New Studio Part 1: Starting - DPChallenge Forums

Canon EF 24-70mm f/2.8L USM

12/05/2004 01:37:38 AM · #1

I sorta promised a few people I would write some stuff about what I've been learning in my first six months in business.

I was asked to shoot my first wedding in March of this year. That was for a June wedding. I shot my first wedding in April, however, for a friend of my fiancee who asked me 3 days before her wedding. I shot it with very little decent equipment, no real clue what I was doing, and enough assurance from the b/g that they had no other plan at ALL that I agreed to do it. "Why not?" Oye! Why not?

(NEVER do a free wedding. If you are not confident in charging for a wedding, assist someone first. Never ever, and I mean friends, family, dog's cousin, do a free wedding. They are not worth it.)

Lesson 1
The first lesson is an easy one: get official as soon as you make the decision to go full time. We spent a lot of $ between May 28th and Sept 4th when we filled out the paperwork to become a partnership. All of that money was 'wasted' for tax purposes because even though we kept our records, the company didn't exist. Of course this didn't hurt us much in that our first wedding was FREE and our second was cheap. However, we booked another for a good sum before Sept 4 and we lost every bit of 'expense' we'd put in until that point.

What kind of business do I want?
There are 5 types of business forms you can choose from:
1) Sole proprietorship.
2) General partnership.
3) Limited partnership.
4) Limited Liability Corporation.
5) Corporation (& S Corp).

Each has advantages and disadvantages. For the sake of argument, let's say you do not choose to be a corporation. This leaves you with a sole proprietorship or a partnership.

Sole proprietorship
A sole proprietorship is the easiest business to form. There is a nominal fee, a couple of papers, very little government (US at least) interference, and you are the boss, owner and everybody in between. In a sole proprietorship, what you say goes. Someone's hired, fired on your word. You do not share profits - it's all yours! The disadvantages of a sole proprietorship is that the business ends with your death. No more studio without you. You have unlimited liability - screw up the wedding and they can sue you - not the company - but YOU. Sole proprietorships also have the most trouble raising funds and go broke the fastest. They have the highest failure rate of all businesses.

Limited partnership
A limited partnership means that one person (the managing partner) is responsible for running the business. The other partners (limited partners) are responsible for providing $ and getting out of the way. The only real benefit in a limited partnership is being the limited partner. Unless you are extremely low on funds and low on ways to get funds, this is probably to be avoided in a photography studio.

General Partnership
Our business is a general partnership. Partnerships are not very difficult to form. In addition to a few government papers, you also must write up a partnership agreement. This can be as few as 5 or 6 paragraphs. There are guides all over the Internet on how to write one. You are still the boss, but so is someone else. Disagreements over the direction of the business are a problem unless areas of authority are clearly mapped out ahead of time.

With a partner, you can complement abilities. One's a good businessperson or salesperson and the other is a fantastic photographer - great! Some disadvantages of partnerships besides disagreements are that profits are shared, there is still unlimited liability, and partnerships are difficult to dissolve.

Despite the drawbacks, we chose to be a partnership. We have clear lines of authority, we talk about our decisions, and since we live together, business meetings are easy to schedule. :)

Once you are 'official' with the state, keep and document everything.

If anyone is interested in this series, the next lesson will be on bookkeeping, setting up shop, and getting started.

M

Message edited by author 2004-12-05 01:39:17.

dwterry

Canon EOS-1D Mark III

12/05/2004 01:50:12 AM · #2

This is interesting... keep the series going. :-)

jbeazell

Nikon D3100

Nikon AF-S DX Zoom-Nikkor 18-55mm f/3.5-5.6G VR

12/05/2004 03:03:29 AM · #3

yes..thank you! Very interesting stuff!

-Jason

KevinRiggs

Canon EOS-1Ds

Canon EF 24-105mm f/4.0L IS

12/05/2004 03:58:38 AM · #4

Mav,

From my experience with opening propietorships, partnerships and sub-chapter "S" corporations you need not "lose" all your investments up until the point at which you filled out the legal paperwork. If you are a sub-chapter "S" corp then you can count all your equipment and costs as material investment into the corporation and should the business take any other losses throughout the year you can take that straight to your bottom line based on percentage of ownership which should in some way be based on the material investments made to the corporation by each of the principals. As a sole proprietorship your bottom line is the business' bottom line and you should be able to write off any investments you've made in equipment or services in the name of your business even if your business didn't have a name but was an eventual goal. As long as you bought equipment and in the same year earned any dollars with that equipment, then as a sole proprietorship you should be able to get "full credit" (which for most camera equipment means that you can write off 20% of the value in depreciation in the US). Had you started your business last year (2003) you would have benefitted from a smal business break that the administration put in place which allowed 50% of equipment or services (for certain types of businesses like photography) costs to be written off to depreciation in the first year (and I'm thinking that anyone who's serious about making a side job or full-time job outta photography probably knows that the development cycle on camera is more like 36 months than 60 months so that was a nice little gift).

Keep in mind, I'm not a CPA or lawyer and I don't know how you chose to constitute your business entity. I just wanted to clarify that it is not accurate to say that in all cases would you lose 100% of the value of your purchases or expenses.

Kev

PhilipDyer

Canon EOS-5D Mark II

12/05/2004 05:22:14 AM · #5

Hi Matt,

That was really great of you to take the time to explain the types of businesses and why you chose yours. I'm looking forward to seeing more of the series and very much appreciate you writing it. Thanks!

Canon EF 28-135mm f/3.5-5.6 IS USM

12/05/2004 09:51:37 AM · #6

Kevin - thanks for the additional info.

I am trying to avoid a very complicated tax lesson here - that may come later. lol

You're right in that ALL startup costs can be ammortized - over 60 months. The real problem is that expenses other than capital expenditures should not have to wait 5 years to be dealt with.

Example: we buy a camera (say $1500), a photo album for resale (say $300), and place an ad in the paper (say $50). Then we form our business.

This year:
Camera can be expensed for $300.
Album and ad can be expensed for $70.
Next year:
Camera can be expensed for $300.
Album and ad can be expensed for $70. Total 2 year expenses: $740.

Now let's look at what would have happened if we'd formed the business first:
This year:
Camera can be expensed for $300.
Album and ad can be expensed for $350.
Next year:
Camera can be expensed for $300. Total 2 year expenses: $950.

(I know that's simplified math - there's a scrap value at the end of 5 years, etc, but I'm trying to keep it fairly simple - the figures work out the same in the end whether you take $100 or $300 off for the camera's scrap value).

My goal is to be profitable (for me, not tax purpose profitable) in 3 years. For those first 3 years, I want everything to be as deductable as possible to allow me to build up the business without paying dearly for that at the end of the year. I figure that 3 years into our business, we'll be at the beginning of some depreciations, the middle of others and the end of some - and that will work out for how our business will be in the long term.

For the first three years, however, I want to pay as little as possible - and that would have been best accomplished by forming the business before advertising, before buying inventory, before joining trade organizations, before buying insurance, and before incurring office expenses.

All of those expenses done prior to legal startup are ammortizable but in the case of the album, it doesn't make sense to wait 5 years to get the tax benefit. :) That's the type of stuff I was talking about.

M

Message edited by author 2004-12-05 09:53:00.

ClubJuggle

Canon EOS-400D Rebel XTi

12/05/2004 09:58:45 AM · #7

Matt --

If you have not done so already, talk to a qualified accountant with experience in tax accounting for small businesses. I'm not sure you are correct about not being able to deduct expenses prior to the partnership paperwork being filed, and there are options such as Section 179 depreciation that may allow you to deduct your equipment on an accelerated basis.

-Terry

digistoune

12/05/2004 10:33:52 AM · #8

Terry is right - talk to an accountant! I'm in the same boat as you and in the process of getting everything 'legal'. Anyway, my accountant talked about several ways to deduct for expenses and at the end of the year (April) we will look at the books to see which direction the deductions should take to get the best deal.

I gotta tell ya, taxes are a pain! I have my retail lisence and have to file a return on the 20th of every month, sales or no sales. I'm sure I'll get more comfortable with experience but they sure don't make it easy to understand this stuff. And then there's this "sales and use" tax which applies to equipment purchased via online vendors. I don't have to pay tax to the vendors but I do have to pay 'sales' tax to the state of SC and these taxes are billed on the 20th as well. My accountant told me that use tax is something that will get you audited fast if you write off equipment. Man, they get you coming and going!

So my point to all this whining is that going into business for yourself is rewarding in SO many ways but lots of photographers, good photographers that take awesome photos, go out of business because they don't understand the importance of the administrative details.

By the way, good book to read is Zimberoff's "Focus on Profit"

KevinRiggs

Canon EOS-1Ds

12/05/2004 11:17:22 AM · #9

Mavrik,

Yeah, that's a good explanation of the difference. I can see how with two different goals (this is your full-time gig and for me its just a way to defray the costs of buying my way into the equipment so that I can build a clientele that I enjoy working with over a long period of time) we may have different tolerances on how quickly we get recognition for the resources that we put into our respective businesses. In my scenario I have a job during the day that allows me to pay my bills and photography allows me to drop $2-10K a year so that I can get a nice little chunk of my taxes back while getting to play with some cool equipment. For you, you wanna build a business into profitability quickly. Don't get me wrong about my goals, if I get an inroad to a contract that'll let me shoot in my off hours and pickup more money than I spend that year then I'll take that; this ol' boy ain't turning away any extra money but I have the luxury of a little more time and I still want to grow and I feel like my clients will benefit from me practicing more and more so that I can compensate for my lack of artistic vision when compared with the work that some of you, my competitors, can provide for them (so I'm not driving my own business as hard as you probably will be).

Ellen, I just wanted to clarify your statement regarding "sales & use" taxes. "Sales & Use" tax doesn't apply only to online purchases. There are two kinds of taxes that the government is pretty uptight about you reporting (in my experience). The first is retail sales tax. What did you sell and how much of a cut should they get out of it. That's why you have to turn in those returns on the 20th every month (some states allow you to file quarterly based on your volume to save a little hassle but you still have to account for every penny so what's the real difference). The other thing they want to know about is what did you buy for your own use. As a reseller the government affords you the right of recognizance. Only you know when you purchase a picture frame (or any other object) if you plan on using that or selling that (hence the name of the tax). If you plan on using the object yourself then you should pay tax on it. If you plan on reselling it then you get a tax break off that item (Wal-Mart or whoever doesn't have to charge you tax so you actually get to buy something for the price that you see on the shelf). The government gives you the benefit of the doubt by allowing you to decide if you need to pay taxes at the time of the purchase rather than requiring the store that sells it to you to collect the taxes and then requiring you to fill out a form to have money sent back to you if you are going to resale the item. This foster business, the govt only gets involved at the end of the whole process and it affords you the ability to decide for yourself about the taxes and you even get some flexibility because you don't have to immediately sell the item to be eligible for tax exemption.

Example:
I need to buy a white colored mat, a black colored mat and a picture frame with glass.
White mat $ 0.50 (not realistic)
Black mat $ 0.50
Frame w/glass $ 10.00
tax $ 0.00
total paid $ 11.00

Why do you do this? Because the government doesn't get to be paid twice. If you pay taxes on this equipment and then resell it to me as a consumer, you are legally required to collect taxes for the government. If you paid taxes at the time of purchase then the government would get paid twice; once when you bought it and again when you sold it to me.

To buy products without tax penalty at retail or wholesale outlets you should provide them with your Employer Identification Number (EIN) which you obtain by soliciting the IRS via a form on their website (too lazy to look it up but its fairly easy to find). Even if you're a sole proprietor you should get an EIN since its easy as filling out a form and mailing it to the IRS and if you don't then you have to use your social security number on your tax exempt forms. Once you have your EIN (or SSN if you wish) you can get a tax exempt form from the IRS (again I think they have it on their website). Its about 8.5" x 5.5" (or a half sheet of paper) and it includes areas for your business name and address and your identification number (EIN or SSN). You will have to take this with you along with a copy of your paperwork from the IRS stating that you are a legitimate reseller of goods (its one piece of paper with your EIN) and the store (WalMart in my hypothetical case) will put that on file. From then on, you simply have to take a new half-sheet tax exempt form for each sales transaction and you can buy goods to resell from other resellers. There is a caveat, however. After some statutory period of time (at least this is the way it used to be) if you purchase something for resale and it stays in your inventory over a certain length of time (perhaps 60 months) then you are required to pay the "use tax" which would be equal to the original "sales tax" that you would have paid on the item.

I've rambled on for quite a length but I hope it brings a little more clarity to Sales & Use taxation.

Kev

12/05/2004 11:28:23 AM · #10

Bingo. Now this first edition has a lot more (and better!) info. I definitely thank everyone for helping add to it and fix it. I'm not a new studio god by any means - I just figure the experiences one of us goes through should be similar to the experiences many of us may go through. :)

M

digistoune

Canon EF-S 18-55mm f/3.5-5.6

12/05/2004 12:11:15 PM · #11

Originally posted by KevinRiggs:

Ellen, I just wanted to clarify your statement regarding "sales & use" taxes. "Sales & Use" tax doesn't apply only to online purchases. There are two kinds of taxes that the government is pretty uptight about you reporting (in my experience). The first is retail sales tax. What did you sell and how much of a cut should they get out of it. That's why you have to turn in those returns on the 20th every month (some states allow you to file quarterly based on your volume to save a little hassle but you still have to account for every penny so what's the real difference). The other thing they want to know about is what did you buy for your own use. As a reseller the government affords you the right of recognizance. Only you know when you purchase a picture frame (or any other object) if you plan on using that or selling that (hence the name of the tax). If you plan on using the object yourself then you should pay tax on it. If you plan on reselling it then you get a tax break off that item (Wal-Mart or whoever doesn't have to charge you tax so you actually get to buy something for the price that you see on the shelf). The government gives you the benefit of the doubt by allowing you to decide if you need to pay taxes at the time of the purchase rather than requiring the store that sells it to you to collect the taxes and then requiring you to fill out a form to have money sent back to you if you are going to resale the item. This foster business, the govt only gets involved at the end of the whole process and it affords you the ability to decide for yourself about the taxes and you even get some flexibility because you don't have to immediately sell the item to be eligible for tax exemption.

Example:
I need to buy a white colored mat, a black colored mat and a picture frame with glass.
White mat $ 0.50 (not realistic)
Black mat $ 0.50
Frame w/glass $ 10.00
tax $ 0.00
total paid $ 11.00

Why do you do this? Because the government doesn't get to be paid twice. If you pay taxes on this equipment and then resell it to me as a consumer, you are legally required to collect taxes for the government. If you paid taxes at the time of purchase then the government would get paid twice; once when you bought it and again when you sold it to me.

To buy products without tax penalty at retail or wholesale outlets you should provide them with your Employer Identification Number (EIN) which you obtain by soliciting the IRS via a form on their website (too lazy to look it up but its fairly easy to find). Even if you're a sole proprietor you should get an EIN since its easy as filling out a form and mailing it to the IRS and if you don't then you have to use your social security number on your tax exempt forms. Once you have your EIN (or SSN if you wish) you can get a tax exempt form from the IRS (again I think they have it on their website). Its about 8.5" x 5.5" (or a half sheet of paper) and it includes areas for your business name and address and your identification number (EIN or SSN). You will have to take this with you along with a copy of your paperwork from the IRS stating that you are a legitimate reseller of goods (its one piece of paper with your EIN) and the store (WalMart in my hypothetical case) will put that on file. From then on, you simply have to take a new half-sheet tax exempt form for each sales transaction and you can buy goods to resell from other resellers. There is a caveat, however. After some statutory period of time (at least this is the way it used to be) if you purchase something for resale and it stays in your inventory over a certain length of time (perhaps 60 months) then you are required to pay the "use tax" which would be equal to the original "sales tax" that you would have paid on the item.

I've rambled on for quite a length but I hope it brings a little more clarity to Sales & Use taxation.

Kev

Hi Kev!
I know what you mean about taxable goods used in business but what I'm talking about is Use Tax on equipment purchased. Here's this little blurb from the South Carolina Dept. of Revenue:

More About Use Tax

Use tax commonly applies to purchases from, but not limited to, mail-order catalogs, television shopping and telephone shopping. Businesses which regularly make non-taxed purchases out of state report and pay the use tax on their monthly sales and use tax return, Form ST-3. Individuals not in business who make non-taxed purchases out of state should report the use tax on Form UT-3, Individual Purchase Use Tax Return. This form is included in the South Carolina individual income tax forms package mailed to taxpayers each year.

Many catalog and mail-order companies already collect South Carolina's sales or use tax when you make a purchase. If the business does not collect the tax at the time of purchase, you are responsible for reporting the purchase and paying the tax yourself. If you make a purchase in another state and pay less than the tax which would be due in South Carolina, you should report and pay the difference on Form UT-3. A credit is allowed for sales tax due and paid in another state.

So according to that and my accountant, I do have to pay tax on equipment I purchase online. Aren't taxes fun??!

Sonifo

Canon EOS-400D Rebel XTi

12/05/2004 12:42:56 PM · #12

Excellent information, Mavrik. I will be waiting for the next bit and keep reading this as the conversation carries on.

Confusing, but I think I am getting most of it.

Tamron SP AF 28-75mm f/2.8 XR Di for Canon

12/05/2004 02:41:53 PM · #13

You chose not to write about LLCs but I think they deserve a brief mention because they are a good option for a start-up business.

Limited liability corporations are good because they have the advantages of a partnership (ownership, management) but also the liability protection and tax benefits of corporation. (Limited liability means that you can't be held personally responsible for debts, etc.) There are no limitations on the number of members in an LLC and there are no limitations on who can participate in management decisions. You can have a single person LLC. There are no corporate taxes in an LLC; the money is passed through to the owners and taxed on their individual income tax returns.

The disadvantage is that there is more paperwork than a partnership but it's still a good option to at least look into if you're thinking of starting a business.

12/05/2004 02:53:38 PM · #14

I chose not to write about LLCs because the typical photographer opens a studio by him or herself or with a spouse or family member. In these cases, the courts will NOT grant protection against debts, etc. You can have a single person LLC, but there are cases (and entire states) where having an LLC will not act as a corporation unless there's separation of you from the business. Having a one person corp and using it strictly for tax purposes will not always work.

I didn't write about corps because of that - I don't want anyone setting up an LLC and thinking they aren't held personally responsible when it's possible for the courts to pierce their corporate veil and hold them responsible for it just as in a partnership.

In Stone v. Frederick Hobby Associates II, LLC, 2001 Conn. Super. LEXIS 1853, Superior Court, judicial district of Stamford-Norwalk, at Stamford, Docket No. CV000181620S (July 10, 2001) (Mintz, J.), the court found that the "instrumentality and identity rules" could be applied, under the facts of the case, to "pierce the corporate veil" of an LLC and hold the individual members personally liable.

M

Tamron SP AF 28-75mm f/2.8 XR Di for Canon

12/05/2004 03:20:21 PM · #15

Well, and LLC isn't a license to do whatever you want with no regard, no. "Piercing the corporate veil" can occur when:

- corporate debt is knowingly incurred when the company is already insolvent;
- required annual shareholders or board of directors meetings are not held, or other Corporate-Formalities are not observed;
- corporate records, especially minutes of directors meetings, are not properly or adequately maintained;
- shareholders remove unreasonable amounts of funds from the corporation, endangering its financial stability;
- there is a pattern of consistent non-payment of dividends, or payment of excessive dividends;
- there is a general commingling of corporate activity and/or funds and those of the person or persons who control the corporation;
- there is a failure to maintain separate offices, the company has little or no other business and is only a facade for the activities of the dominant shareholder who is in fact, the corporate "alter ego."

However, that doesn't necessarily mean it should be immediately ruled out. I don't think that the possibility of being held liable necessarily makes it more disadvantageous than a partnership. There are an equal number, if not more, of disadvantages to a partnership. I have no idea whether your statement about "the typical photographer" opening a studio with a spouse or family member is true or not (you didn't) but even then, I still think it's a viable option to consider. I'm not discrediting your choice, just pointing out something others may want to look into.

cbeller

Nikon D300

Nikon AF-S DX Zoom-Nikkor 16-85 f/3.5-5.6G ED VR

12/05/2004 05:17:35 PM · #16

A sole-proprietorship or general partnership provides no liability protection.

An LLC or S-Corp (even if formed by a single person) can provide liability protection, where you are only liable for your investment into the business.

An LLC is just as simple to setup as a sole-proprietorship or partnership, and the taxes can be handled the same way. In Indiana I have to submit Articles of Organization to the Indiana Secretary of State and then file for my EIN by submitting Form SS-4 online (form Kevin didn't remember name of). Two forms and only one has to be paper. :)

The problems arise when the LLC/corporation becomes an "alter ego" of the owner, as mk mentioned. If you are diligent about your accounting and business practices, you should be fine.

My choice is to try and protect myself and my finances.

Edit: typo

Message edited by author 2004-12-05 17:19:28.

12/05/2004 05:37:11 PM · #17

This is a common test for LLCs to be pierced:

(1) The corporation must be influenced and governed by the person asserted to be its alter ego;
If you're the only photographer and/or only owner, this part is likely met.

(2) there must be such unity of interest and ownership that one is inseparable from the other; and
If you use the same equipment to go shoot a wedding as you shoot your family gtg, this is probably true. Unity of interest with yourself and your business wouldn't be too difficult to prove.

(3) the facts must be such that adherence to the fiction of separate entity would, under the circumstances, sanction a fraud or promote injustice.
If you injure someone or you royally screw up, they sue, the corporation goes bankrupt and you try to avoid liability, this is exactly what the court is looking for as far as piercing your LLC.

I chose not to mention LLC for simplicity and talking about how we started up, but I do see the merits in it - if you're going to accept outside funding, partners/investors who do no shooting, and that sort of thing, then LLC is definitely something that should be looked into. If you're the sole photographer, or if you and a family member/significant other are starting the business, I don't really see what the benefits would be.

Anyways...lots to think about for someone starting up.

AllgoodPics