The BUSINESS of the knifemaking business?

WalterDavis

WalterDavis

Joined
Nov 23, 2005
Messages
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Well, since I've started selling knives, and hope to do so at a profit (small as it may be:D) this year, I went down and got myself a business license! A small step in the journey of creating a knifemaking business that I can retire on;) but a necessary one, I'm sure. My question is: what now? Is this enough to create a long term business off of, or is there more involved? How can having a business license help with purchasing equiptment and supplies? Are there advantages to incorporating or creating an LLC for a one-man operation, and has it been worth the money to you? Can you recomend any good books on running/creating a business? I read "The Idiot's Guide to Starting Your Own Business" but I didn't get a lot of usefull information out of it.

I know it's a pretty broad question, and I apologize. I managed a multi-million dollar restaurant for a few years, so I can understand the basics of making a business profitable-more $ coming in than going out:p I'd just like to hear how others have confronted the business aspects of the knifemaking business-what's worked out well for you and what (unfortunately) hasn't. I could definitely use any advice you all could give me!

Thanks,

Walter Davis (probably not a future 'Fortune 500' CEO:foot:)
 
Let me tell you something about your business license...
I assume that you also got a tax number. Let me tell you a little story...

A friend, a shrewd businessman, had his own business. Used his tax number for this and that, no problem. Well, it appears that he did some creative accounting with his business. As luck would have it, he got audited one year. What he bought using his tax number didn't jive with his inventory and what he reported as income from his business. Now, let me explain that my friend at the time was not a US citizen but here on a green card from Viet Nam. He was one of the "boat people". The auditor and my friend argued back and forth a bit until finally the auditor told him, "Mr. Nguyen, let me remind you of your immigration status and if you are convicted of tax fraud that you could very well be deported back to Viet Nam."

My friend's response...

"How much do I owe."

Moral of the story...be honest with your tax exempt status as a business.

Craig
 
Hi Walter,

You might want to check out www.score.org.

SCORE "Counselors to America's Small Business" is a nonprofit association dedicated to educating entrepreneurs and the formation, growth and success of small business nationwide. SCORE is a resource partner with the U.S. Small Business Administration (SBA).

They are a pretty good resource. There's a good chance they have an office near you too.

All the best, Phil
 
Thanks guys! I definitely plan to keep immaculate tax records. I've been stung by the IRS once-totally my fault and I knew it was coming but it still hurt-so I don't plan on that ever happening again.

Phil, thanks for the link. Looks like a lot of good info available!
 
Ditto, on Craig's caveat.

Having a tax number doesn't mean that everything you buy is tax free, or that everything you spend can be tax deductible.
If you sell knives, an air conditioned is not a tax free purchase using your tax number. A trip to Hawaii is not a tax deductible expense ,just because you visited Phil while there. A Moran knife for your private collection is not a business expense...etc.

Talk to a good CPA and get some advise about operating a business and keeping records (poor records are the downfall of most failed businesses). Retaining the receipts on all material purchases, services used, and keep an accurate inventory of knives and materials on hand will be necessary. Sales records on every knife sold are mandatory. A box in the corner is not a good filing system.Set up a small file folder or a cabinet....and put the records and receipts in there religiously. Fill out the log books daily....if you put it off, it usually doesn't get done.

Remember to pay your taxes when they are due, often quarterly. An now that you are a self employed business, you will need to pay the SE tax. You will owe local taxes on the business in most places ,too (check where you got the business license).

Finally, being in business means being a Businessman. It requires being honest with your customers, the regulatory and tax agencies, and yourself. If the paper work and taxes are not for you. Don't become a full time maker...because there is plenty of both to deal with. Having your spouse deal with the paperwork and record keeping is a good system. And if you are going to be a full time maker - it may be the only time you spend together.

Stacy
 
An LLC is a way to minimize legal exposure. In theory - and probably most of the time - someone can only take the business and it's assets. If you don't have an LLC, some one can take every thing you own. That alone is worth getting one. I did mine several years ago by buying a $50 download boiler plate software program and filled in the blanks. It's perfectly legal and you can modify it anyway you want. I filed with the state online and paid a one time fee of $185 I think. Annual renewal (in Minnesota) is simply signing a reminder postcard they send every year and sending it back telling them you are still in business. Most states are very friendly towards a sole proprietary ownership LLC as it is very friendly to small business guys like you. Get a CPA and have them walk you through what is legally deductible - which is nearly everything knife related. All of your tools, even the ones you owned previously are deductible. A trip to the Blade show is deductible for example so is your cell phone or part of based on how much you use for your business. You don't *have* to turn a profit every year. Take your deductions. You do have to turn a profit eventually or it's going to be ruled a tax dodge scheme that will hurt.

You weren't clear on which tax number you got. Get both the state and Federal versions. When you purchase supplies that will be used in resale, buy them as non-taxable using your state tax number. Most of the time you will have to fax the seller a form. Your state will most likely provide those.
 
Thanks, guys! I just got a local business license through the county (though the license does appear to apply to the State of Utah). I guess now I need to get an EIN through the IRS, correct? Also, is my business license number my state tax number, or do I need to apply for one of those, also? I've been looking on-line, but there's a ton of info all mixed in with the 'apply here for your tax number for only $$$' ads.
 
NOLO makes a good book called "Tax Deductions for Professionals." It's aimed a little more @ professionals like consultants, etc, but it will give you a good idea of how to take advantage of deductions for a business like yours, too. I would read it, make notes, then talk to a CPA.
 
I think its best to have all the necessary paperwork if you are going to make it a business. There are tax advantages that go with the extra trouble. You may want to check with the local knife shows, here in california you must have a reseller license to have a table. The other advantage is you get access to commercial suppliers and also get business discounts which can be significant.

Entrepreuer magazine has a series of books on starting and operating a small business that are very helpfull. I would also suggest you start a web site, its not expensive and gives your business a professional look when you have a business email address.
 
I have been self employed for almost thirty years, started 4 businesses, and all have been successful. (OK, the first one is defined as successful simply because I didn't lose money..)

Lots of good information has been posted here. I would like to reinforce the idea that as a businessman, you will not be able to plead ignorance to issues previously unknown to you by saying "you are just getting started". In the eyes of the law, ignorance is no excuse. Once you proclaim you are in business, you have just jumped into the deep water. Legally, on all fronts, you will be expected to perform on the same level as a business that has been up and running for 50 years. Trust me... I shut down my very first business after two years as it became obvious to me how little I actually knew about running a business and how they work.

You should take some bookkeeping classes, even if you don't want to keep your own books. Learn how business money operates. You don't want to be at the mercy of bookkeeper to make sure you house is in order when tax time or account reconciliation time comes. Keep all your personal and business expenses completely separate, and open an economy business account at your bank. If you can, get a business credit card as well. This makes things soooo much easier to separate when bookkeeping chores are being done.

DO NOT think that incorporating or assuming the status of an LLC entity will give you anything more than a small amount of protection. I would still advise the LLC route as well, but you should know that it offers NO, NONE, ZERO protection in cases of negligence. As a general contractor, this was drilled into me quite well. The corporate or LLC veil can easily be pierced if someone can prove negligence. And remember, to get the legal ball rolling all it takes is an accusation. Even if you are not found to be at any fault, legal representation can take everything you have.

Learn the legal pitfalls of your new business. Include information that tells people that knives are sharp and should be handled with care. Write your disclaimers on your invoices that release you from liability. It isn't much, but it provides at least a small barrier.

You will quickly find that being a businessman has little to do with the the business you have chosen. Client development, filling orders, managing the books, preparing (or paying for prep) of taxes, accounts receivable, accounts payable, vendor price negotiations, supplier screwups, and on and on take up a lot of your day. Gawd forbid if you get employees.... it creates a business in itself.

When I belonged to a small businessman's association a few years ago, we figured that we applied our trades about 50% of the day, and the rest was responsible running of a small business.

You best bet (to me) is to ask everyone in business how they handle every aspect of what you are trying to do. The SCORE suggestion is great, but it is only as good as your local chapter. Your local community college will have classes in accounting principles, and some even have classes on becoming an "entrepreneur". Get all the education you can about business in general. It is your best weapon to stay in business.

Good luck!

Robert
 
All I can add Is, if I remeber correctly...

...you have to show a profit in one out of five years...

Somebody correct me on that...if it ain't so...

THis is absolutley a great thread..and it was a VERY good question.

Shane
 
shane justice said:
All I can add Is, if I remeber correctly...

...you have to show a profit in one out of five years...

Somebody correct me on that...if it ain't so...

THis is absolutley a great thread..and it was a VERY good question.

Shane
Click to expand...

According to my tax guru, it is three years. But there is some leeway. IIRC, you cannot have three consecutive years of loss since this could allow a tax election method of income averaging that could drop a good year to nothing.

On the other hand, you might make three years if you lost money for 2, then made some for one, then lost money for another couple, etc. I am not sure, but I think they are looking at enacting a new rule that will not allow that kind of loss/profit monkeying around since people are moving around their income and expenditures to manipulate their incomes when an LLC.

For example, take a look at OP's situation. He is now opening a knife sales shop as an LLC. (But, hopefully, he hasn't quit his day job!) So he has job income, but he can show certain losses attributed to the new LLC as deductions to his income. So in effect, he could write off trips to knife shows, knife factory tours, knife making education, etc., as well as costs of maintaining his inventory.

BUT... if he loses money for more than three years, this new endeavor will be looked at as simply a hobby, and it will be disallowed from that point. Further, if you write down more over a period of time than you should (say, losses for 5 years), the IRS can go back and adjust/collect your taxes with penalties and interest to bring them into compliance with the tax codes.

As a sidebar, you can easily see how some enterprising lad would think this is the ticket to write off his knife hobby, and couple it with hunting, etc. It happens all the time in every hobby field no matter what it is, and knowing that is why the time limit is in the tax code.

As tempting as it is to TurboTax my company returns, I won't. No computer program will replace a knowledgeable individual that keep up to date with the newest trends in filings and has a keen eye for that "fine line" we all want to walk. I do all my own bookkeeping, but won't touch my company taxes.

Robert
 
Wow, there's a ton of great info! I definitely appreciate it, it looks like I'll need to start looking for a good accountant ASAP! Thanks for all the guidance and info!
 
I've heard the 1 profit in 3 year deal, I've also heard the 1 in 5 'rule'. My accountant offered this: If you can prove you are building a business you can lose money for several years. You have to have the intention of making a profit eventually. (I don't know how you prove that. Lawyer fodder I guess) If you have a store front (virtual or physical), merchant account, etc, that would go a long way to show business intent. If you just buy and sell occasionally, even in volume, it's probably going to be ruled a hobby. You don't have to make money every year after your first profit year either.
I do my taxes at a small two person firm and it's discouraging to see how often those two disagree on tax law interpretation. The best money I've spent at this place was an hour session on what I can deduct and can't deduct.
 
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