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Tax
Time is upon us once again. I have often noticed that while
we have many great articles on jigs/repairs/finishing/building/etc.
we don’t have, in my opinion, enough on the business/tax
tactic side. Here is where I come in…I am a Sarasota
, Fl. Luthier, who also happens to own and operate a small
C.P.A. firm. I have been in practice for over fifteen (15)
years and am a Member of the American Institute of Certified
Public Accountants (A.I.C.P.A.) and the Florida Institute
of Certified Public Accountants (F.I.C.P.A.) including many
other financial and legal associations.
While you may call me anytime, to discuss a tax issue, it
is best to consult your own, personal, C.P.A. If you don’t
have one, GET ONE! Don’t wait too long as some elections
have time limits as to when they must be filed to effective
for the upcoming year. There really is a Big difference
between a C.P.A. and your run of the mill “tax guy”.
A C.P.A. is trained, tested, and certified, to help you
make the right decision. He or she usually has many years
experience dealing with many different types of businesses.
He or She is licensed and that means there is a License
to lose. The State Department of Professional Regulation
is very adamant about monitoring CPA’s. Yes, you might
pay a little more…but you get what you pay for. We
all try to get the best tonewoods at the best prices and
usually get what we pay for. We always explain this concept
to our customers so why not take a little of our own advice?
Especially when making an important business decision. Now…
There are Seven (7) Major types of “entities”
by which we can do business in the United States of America
. Some/most are formed at the State level and may or may
not be taxed by that State. All are taxed (or at least require
reporting) on the Federal Level. This is the one which usually
has the greatest taxable consequences.
1)
Sole Proprietor- This is the simplest. Far from the best.
2) Partnership- More than one person. Easy to form but can
be disastrous.
3) Limited Liability Partnership (LLP)- This is similar
to a partnership. Not for us.
4)
Limited Liability Corporation (LLC) – New & Hot
– Not for Luthiers.
5)
Corporation (C) – standard corporation.- General Motors,
G.E. etc.
6)
Corporation (S) – This in my opinion is the best form
of business and has the only real tax loop hole left in
Income Tax Law.
7)
Non-Profit Organization – Most of us don’t qualify
for non-profit status. Forget about it.
Now
let’s take a closer look at each Entity:
1)
Sole Proprietor- easy to form but there are some major “catches”
if you will:
Full liability to creditors/vendors/everyone. Don’t
pay that lumber bill…you are personally liable. Get
in an auto accident and maim/cripple someone your insurance
will never cover the damages…but you will…even
homestead can’t stop the liens. The business income
and deductions go on your personal tax return ( Schedule-C
). Get audited for business deductions and the agent will
probably extend the audit to your personal deductions portion
(Schedule – A). They are not supposed to but they
do!
You
are also subject to Self-employment tax (15.3%) on every
dollar of profit. Even if you don’t owe any income
tax, or were generally due a refund, you now owe Self-employment
tax . This is a below the line tax, separately computed,
and due if your net profit is $600 or more.
2) Partnership – easy to form, again some major things
to consider:
In most cases you are fully liable for all debts and liabilities
of the Partnership. You may be liable for those liabilities
which your partner contracts on your behalf and without
your knowledge. Limited Partners escape liability beyond
their investment but only if they don’t participate
in the day to day operations/management. General partners
are fully liable for all liabilities. IRS usually looks
for deep pockets.
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