When I started my jewelry business, I think I may have had an unfair advantage over other people. That advantage was that I had started other businesses before and I had answers to previous questions that I had asked my accountant before.
I know many people who have had great ideas and made a bit of cash on the side, but their fear of screwing something up, taxes, and other complexities kept them from stepping up to the next level. (My accountant and other professional associates have helped me tremendously…I will try to impart some of that knowledge to you.)
Believe me when I say that creating a birthstone bracelet or any other piece of handmade beaded jewelry is a snap compared to dealing with business formation and getting all of your accounting ducks in a row…but doing business the right way is not that difficult.
Here are a couple of the questions that I repeatedly hear from people looking to start a business. I will answer each one of these to the best of my ability and hopefully show you that this is easier than you can imagine. These answers will be based on tax ramifications only, not from a perspective of asset protection.
- Do I really need to start a business?
- I don’t have that much in sales, so why should I bother?
- Do I need a lawyer to form a corporation?
- What kind of corporation do I form?
- Why don’t I just run all of my business through my own social security number?
The first and last questions are very similar, and have a similar answer.
The short answer is…yes, I would form my company even though I don’t have a lot of sales just yet. It isn’t that expensive. Actually, it is surprisingly cheap to start your company. And the fact is, the IRS doesn’t look as closely at a corporation’s taxes as it does individual people who are running a business through their own social security number (which is basically a sole proprietorship). (That came directly from my accountant.) Even though we are allowed to take legitimate deductions, corporations seem to have more leeway in taking their deductions.
The next question that follows up is how do I form a corporation? Do I need a lawyer? The answer is maybe, it depends on you. If you want to be totally hands off and have a lot of money for a lawyer, go ahead and hire a lawyer to form your company.
If you want to start a company, but don’t want to learn how, there are companies out there “that were formed by top attorneys” who can take care of wills, businesses, etc. (I know you have seen the commercials. I used them the first time I formed a company.)
If you are a bit of a ‘go getter’, you don’t need a lawyer. You just need to spend about 30 minutes reading online on what paperwork to fill out. I ran downtown and started my S-corp for a whole $90. Your states may vary, but I think you see my point.
Finally, what kind of corporation do I form? You have a few options here. You can for form a C corp, an S corp, or an LLC. I don’t have a problem with an LLC, it has its purposes…but I would swear that too many people use them the wrong way. For one, you need a second person on the paperwork when you form the company. If you cheat on this one and wind up before a judge for whatever reason regarding your business, all of the benefits of the LLC can be thrown out and they may view you as a sole proprietorship…which is a scary proposition. Taxes on a sole proprietorship are insanely expensive if you make too much money. And another strike in my book against the LLC, whatever money you make in the company rolls up to your Schedule C form on your 1040 when it comes tax time. The schedule C is the number one most audited form by the IRS…so if there are other options, why would you paint a bullseye on your back?
My suggestion is to go with either a C-corp or an S-corp. Your account can help you really decide which one is best for you. These corporations can pay for your medical insurance, doctor visits, company car, etc. The benefits can be endless, but the main thing is to legally and ethically take all the deductions you can under the tax law and get your taxable income to an absolute minimum. I don’t mind paying my fair share in taxes, but please don’t harm the golden goose.
And one more thing about the taxes…you need to familiarize yourself with deductions that pertain to your business. Your accountant is probably a genius, but there is so much tax code that no one is that good. Ask questions, and get real answers. It’s the best way to save yourself money…no matter if your business is a retail store, an engineering company, or even a beaded jewelry business online. We all fight the same fight every year on April 15th…
