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08/15/2007 08:36:25 PM · #1 |
Hello everyone,
let me tell you my situation. I have been into photography for some time now, mainly as a hobby, but here recently i've been asked numerous times from people to do pics, so i have started my own little side business mainly to fund my habit of purchasing expensive equipment. :P i'm still in the red, have invested quite a bit in my equipment, and am mainly working to fund this, and to when i get in the "green" to have a nice side business to make some extra money. side business or not, i know that uncle sam wants his, and i was wondering what would be the best way of going about this? any comments / suggestions from all of you out there that could give me some insite would be greatly appreciated.
i sat in with my buddy, who has an ebay business selling used guitars, when he met with his family accountant to see what i should do for my side business, and from what i gained from it it would be smart to become an LLC who is taxed as an S-Corporation. does this sound right? i am going to look into it. i'm starting to get about 5 - 6 requests for weddings, so it will be less than a $20,000 a year income for now, but i was wondering what would be the best way to get this started, because i want to pursue a career in this, wether one day it be full time or do the weekend thing with weddings / model portfolios and such.
thanks so much, the information you all give me has always been greatly appreciated, and i can't tell you how thankful i am to each and every one of you.
thank you :)
*****edit for very important words i left out :D *********
Message edited by author 2007-08-15 22:24:48. |
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08/15/2007 09:32:05 PM · #2 |
| Ummm... Is your buddy either a lawyer or a Certified Public Accountant? If not I'd suggest one of those or both before going further. |
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08/15/2007 10:23:45 PM · #3 |
i apologize, i left out a few important words. it should have read "i sat in with my buddy when he met with his family accountant"
i'll edit it in the original post :D |
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08/15/2007 10:29:07 PM · #4 |
In Australia there is an "X" amount of profit that you can make on a hobby that does not need to be declared as income. Is there such a thing there. Also if you make $$$ amount of profit and spend $$$$ in expenses than you have not made a profit and therefore there is no profit to pay tax on. This may work in your favour for at least the first couple of years if you sink your profits back into buying new and extra equipment. At least it works that way here.
Like _eug said, speak to an accountant that you can trust has your interests at heart.
Message edited by author 2007-08-15 22:29:42. |
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08/16/2007 07:00:08 AM · #5 |
Originally posted by Monique64:
In Australia there is an "X" amount of profit that you can make on a hobby that does not need to be declared as income |
Similar in the UK. As a "Self Employed" person, you can mke a little over £5K I think without having to pay tax. You should still declare it though, to be above board... |
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08/16/2007 08:57:12 AM · #6 |
LLC's were 'invented' (so to speak) for doctors and the like to protect the OTHER partner when one screws up and gets sued. In theory a corp protects the assets of the owners (stock holders) but states still want to hold some people (doctors for one) liable, so doctors can't form corporations to protect their assets (here in pa it's common for the house, cars, etc to be in teh wife's name for that reason)
Remember also that a corp has no credit, and no assetts (unless you 'sell' it all your camera gear, computers, etc). Form a corp and go get a loan...it's like a newborn baby, and banks know they can't come after your assets....so they most likely will have you co-sign the loan...so if the idea is to protect your assets if the company fails, well, this won't work if you've co-signed a loan!
Corp's generally sell stock to get the money to buy these things...is this getting complicated enough for you?
An LLC is simpler, but still designed primarily for partnerships. Some people want to protect themselves if they get sued - first, get insurance (business liability). Second, so you screw up a photo? No judge is going to take your house for that.
If you are doing $150k+ a year then consider incorporating - until then a sole proprietor is all you need to be. Especially starting out.
You do need to check with your state and local gov't regarding names and licenses. Here in PA if I start a biz with my name, fine. If I call it 'Perry and Sons' or 'Studio P' then I need to file paperwork with the state (to keep dup names from happening and to associate, legally, the name with a person). The only licence I need is my local township one. Other states are different.
For tax purposes it's not too complicated:
You need to keep 'books'. A spreadsheet will work fine. You need a file for receipts for EVERYTHING you buy for the business, and need to track miles on your car, or bus fare, etc, also.
You have 3 things to track -
You have income - that's pretty simple. Check with your state to see if you should be collecting sales tax. Here in PA everything photographic (service and products) gets taxed. I collect it and pay the state quarterly. Pretty simple after the first time. Some things are not taxed here - shipping is one, so that needs to be tracked also.
Expenses - what you spend on the business is what it cost you to make the income. Advertising (incl business cards), phone, internet, computer, software, electricity, rent (your work from somewhere - a room in your home probably - you can deduct that too, but there are VERY specific rules you have to follow), prints you make, frames, postage, office supplies, furniture, etc, etc. You can write off car mileage at 41c /mile (there are again, specific rules on how to do this, record keeping wise, and that 41c changes often) Last year I wrote off almost 4,000 miles - that's a nice deduction!
Capital Expenses - regular expenses are deducted against your income in the year they occur. Capital items are depreciated over several years -their lifespan as decreed by the IRS. Talk to your CPA about this one as the rules can change, and a $800 XTi can probably be expenses, where as a $4500 Mark 3 will need depreciated.
SO it works like this:
Income $20,000
Expenses - $18,000
Depreciation - $1000
Net Income = $1000
You pay taxes on the $1000.
You can also 'lose' money - if your income is less than your expenses for example. And contrary to popular opnion, you never have to make a profit - the gov't can legislate that you be a good business man. You may have to prove you are trying to make it a going, profitable business (by advertising, working 12 months, etc)
Take the above Net Income and add (or deduct if it's less than $0) to your regular income and pay taxes on that.
Google the IRS site and read some - it's not as 'thick' as a tax form.
//www.irs.gov/newsroom/article/0,,id=169490,00.html
//www.irs.gov/faqs/faq12-1.html
Remember - Al Capone was a big time gangster and did a lot of killing, rackateering and bootlegging. The FBI couldn't get him, but the IRS did. A judge may not take your house, but the IRS can, and will. And don't think you won't get caught - who does that Uncle Bob work for that got in your way at the last wedding, the one you told to go 'suck seat and sit down'? LOL
Message edited by author 2007-08-16 08:59:41. |
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08/16/2007 09:29:50 AM · #7 |
Originally posted by Prof_Fate:
LLC's were 'invented' (so to speak) for doctors and the like to protect the OTHER partner when one screws up and gets sued. In theory a corp protects the assets of the owners (stock holders) but states still want to hold some people (doctors for one) liable, so doctors can't form corporations to protect their assets (here in pa it's common for the house, cars, etc to be in teh wife's name for that reason)
Remember also that a corp has no credit, and no assetts (unless you 'sell' it all your camera gear, computers, etc). Form a corp and go get a loan...it's like a newborn baby, and banks know they can't come after your assets....so they most likely will have you co-sign the loan...so if the idea is to protect your assets if the company fails, well, this won't work if you've co-signed a loan!
Corp's generally sell stock to get the money to buy these things...is this getting complicated enough for you?
An LLC is simpler, but still designed primarily for partnerships. Some people want to protect themselves if they get sued - first, get insurance (business liability). Second, so you screw up a photo? No judge is going to take your house for that.
If you are doing $150k+ a year then consider incorporating - until then a sole proprietor is all you need to be. Especially starting out.
You do need to check with your state and local gov't regarding names and licenses. Here in PA if I start a biz with my name, fine. If I call it 'Perry and Sons' or 'Studio P' then I need to file paperwork with the state (to keep dup names from happening and to associate, legally, the name with a person). The only licence I need is my local township one. Other states are different.
For tax purposes it's not too complicated:
You need to keep 'books'. A spreadsheet will work fine. You need a file for receipts for EVERYTHING you buy for the business, and need to track miles on your car, or bus fare, etc, also.
You have 3 things to track -
You have income - that's pretty simple. Check with your state to see if you should be collecting sales tax. Here in PA everything photographic (service and products) gets taxed. I collect it and pay the state quarterly. Pretty simple after the first time. Some things are not taxed here - shipping is one, so that needs to be tracked also.
Expenses - what you spend on the business is what it cost you to make the income. Advertising (incl business cards), phone, internet, computer, software, electricity, rent (your work from somewhere - a room in your home probably - you can deduct that too, but there are VERY specific rules you have to follow), prints you make, frames, postage, office supplies, furniture, etc, etc. You can write off car mileage at 41c /mile (there are again, specific rules on how to do this, record keeping wise, and that 41c changes often) Last year I wrote off almost 4,000 miles - that's a nice deduction!
Capital Expenses - regular expenses are deducted against your income in the year they occur. Capital items are depreciated over several years -their lifespan as decreed by the IRS. Talk to your CPA about this one as the rules can change, and a $800 XTi can probably be expenses, where as a $4500 Mark 3 will need depreciated.
SO it works like this:
Income $20,000
Expenses - $18,000
Depreciation - $1000
Net Income = $1000
You pay taxes on the $1000.
You can also 'lose' money - if your income is less than your expenses for example. And contrary to popular opnion, you never have to make a profit - the gov't can legislate that you be a good business man. You may have to prove you are trying to make it a going, profitable business (by advertising, working 12 months, etc)
Take the above Net Income and add (or deduct if it's less than $0) to your regular income and pay taxes on that.
Google the IRS site and read some - it's not as 'thick' as a tax form.
//www.irs.gov/newsroom/article/0,,id=169490,00.html
//www.irs.gov/faqs/faq12-1.html
Remember - Al Capone was a big time gangster and did a lot of killing, rackateering and bootlegging. The FBI couldn't get him, but the IRS did. A judge may not take your house, but the IRS can, and will. And don't think you won't get caught - who does that Uncle Bob work for that got in your way at the last wedding, the one you told to go 'suck seat and sit down'? LOL |
Ummm yeah...
The laws will be different depending on the state.
Talk to someone at the Small Business Administration. They'll help you figure it out and put you in touch with the right people. I pretty much guarantee that they know much more about starting a business in Arkansas than Prof_fate does.
And BTW, the IRS mileage reimbursement/deduction rate is $0.485/mile. |
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08/16/2007 09:34:09 AM · #8 |
Prof,
1 thing about the LLC was incorrect. If you file as an LLC and attempt a bank loan, your assets are not initially protected. For any seed money, a bank or lending institution is going to have you guarantee the loan meaning your putting the business and your personal assets on the line to guarantee the loan. This is almost a standard clause for initial investment/seed money. Depending on the business/your credit score/amount requested, they may also ask for a cosignor.
The LLC does protect you in case you do get sued for some reason.
I just finished the process of getting seed money so if you need info on doing that I can help. The SBA is a good place to start.
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08/16/2007 01:41:42 PM · #9 |
If you file as an LLC, you are a business, which may get you some perks here and there (e.g. its easier to rent a car if you say you work for than if you say you're self-employed).
But if you file as an LLC there may also be some negative things. Here in Connecticut, there is a $250/year "business entity tax" (one year it was $300 when the government needed more money) in addition to the $10/year filing fee.
Be careful about deducting more than you make, you have to check the "hobby" rules if you're not making a significant amount from photography. |
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08/16/2007 02:06:35 PM · #10 |
Holy crap, $250-$300. In VT its $75/yr for your LLC filing and something small when you file year end reports.
Until your LLC makes decent money or has been around for multiple years, everytime you try to either borrow money or buy something on credit, they always check the credit report of the owners.
Great place to get FREE business advice is SCORE. There are branches just about everywhere. SCORE stands for service corps of retired executives. Usually they are prominent business people in the area and offer help in creating your business whether thats finding funding or management or writing the business plan. Really a great group and cannot say enough nice things about them. Not only are they free and helpful, but they also tie you in with tons of connections. My score advisor was a CPA. He wanted to help us with nothing in return. Throughout the process, we met weekly and he introduced us to his law friends and bank friends and other CPAs etc.
in vt its www.score84.org I think. They also have ties with the SBA.
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08/16/2007 02:08:46 PM · #11 |
Regarding Sales Tax:
Some States may require you post a bond or deposit, as new businesses often get into trouble paying their State Franchise Tax Boards. Here's a tip: If you do collect sales tax, put every single red cent collected into a separate savings account, plus $20 or so a month for padding, and DON'T touch it! When the tax bill comes due, there is no leniency on being late or not having enough, and by having it tucked away, you will always have it. Remember, you don't charge tax, you collect it for the State, and they get really nasty when it's due them. So many new businesses get into some real heavy problems screwing around with the State Franchise Tax Boards. |
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08/16/2007 02:16:56 PM · #12 |
Within the next 2 years I plan on incorporating myself, simply for the tax benefits.
I also plan on selling my car, and buying a new one as a company car (alls it takes is a sticker with the company name and to be used "primarily" for business" and then its a total write off. |
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08/16/2007 02:17:50 PM · #13 |
| Annual Franchise Tax in DE is dirt cheap, I think like $75? |
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08/16/2007 02:28:53 PM · #14 |
ajdeleware,
Thats not entirely true for a complete write off. You need to be able to prove that its used primarily for business and even then you will only be able to deduct a percentage. Its the same as mileage reimbursement. You can only count miles that were driven for business. So if you drive to and from the office each day say 25miles, those 25miles are not deductable, only miles from the office to conduct business.
Here is an example from when i sold insurance. 100% commission no taxes taken out of paycheck so we wrote off everything we could. We also didn't have a local office due to us all being outside sales people. Anyway, each week we got an assignment in a specific town that we would sell in all week. If that town was 50 miles away and I drove from my house directly to my first appointment, those 50 miles were NOT deductable because it was considered getting to work. Any miles I did between that appointment and my last appointment were deductable. To get around this, we held morning meetings at a hotel in town. We would have a meeting and then go to your assignment. This allowed us to write off all miles between the meeting and the first apointment.
I had another job in which mileage deductions played a part, each day my boss would give me a piece of outgoing mail that I would drop off at the post office on my way to work. This made the miles from teh post office to the office deductable. Otherwise from my house to the office was not deductable.
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08/16/2007 02:32:57 PM · #15 |
Oh I know, for the last 3 tax seasons ive been in outside sales. Ive become a master at writing off everything. And the best way to maximize your mileage deduction - whenever possible, stop to visit customers on the way to the office and on the way home from the office.
I lived 25 miles from the office, I had clients 5 miles from home, so I would stop and do client visits on the way to the office, which then makes that 5 miles non-deductible, and then the additional 20 are.
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08/16/2007 02:34:14 PM · #16 |
| And I think it is different if the car is registered in the corporations name. |
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08/16/2007 02:36:30 PM · #17 |
And don't forget you can only sink money into a "failing" business for a certain amount of time (varies state to state I am sure). My dad has some old family farmland that he leases out to be farmed...to skirt some taxes on it he "sunk more money" into it then he got in return from the lease. After (I think) seven years of "losing money on the farm", his accountant called and said, "You better turn a profit this year or else you are going to get hit with some stiff penalities." So now they alternate a few years "making money" and a few years "losing money" with the farm.
Again, check local listings...
-drew |
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08/16/2007 02:37:32 PM · #18 |
| Yeah, I think in Delaware you can claim a loss for the first 2 years of the business maybe? |
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08/16/2007 02:38:50 PM · #19 |
| And it could be that farms have a different listing than a service business. |
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08/16/2007 02:40:58 PM · #20 |
| Farms get all sorts of guvment hook ups. its a good think to own. |
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08/16/2007 02:41:46 PM · #21 |
I have found as a new LLC, its almost impossible to do anything in teh company's name. there would be no way I could buy a new car in the company's name unless i paid it off in full. If they let me finance, they would make me guarantee the loan which allows them to come after me personally if I can't make payments.
I have found that the first 2 years you don't get shit for being a corp. All you get is protection from being sued. After 2 years, everyone want to lend you money and give you stuff on credit. I had banks tell me they won't lend to a startup, but in two years if we want to refinance they will do it. |
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08/16/2007 02:50:50 PM · #22 |
Best advise:
Retain and consult with a Business Lawyer and an Accountant.
Period.
"Billy Joe Bob on DPC said I could do it" or "I got the idea from a guy online that said his Dad did it" is NOT going to fly. This is serious business (sorry about the pun there) and you NEED to advise of Professionals, NOT people who know just enough to get into trouble.
Message edited by author 2007-08-16 15:00:49. |
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08/16/2007 03:01:04 PM · #23 |
Brad, very true, but for small starups like what many people are doing with their photo work, I would suggest another avenue.
Law and accountant advice is not free. Most of it is so simple that they get the business because people are too afraid to even try to learn it themselves.
I wouldn't suggest just trying to do anything completely by yourself, but textbooks and certain software is helpful. Best of all is just visit an SBA office or Economic Development office. Most cities have non profit organizations that specialize in business development. These places will do everyhting a lawyer or accountant will do for free.
In Vermont, we have...
SBA - Small Business Admin.
CEDO - community economic developent office
SCORE- service corps of retired executives
Community Capital of VT- non profit lending office.
Im sure other towns have similar offices.
Im not saying to don't seek advice, just try alternative routes before you are being billed through the nose. Starting a business is hard enough, you don't need to add in spending on stuff you can get for free.
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08/16/2007 03:05:14 PM · #24 |
Originally posted by Jmnuggy:
Brad, very true, but for small starups like what many people are doing with their photo work, I would suggest another avenue.
Law and accountant advice is not free. Most of it is so simple that they get the business because people are too afraid to even try to learn it themselves.
I wouldn't suggest just trying to do anything completely by yourself, but textbooks and certain software is helpful. Best of all is just visit an SBA office or Economic Development office. Most cities have non profit organizations that specialize in business development. These places will do everyhting a lawyer or accountant will do for free.
In Vermont, we have...
SBA - Small Business Admin.
CEDO - community economic developent office
SCORE- service corps of retired executives
Community Capital of VT- non profit lending office.
Im sure other towns have similar offices.
Im not saying to don't seek advice, just try alternative routes before you are being billed through the nose. Starting a business is hard enough, you don't need to add in spending on stuff you can get for free. |
The SBA has lawyers and accountants to help guide you, but getting an accountant to help you pay your taxes should not expensive. My wife pays about $150/year for a review of her business tax situation by an accountant. |
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08/16/2007 03:17:46 PM · #25 |
Something else to add about these organizations. I know our lending orgainzation has incentives for continuing education. If I want to take a course in say accounting or marketing, they will pay for it. They also provide basic classes as well.
I feel kind of lucky in that I did accounting in college and have been able to do my own taxes for the last few years. Also I can use quick books and our SCORE advisor will review it. He won't do it completely but he will look at what I did and say its good.
I cannot stress how much of an asset being involved with these groups has been. We haven't paid a red cent for advice yet, no lawyor, no accountant etc... All the resources are there.
Also, if your business can create just 1 job, that opens up even more doors for free services and incentives. That may not be everywhere, but in Vermont, its a progressive atmosphere with a strong sense of small business especially small local business creating more local jobs.
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