, a CPA can more than pay for themselves in tax savings. It’s about legitimate deductions. The three year thing to turn a profit may or may not apply to you.
 

Casey Brown

Well-Known Member
Very true, Tracy. I'm speaking from my experience, as filing as a sole proprietor LLC with a schedule C. Another filing form is a K-1 or 1065, which was an option also but more complicated. You really need a CPA to give guidance on which direction to go. As Tracy mentioned, I did same some taxable income through filing this way, and should this year also as I've had some larger expenses filling out my shop. I'll just have to watch my expenses next year.
 

Guindesigns

Well-Known Member
So with me not making knives but like once a year right now should I worry about getting an LLC or any form of business licences?
 

BossDog

KnifeDogs.com & USAknifemaker.com Owner
I am not an attorney or CPA but I have gone through all this with a CPA and lawyer:

An LLC helps shield you from liability and may or may not affect taxes depending on what type you get. They are usually easy to obtain and inexpensive. Someone can't get hurt and take all your assets with an LLC via a lawsuit.

Filing taxes as a business or hobby business is different and doesn't necessarily require an LLC. In some cases there are significant expenses related to knife making and your individual taxable income situation could benefit from a review by a CPA. A net loss of profit, after deducting expenses can be used to lower your taxable income and you get to keep more money. Losses can be carried over and applied to future taxable income.

If someone is going to make and sell knives, even part time, they should look into an LLC and meet with a CPA.
 
Top