Reptile business...

.....I am clueless when it comes to business related stuff, and was just wondering this the other day...and another post just reminded me to ask.

When should a 'hobby' herp keeper that is selling reptiles go about forming a proper business? Is there a certain level of income or expense that should be reached first or should this be done right from the start? What benefits would it offer?

If any of you know a good 'starting up a business' site that I can check out to learn a little please let me know. It seems that I have spent all my college years learning how to design stuff and the only business training that I have is preparing budgets, schedules, and estimates for construction projects......I have not learned a single thing about how to run a business or even how to start one.

One of our resident accountants will have to chime in, but I think the cut off between "hobby" and "business" is $1,200.00 in annual income???

Don't quote me on that though.

-adam

The IRS seperates a business from a hobby is you actually turn a profit in the first three years. If after three years, you still don't have enough income to report, your "business" is then classified as a hobby, and you can no longer take deductions from your "hobby".

I need to find an accountant anyways.....having two different jobs and getting married half way though the year really seems to be complicating things for taxes...

Ken, help me understand. After three years from ??? when you started taking deductions, losses, etc...

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Originally Posted by ARamos8

Ken, help me understand. After three years from ??? when you started taking deductions, losses, etc...

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This is quoted directly from TurboTax's "Tax Help"

(When they speak of "This Schedule" they're talking about Schedule C)

What should I consider before I complete my business income and expenses?


Make sure that your business is actually a business and not a hobby.

You can report your business income and expenses on this schedule only if you intend to make a profit. Don't report your income and expenses here if this is a hobby, even if you make a profit from it. In other words, you can't deduct expenses for your hobby simply by calling it a business.

The IRS automatically considers your business a hobby if you show a loss for three or more of the last five years. There's an exception to this rule. Horse breeding or racing are considered businesses if they show a profit in at least two of the last seven years.

If your business is considered a hobby:

- The IRS will not allow you to deduct more expenses than the amount you report as income.

- You must report your income as "Other income" instead of on this schedule.

- You can deduct your expenses only on Schedule A, Itemized Deductions.

You should form an LLC or corp of some kind NOW. One thing most people forget when they are setting up a small or home based business is Personal Liability. If you're running a business in your name and something goes wrong, YOU get sued. If you've got an LLC, structured properly, and something goes wrong, the LLC gets sued. It will sheild you, and your assets. So I wouldn't wait. Plus you want something in place for taxes before you start making money, not after.

Crystal Clear. I got it Ken. So you can't have your cake (losses / deductions) and eat it too (profits from a hobby). Thanks.:D

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Originally Posted by monkeywrench133

You should form an LLC or corp of some kind NOW. One thing most people forget when they are setting up a small or home based business is Personal Liability. If you're running a business in your name and something goes wrong, YOU get sued. If you've got an LLC, structured properly, and something goes wrong, the LLC gets sued. It will sheild you, and your assets. So I wouldn't wait. Plus you want something in place for taxes before you start making money, not after.

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The levels of protection afforded by incorporating aren't what they used to be. These days, even executives of traditional corporate structures are being held accountable for their actions in US civil courts. That’s why executive liability insurance is one of the fastest growing sectors of the insurance market.

The "shield" that used to be the us corporation is not as strong as it once was.

Your liability as the owner of a home based business operating as an LLC is really the same as if you were a sole proprietor ship. While the courts are always hesitant to seize personal property, if fitting, LLC status will not stop them.

-adam

Does it cost anything to form a LLC? Is there something different from a LLC I should consider?

Great thread, Daniel.. I was wondering the same things. I don't expect to turn a profit any time soon, but I would like to be prepared.

Adam, True, the level of protection isn't what it used to be, but something is still better than nothing.

Shelby, When I set up my Chapter S Corp. it cost $400. In AZ you can set up an LLC for about $200. There are only two types of LLC that I know of, the standard LLC, and a PLLC (professional limited liability corp) that is designed for professionals such as doctors, lawyer, and realtors. I am a realtor, but my attorney and accountant/tax advisor set up an S Corp for me (service corp) because real estate is not the only thing I do.

I don't know what an S corp is.. my dad has talked to me about it but it went over my head. *sigh*

Would you recommend a LLC for a snake breeder? How do I go about forming one?

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Originally Posted by Shelby

Would you recommend a LLC for a snake breeder? How do I go about forming one?

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oh boy....someone that knows just as much about this stuff as me :D

I figured that since ALOT of people on this site are talking about breeding ball pythons that this would be a really helpful topic....I plan to own my own business one day anyways...so if i can learn that kinda stuff now, it would be really helpful ;)

Ditto, Daniel. Especially since I plan on breeding one pair of snakes and selling babies this year.. I also have a budding art business. Getting requests from co-workers now.. lol

An S Corp is a corporation the specializes in personal services, as opposed to manufacturing or construction. There are specific rules that apply to each type of corp regarding what they can and can't do in regards to taxes. LLC are more flexible than corps, and are somewhat easier to maintain, there is certain record keeping that must be done to maintain status as a corp. So, an LLC would probably be your best bet. Really, if I were you, I'd find a really good accountant, who is an Enrolled Agent (meaning he is authorized by the IRS to represent you in tax court) and who's been in the business for a while. Sit down with them and discuss your financial situation, and where you plan to be in 5 years, and see what they say.

Would the LLC also apply to those individuals who just want to dink with breeding as a hobby and do an occassional sale here and there? I would suspect some degree of protection would be a "nice to have".

You can incorporate or form an LLC at any time, for any reason. And it makes no difference how much business you've done, or how much you plan on doing. As I said earlier, it's better to get the structure in place before you start making money, so when you begin making it, you're not paying an arm and a leg in taxes. Again, find a good, knowledgeable accountant, who's been around the block a couple times and isn't afraid to go nose to nose with the IRS, and write out a 5 year plan with him.

LLC's are perfect for a home based breeding business owned by a single individual. With LLC's, you don't have to mess with issuing stock, boards of directors, and they allow for pass through profit taking.

Corps and S-Corps are really designed for larger organization that might have multiple partners and/or investors. Most of the time with corps and s-corps, owners must be paid a salary which is taxed when paid and when received ... and then profits of the corp or s-corp are taxed (at a higher rate) as well.

With an LLC or sole proprietorship (which is not a corporation but still a viable business entity) the profits are your salary and are only taxed once.

For most people, a sole proprietorship is just fine.

-adam

Ok.. bear with me here. What's the difference between an LLC and a sole proprietorship? Does it cost the same amount to start either one?

As I understand it, when you create an LLC or incorporate, you create a separate, independent entity that conducts business. That's where the layer of protection is . With a sole proprietorship, YOU are the business. The tax issues may be very similar to an LLC, but if something goes wrong, your butt is directly in the line of fire.

I don't believe there's any cost in setting up a sole proprietorship, other than printing the letterhead.

I was just wondering because I have spent around $4000-$5000 on snakes, lizards, enclosures, heating equipment, feeder rodents and insects, website, various memberships and accounts, uniforms (i made these wicked DH Reptiles Shirts ;)), bunch of office type supplies to keep myself organized, and various other things. I have yet to produce any reptiles to sell, and will not have the chance to until this time next year. I keep receipts for everything so I could get an exact number of my expences. I really would like to get where I need to be on all this 'business' stuff especially before I drop a few grand on some more animals.

Like I said before, I can do budgets, handle and invest money, predict costs and make cost estimates....but when it comes to the actual function of a business entity itself...i have no clue how to start one or keep up with one. Is there a good place to get info on this stuff, before i go the whole nine yards and get an accountant to handle everything....I like to be somewhat prepared and educated so I dont sound like an idiot.

Ok that makes sense. Thanks for your patience with the clueless. lol

Daniel, keep in mind that you can amend tax return for up to three years.


So keep all your reciepts, etc, but don't claim the deductions yet, then in a couple years, if you have made a profit breeding/selling snakes, you can go back and claim those deductions.

I should keep records from all the stuff I'm spending money on for the snakes..

Dumb question alert - do I have to have the actual paper recipts, or can I keep a record on my computer? I know I don't have every recipt for the racks and cages and whatnot..

As long as you can prove you spent the money, you "should" be OK.

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Originally Posted by monkeywrench133

As I understand it, when you create an LLC or incorporate, you create a separate, independent entity that conducts business. That's where the layer of protection is . With a sole proprietorship, YOU are the business. The tax issues may be very similar to an LLC, but if something goes wrong, your butt is directly in the line of fire.

I don't believe there's any cost in setting up a sole proprietorship, other than printing the letterhead.

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If you're a single owner of an LLC that is a home based business, legally, your butt is just as much in the line of fire as a sole proprietorship. There is case law after case law of personal assests being ceased in civil actions against solely owned LLCs.

The real advantage to forming an LLC is that once you reach a certain level of income and business activity, the tax breaks are better. Once your start dealing with things like payrolls and material investments in the 10's of thousands of dollars, an LLC is the best way to go. For a reptile breeder doing 10K a year or less selling snakes, there is nothing wrong with a sole proprietorship and best of all, it's free. :D

-adam

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Originally Posted by Shelby

Dumb question alert - do I have to have the actual paper recipts

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It's really a good idea to keep them. I certainly wouldn't want to show up to an audit without receipts for deductions that I took ... could be painful. ;)

-adam

I'll keep them from now on. I didn't think I'd ever need them (dumb)

Thanks for the advice about finding the right sort of accountant. I'm not sure either what Mike and I will eventually set up as we are partners in any future breeding/selling ventures so it needs to be set up as such.



~~Jo~~

I plan on finally getting around to forming an LLC this year. Cost is anywhere from $200-$300, but you can set it up yourself with the proper forms and paperwork. I'm doing some research now and hopefully will have that set up soon.


Most small hobbyist/breeders here in FL don't set up anything as they don't want to claim any income from breeding. I know a few breeders producing & selling between $20K-$100K a year and don't ever plan of setting anything up at all. Whether this will bite them in the end some day is another story!

There are two things in this world I don't mess with...God and the IRS!!

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Originally Posted by ssscales

There are two things in this world I don't mess with...God and the IRS!!

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God has the capacitiy to forgive, worry more about the IRS.