Should I get my LLC??

Guindesigns

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?
 
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.
 
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.
 
Casey Brown said:
The IRS says that if you are only losing money, it's a hobby, not a business
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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?
 
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.
KenH said:
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?
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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.
 
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}.
 
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.
 
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.
 
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.
 
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?
 
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.
 
Is it possible to form an LLC and still keep the knife making as a hobby on your taxes? I really like the idea of protecting my assets with an LLC, but my knife making will always be low volume, maybe turning out one knife per month.
 
j elky said:
Is it possible to form an LLC and still keep the knife making as a hobby on your taxes? I really like the idea of protecting my assets with an LLC, but my knife making will always be low volume, maybe turning out one knife per month.
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If you're a single member LLC then the IRS considers it the same as a sole proprietor and you fill out a schedule C when you file your personal taxes. It's taxes so it gets complicated as F, but in the end you'll figure up your cost of goods sold, which will subtract items used to make the knife (glue, metal, handle material, pins, etc.) from how much you make. Your business expenses will also be deducted (belts, equipment, etc.). The final result is what you're taxed on, and that total (positive or negative) goes towards your personal taxes. I, for example, have a full time job, so the knives I make this year won't end up counting towards anything because I've bought several expensive pieces of equipment. Our personal taxes will actually have a lower AGI than normal because of all of it getting deducted. It won't really affect you as much as you think, if you're only making a small amount. On the other hand, you do have to pay sales tax, and that (at least in Georgia) is owed monthly. Once you've made your business "official", I don't think there's any way to get around paying taxes, but it's not that big of a deal if you have another job and are already having taxes taken out. Speaking to a professional is always for the best though. I usually do my own taxes online, but since I've made everything legit this year I'll be paying a professional to do it. Just make sure you keep receipts for everything and create invoices for sales.
 
Always talk to a CPA about these things. They will charge you several hundred dollars but can save you thousands and thousands.

I operate my business under two different LLC's. They offer some liability protection and tax benefits. There is often more than one type of LLC offered by a state. I switched mine from a "sole proprietary" ownership to a type "S" after I paid an attorney to research my situation.

Some things to consider:
  1. If you call your knifemaking a hobby, you set yourself up for losing an audit with the IRS. Call it a small business because it is.
  2. keep records and receipts. If you get audited you will need them.
  3. You will need to show some income at some point. ie you can't sell for cash, never declare any income and then expect to be able to take deductions forever. You will lose a judgement by the IRS if you are audited.
  4. Every knifemaker can be a small business, even if you make just a few knives a year.
  5. There is a myth that you have to make money at your small business. You don't and you don't have to be "good" at running a business to own and operate one.
  6. The benefit, at least when you are starting out, is the deductions you can take against income. You can carry a loss balance over year after year until you can eventually deduct it all away.
  7. Your deductions can be significantly more than your income for at least a while. That is often what it takes in business to get going and is very common.
 
BossDog said:
Always talk to a CPA about these things. They will charge you several hundred dollars but can save you thousands and thousands.

I operate my business under two different LLC's. They offer some liability protection and tax benefits. There is often more than one type of LLC offered by a state. I switched mine from a "sole proprietary" ownership to a type "S" after I paid an attorney to research my situation.

Some things to consider:
  1. If you call your knifemaking a hobby, you set yourself up for losing an audit with the IRS. Call it a small business because it is.
  2. keep records and receipts. If you get audited you will need them.
  3. You will need to show some income at some point. ie you can't sell for cash, never declare any income and then expect to be able to take deductions forever. You will lose a judgement by the IRS if you are audited.
  4. Every knifemaker can be a small business, even if you make just a few knives a year.
  5. There is a myth that you have to make money at your small business. You don't and you don't have to be "good" at running a business to own and operate one.
  6. The benefit, at least when you are starting out, is the deductions you can take against income. You can carry a loss balance over year after year until you can eventually deduct it all away.
  7. Your deductions can be significantly more than your income for at least a while. That is often what it takes in business to get going and is very common.
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That's excellent information Tracy. Thanks for posting
 
Sorry for a post years after the thread's started.

One thing to think about is, if you register as a business or LLC, what does your community have to say (ordinances) about you running a business that manufactures cutlery at that address, especially if it is your home? Also, check house insurance - that'll change, too.

When I checked into it, the city I live in wouldn't allow this type of work at a residential address. Insurance just laughed. That was part of what drove me out of selling.
 
I had a similar situation quite recently. I believe that if this is a hobby for you, you should not pay taxes at all. If I sell my knife to my friend, will I deceive the state? No. But if you are going to regularly sell knives, it is better to create an LLC and pay taxes. But keep in mind that your business will most likely not be profitable at first. I recently calculated approximately my W2 form online on a calculator https://www.thepaystubs.com/w2-form-generator and it turned out that I pay more taxes than I receive revenue. Now I have decided to close my LLC and only occasionally sell a pair of knives to someone I know, because for me this is also more of a hobby than a business.
 
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Prolly doesn't really matter what we think....if the Gov't thinks we're running a business per THEIR definition...we are. Once money is regularly changing hands things get dicey....lol.

Tracy's advice above is excellent for both liability issues and keeping the IRS off your back...
 
Perhaps I missed it, but here's a couple of tips I learned after running several LLC's for over 40 yrs.
What ever you do, setup a separate bank account in the business form you decide to use. This is critical to show a separation between your business financial transactions and your personal banking transactions. DO NOT commingle your business and personal banking activities. It's really easy to mix business and personal income and expenses, and it's an IRS trap when you try to show you have an independent business.
Also consider: getting checks printed with your company name, address and phone number. Get a credit card in the business name to use for online purchases. Get some business cards, either cheaply made or fancy. Get a phone in your company's name (or transfer your existing line). All these things taken together demonstrate that you are a legitimate business.
So, when you buy something that you want to expense for the business ALWAYS make sure the charge comes from your business account, not your personal account, and likewise income you receive from selling your products (or services) must go into your business account.
 
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