Running it as a business

If I were to sell 5 - 10 knives a year, do I really need to register with the state and do all the sales tax stuff?
Missouri in my case.
 
Col Defender said:
If I were to sell 5 - 10 knives a year, do I really need to register with the state and do all the sales tax stuff?
Missouri in my case.
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In Illinois, no. It doesn't meet the standard for a "business." I know it might be different in Missouri, but at least you know where to start looking.
 
Fiddleback said:
Hi JohnnyMac. Been a while.

Never take deposits in advance. When you do, you owe that customer, and you work for them till delivery.
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I have taken a couple deposits to purchase materials. Have you ever had the buyer back out and you're stuck with the cost of the materials? I just recently was commissioned for a knife and asked for the deposit of $60 to cover materials. The guy paid in full and then as you say "I worked for him", I didn't like working on the knife and felt like I HAD to get it done quickly. Not a situation I want to repeat. It has actually made me reconsider how I go about the whole aspect of knifemaking and making custom pieces for people. I have really been thinking about just making knives I want to make and if people want to buy them... Cool. I'm not trying to make a living at this, just trying to ease some of the financial burden of the "hobby"
 
Sandeggo said:
I have taken a couple deposits to purchase materials. Have you ever had the buyer back out and you're stuck with the cost of the materials? I just recently was commissioned for a knife and asked for the deposit of $60 to cover materials. The guy paid in full and then as you say "I worked for him", I didn't like working on the knife and felt like I HAD to get it done quickly. Not a situation I want to repeat. It has actually made me reconsider how I go about the whole aspect of knifemaking and making custom pieces for people. I have really been thinking about just making knives I want to make and if people want to buy them... Cool. I'm not trying to make a living at this, just trying to ease some of the financial burden of the "hobby"
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That situation is exactly why I don't ever take a dime before delivery, even to cover the costs of materials. In my opinion, you should be able to cover the costs of materials yourself, it's part of the operating expense of running a shop whether it's full time, part time, or even just hobby. If you invest in the materials and the buyer can't complete the deal, you're free to sell the knife to whomever you please and you're then reimbursed. The only exception would be if someone wants something done so personalized that the knife would be unsellable to anyone else. Personally I don't do anything with personal engraving and such so I'm confident making knives to completion before accepting payment.
 
Fiddleback said:
Work in batches to maximize profits. For a knife business, branding is critical. You need a good logo, and a strong guarantee. Provide a location (for me, a forum) for your customers to gather and buy your knives. Feed the 'location' (mine is here at Bladeforums) regularly with knives. Nobody gathers around your forum if there is regulary nothing to see or buy. Post a lot of what you do. You need to name everything you do. People like to study things and memorize things. Remember that your time must be billed at a minimum of $50hr to survive. Remember that your time must cover all expenses and employees. Do everything above board, pay your taxes, hire a good accountant, pay people with the proper paperwork. Do not get into debt. This means you need to grow slowly. Thats also a benefit, because even though your orders seem like they may lead to big opportunity (and they may) it is hard to sell knives consistently enough to stay afloat. Sales is the hard part. So growing slowly is actually a good thing. Be aware that there are major ebbs and flows to revenue in a knife business. The panick during the first few ebbs will put you on your knees. Its common, its real, and its worse in July. Be prepared for the July slump. Be very careful about insurance, especially your homeowners coverage if your shop is in your home. And, remember, every one of the dusts will kill you. Be vigilant about safety on all levels.

It can work! Good luck.
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Well said my friend!
 
Sandeggo said:
I have taken a couple deposits to purchase materials. Have you ever had the buyer back out and you're stuck with the cost of the materials? I just recently was commissioned for a knife and asked for the deposit of $60 to cover materials. The guy paid in full and then as you say "I worked for him", I didn't like working on the knife and felt like I HAD to get it done quickly. Not a situation I want to repeat. It has actually made me reconsider how I go about the whole aspect of knifemaking and making custom pieces for people. I have really been thinking about just making knives I want to make and if people want to buy them... Cool. I'm not trying to make a living at this, just trying to ease some of the financial burden of the "hobby"
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Materials is simply the cost of doing business. If a customer backs out, you sell the knife to someone else. The problem you have, and you aluded to this, is that you take orders. If you do what you're leaning toward, and make what you want that hassle disapears. But, you've got to know how to, or be able to sell the knives once they are done. A few a month shouldn't be a problem. When I was doing it as a hobby, thats really all I had time to make anyway.
 
Fiddleback said:
Materials is simply the cost of doing business. If a customer backs out, you sell the knife to someone else. The problem you have, and you aluded to this, is that you take orders. If you do what you're leaning toward, and make what you want that hassle disapears. But, you've got to know how to, or be able to sell the knives once they are done. A few a month shouldn't be a problem. When I was doing it as a hobby, thats really all I had time to make anyway.
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Yeah I am going to be moving in that direction. What I was referring to in my example is if the customer wants an expensive piece of damascus with oddball scales that may not attract another buyer, you could be stuck with an expensive ugly knife lol. That is, if you can't sway the customer into going a "correct" direction.
 
I quoted not taking money before the knife is made earlier in this post. I don't think taking a small deposit to make sure the customer is serious is a huge mistake. If someone gives me a fifty dollar deposit and things go south I can easily refund the money without financial hardship. The big mistake is taking money that you are actually using to pay rent, buy gas and groceries, ect, so when something goes bad you are not in a position to refund the money and you have an unhappy customer that is often able to damage your credibility in this fairly niche market. It has really messed up some knife makers ability to continue to make and sell knives.





jonnymac44 said:
That situation is exactly why I don't ever take a dime before delivery, even to cover the costs of materials. In my opinion, you should be able to cover the costs of materials yourself, it's part of the operating expense of running a shop whether it's full time, part time, or even just hobby. If you invest in the materials and the buyer can't complete the deal, you're free to sell the knife to whomever you please and you're then reimbursed. The only exception would be if someone wants something done so personalized that the knife would be unsellable to anyone else. Personally I don't do anything with personal engraving and such so I'm confident making knives to completion before accepting payment.
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Brian there is a lot of excellent advice here. I'd want to add one thing. Years ago I read a graduate paper published by a prestigeous university, on small business failures. The paper's contention was the number one reason for any small business to fail was the owner not putting a dollar amount on their time. Now this is not meant in an accounting sense such has already been discussed, its more of a mind set in making business decisions. The best way to illustrate it is the old story about Bill Gates when he was running Microsoft. Story was that if Gates dropped a $1,000 bill it would cost him money to stop and bend down and pick it up. Whatever he was doing, wherever he was going, he was making more money then he would lose by ignoring the $1,000 bill.

In knife terms I was struggling with continuing to do my own HT or send it out to Peter's. Had a friend come over that is real good with numbers. He followed me through a batch of HT taking notes. At the end he said it cost me $13 a blade (not counting warp issues) to do my own HT. Peter's in the numbers I work in charges about $3 a blade. It became a no brainer.

Now me doing the HT wasn't "costing" me anything but time. But when you put a $ figure on your time I was not running an efficient business. I have sent every knife to Peter's since. Your time hass to have a value to make it.

Edit: Meant to add Good Luk on your venture!
 
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I had a hobby business ebay that went from around $ 15,000 to $ 120,000 per year and I had to scramble to deal with lots of stuff.

A few lessons/tips.

You need to keep track of your expenditures. Having one credit card used just for business that gives you year end summaries with expense categories broken out is a big time saver in tracking expenses.

If you use paypal and many buyers of craft and hobby items do use it Paypal's IRS reporting trigger is $ 20,000 or more of incoming transaction volume. Be keenly aware of this.
Internal Revenue Code (IRC) Section 6050W states that all US payment processors, including PayPal, are required by the Internal Revenue Service (IRS) to provide information to the IRS about certain customers who receive payments for the sale of goods or services through PayPal. PayPal is required to report gross payments received for sellers who receive over $20,000 in gross payment volume AND over 200 separate payments in a calendar year. In order to help you understand these changes, we have prepared the following FAQs.
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Get a professional, experienced accountant if you are going to report sales or have substantive dollar income. There are LOTS of IRS liability pitfalls and money and deductions you will potentially leave on the table if you do not have a good accountant advising you. An accounting program is great and useful but it is not a substitute for professional advice.

Be aware of the carrying cost of what you buy on your business credit card. Try to keep it paid off as much as possible.

If you are going to be serious about production you need to have some equipment backups if practical. Going down and delaying deliveries will piss people off even if they are polite about it.

If you ship expensive items make sure you use tracking and insurance. If super expensive make sure it's a signed for delivery. You can buy and print labels and postage at a substantial discount (vs buying at the Post Office window) online via the USPS site or directly from paypal. USPS Priority for light weight items is often less expensive than the slower Parcel Select. Paypal seller accounts also let you generate invoices and have lots of other handy selling tools if you drill down into the features.
 
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The thing I learned LONG ago is that you must acknowledge that there are things you don't know... but the challenge is knowing what it is you don't know.

In my case I was trying to start a software business. I was really good at making software. I was really good at building computers. Turns out I suck at marketing. It took failing at the business (for a $25K loss) to teach me what I didn't know.

Once you know what you don't know, you have two options. Hire someone to do what you can't do, or learn to do it. Either one bites into the business... one directly (by having to pay someone), the other indirectly (by forcing you to spend time learning or doing something you don't do well).

I know most knifemakers don't have this problem because customers just come pouring in without any marketing or advertising. But still, think about the whole business, not just the part you love.
 
Col Defender said:
If I were to sell 5 - 10 knives a year, do I really need to register with the state and do all the sales tax stuff?
Missouri in my case.
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I checked this out - for a senior citizen in Missouri, no sales tax if "the income from the sales of handicraft items does not constitute more than 50% of your annual income". There's a certificate I have to fill out and a copy goes to the state but none of this will be a problem. Hopefully other states have parallel laws that you guys can benefit from. None of this will be a problem in my case.

Steve
 
Col Defender said:
I checked this out - for a senior citizen in Missouri, no sales tax if "the income from the sales of handicraft items does not constitute more than 50% of your annual income". There's a certificate I have to fill out and a copy goes to the state but none of this will be a problem. Hopefully other states have parallel laws that you guys can benefit from. None of this will be a problem in my case.

Steve
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What about for a non senior citizen :D?
 
gredpe3 said:
I think it is more to do with how many dollars you make not knives.
Eddie
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Pretty much this^^. Unless there's some knife manufacturing specific law (unlikely) it's all about the dollar trigger points. If you deal strictly in cash you could fly under the radar but the negative flip side to this is that for many people (myself included) it's not always convenient to use cash for largish out of state retail purchases. Paypal or credit cards are often the preferred medium for things being shipped.

Unless you are really putting out super expensive knives selling 5-10 knives a year is not likely to hit the paypal $ 20,000 IRS notice triggering limits.
 
Great advice here. Anytime someone asks for business advice, one unanimous opinion inevitably arises: hire a professional accountant/lawyer. This has often perplexed me, especially in the arena of knifemaking. We are a group of do-it-yourselfers. We don't hire material scientists before we make micarta. We don't consult with engineers before we build our forges. So on and so forth. We tackle relatively technical tasks by researching and experimenting. We are aware that we would be bankrupt if we hired an expert for every non-mundane task.

Yet somehow, bookkeeping is thought of as an impossible and untouchable process that must be left to an 'expert.' My two cents is: treat bookkeeping like any other process of your business. It is not rocket science. Hire an expert, if doing so yields the best value of your resources (time and money). If time is the bottleneck, then spend money and outsource or consult with an expert. Conversely, if money is the bottleneck, then spend time learning and doing it yourself.
 
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Be sure to ask other businesses for a referral for the accountant, I have had a few and most are not aggressive enough on tax deductions, resulting in over paying. A good accountant will have method to the madness, they give you a way to categorize your deductions and a range that is acceptable. I deduct my truck, some business meals with the wife, and many other small item that big business is allowed but we don't think of. These have to be in proportion you your income but will make you more profitable in the long run.
 
P.Brewster said:
Great advice here. Anytime someone asks for business advice, one unanimous opinion inevitably arises: hire a professional accountant/lawyer. This has often perplexed me, especially in the arena of knifemaking. We are a group of do-it-yourselfers. We don't hire material scientists before we make micarta. We don't consult with engineers before we build our forges. So on and so forth. We tackle relatively technical tasks by researching and experimenting. We are aware that we would be bankrupt if we hired an expert for every non-mundane task.

Yet somehow, bookkeeping is thought of as an impossible and untouchable process that must be left to an 'expert.' My two cents is: treat bookkeeping like any other process of your business. It is not rocket science. Hire an expert, if doing so yields the best value of your resources (time and money). If time is the bottleneck, then spend money and outsource or consult with an expert. Conversely, if money is the bottleneck, then spend time learning and doing it yourself.
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If the business becomes semi-serious a savvy accountant will know how close the line you can hew with deductions and certain favorable categorizations without triggering an audit or when it might be useful to incorporate. One common area of audit bait is vehicle deductions where some people throw out ridiculous mileage deductions claims as if the IRS were idiots and then get called in. Another area where people leave huge piles of money on the table is in not incorporating. If you are making less than $ 50,000 - $ 60,000 in your business incorporating is probably a wash, above that you're (IMO) being foolish if you don't do it especially with respect to how State unemployment tax is (usually) treated.

In my experience there are certain things where DIY has it's limitations and paying for professional advice is worth the cost. Accounting and medical advice are two of those areas.
 
monkapotamus said:
If the business becomes semi-serious a savvy accountant will know how close the line you can hew with deductions and certain favorable categorizations without triggering an audit or when it might be useful to incorporate. One common area of audit bait is vehicle deductions where some people throw out ridiculous mileage deductions claims as if the IRS were idiots and then get called in. Another area where people leave huge piles of money on the table is in not incorporating. If you are making less than $ 50,000 - $ 60,000 in your business incorporating is probably a wash, above that you're (IMO) being foolish if you don't do it especially with respect to how State unemployment tax is (usually) treated.

In my experience there are certain things where DIY has it's limitations and paying for professional advice is worth the cost. Accounting and medical advice are two of those areas.
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Valid points. I think a huge part of the decision to trust experts is a fear of failure. In medical care, failure would be serious illness or death. In bookkeeping/accounting, it would be an audit, penalties, etc. If all revenue and expenses are fully documented and legitimate, and the bookkeeping is done is good faith, I think there is little to fear. Obviously it is important to distinguish between a tax return that is based on factual, documented transactions and a tax return based on dishonest or exaggerated numbers.

The paradox of the expert is that the non-expert cannot judge the quality of the expert's work; he can only judge the outcome. It seems that the world is full of people who are sure their accountant is doing a great job without actually knowing much about bookkeeping. All they know is that they haven't been audited. Much like "Odin promised to destroy the Ice Giants. I don't see any Ice Giants. Therefore Odin is a great God!"

Some of my experiences, upon which I base my opinions, are listed below.
- I've paid $800 for an accountant to add all my expense receipts into one sum, and enter that sum on one line of a Schedule C.
- I've paid $80 (1 hour labor) for an accountant to provide me a standard depreciation schedule for 6 assets. I now know this can be done in 2 minutes on Google.
- I've made mistakes on my bookkeeping and failed to file important returns. The problem was brought to my attention by the state and was resolved without drama.
 
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