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Starting Lutherie Business
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Author:  MaxBishop [ Tue Jan 02, 2007 2:53 am ]
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After a year of building guitars I want to start a business. I live in Brighton, Michigan and have also posted this on the Michigan Luthiers forum.

I know Hesh is down the road in Ann Arbor and suspect there are other Michigan luthiers on the forum. I need direction on how to go about setting up from a government/forms/tax standpoint, but I am also very interested in others' experience regarding dos, don't and any other tips.

I also thought that this might be an interesting string for members' anecdotes, etc.

Thanks in advance,
Max
Author:  Michael Dale Payne [ Tue Jan 02, 2007 3:16 am ]
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IMO. If you are just getting started I would not go to the expense of forming a company. Rather set up a checking account in your name as a DBA account (Doing Business As) All deposits and payments are deposited into this account. All expenditures are paid from this account. At the end of each Commission pay yourself out of this account. Keep your records in order and at tax time declare the income as earned income. If after 5 years of doing business this way you are still in business and you have enough consistent work that the IRS will allow you to deduct depreciation on your tools then you might want to set up a cooperation or limited enterprise but to get started I think a DBA account is a better way to go.MichaelP39084.474849537
Author:  David Collins [ Tue Jan 02, 2007 3:42 am ]
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Hi Max, good to have you here.

What type of business or market are you aiming for? Building custom or
production, repair, retail? I would certainly recommend trying to
attend the next MGL meeting if you have the chance.

As far as opening a business, if it's a solo operation all you really need is
a DBA if you want to use your business name in a legal sense. You really
don't need a federal or state tax ID number unless you will have
employees or offer retail sales. I've only needed my tax numbers to open
accounts with wholesale distributors that I deal with, but most won't sell
to you unless you have a commercial address anyway. I'll be taking on an
employee in the next few months so that will be changing, and I can't
wait to deal with more paperwork.

I'm right down the road here in Ann Arbor, so feel free to call or drop by
any time you're down here.
Author:  Brock Poling [ Tue Jan 02, 2007 3:47 am ]
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[QUOTE=MichaelP] IMO. If you are just getting started I would not go to the expense of forming a company. Rather set up a checking account in your name as a DBA account (Doing Business As) All deposits and payments are deposited into this account. All expenditures are paid from this account. At the end of each Commission pay yourself out of this account. Keep your records in order and at tax time declare the income as earned income. If after 5 years of doing business this way you are still in business and you have enough consistent work that the IRS will allow you to deduct depreciation on your tools then you might want to set up a cooperation or limited enterprise but to get started I think a DBA account is a better way to go.[/QUOTE]

You are definitely right about keeping the books, but I would definitely set up a corporate structure from the get go. It really isn't that expensive (especially a single member LLC) and it makes things a lot cleaner.

Another thing I would do is hire an accountant to produce financial statements for you on at least a quarterly basis. This is fairly inexpensive if you keep decent records and not only will it help you understand how much you are making (or losing), but accountants often have creative ways of helping you minimize taxes and managing the financial side of the business.

Author:  martinedwards [ Tue Jan 02, 2007 3:59 am ]
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An accountant is rarely a wasted expence.
Author:  Michael Dale Payne [ Tue Jan 02, 2007 4:51 am ]
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I have not ran in to any vendor that will not ship to my home as long as my invoice is pre-paid. I have an personal accountant that also does my taxes. He told me that unless I could prove enough business that the IRS would not allow me to take business deductions or depreciate my tooling. with out those deduction I found no real reason other than liability to incorporate. I have no employees and very little product liability issues to worry with, so he recommended that I stay on a DBA account. I wholeheartedly suggest you have an accountant. but If your business is building and you are the only one working in your shop. I would at least start as a DBA till you know that you are going to stick with it. Now if you are planing on doing a lot of repair work which will put other peoples instruments in your shop, or anything else that will increase your liability then an LLC is a good idea.
Author:  Sam Price [ Tue Jan 02, 2007 4:53 am ]
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Max, all the very best for your venture.

We've talked about this at home at great length, and him indoors knows how long I've wanted to build guitars for, I'm quite keen at this building malarky ...it may be possible that when the time is right, I'm going to start looking for employment in this area as opposed to starting a business...

As a lifelong artist/craftsperson, I have NEVER been so creatively satisfied in all my life. Ideas are just coming to me all the time.

However it's a venture I couldn't support the fmaily with if I went out on my own.

Sam Price39084.5386574074
Author:  MaxBishop [ Tue Jan 02, 2007 5:51 am ]
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Thanks, Hesh. I would love to get together sometime. The pictures of your guitars have knocked me out.

Max
Author:  MaxBishop [ Tue Jan 02, 2007 5:52 am ]
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Thanks, Michael. I will look into the the DBA approach. Your input is most appreciated.

Regards,
Max
Author:  MaxBishop [ Tue Jan 02, 2007 6:06 am ]
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Hi David,

I am planning to do custom work and possibly some repairs. Where can I find out about tax benefits of the DBA?

I would love to get together sometime and I will check on the MGL meeting.

Thanks,
Max
Author:  MaxBishop [ Tue Jan 02, 2007 6:13 am ]
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Hi Sam,

it's nice to hear from you. I have wanted to do this for about 40 years and recent my retirement allows me to do it at last without many of the concerns of making a living at it that you have.

I wish you all the best of luck in your search for work in the field and hope to hear of your success.

Best regards,
Max
Author:  Howard Klepper [ Tue Jan 02, 2007 6:28 am ]
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[QUOTE=MichaelP] I have not ran in to any vendor that will not ship to my home as long as my invoice is pre-paid. I have an personal accountant that also does my taxes. He told me that unless I could prove enough business that the IRS would not allow me to take business deductions or depreciate my tooling. with out those deduction I found no real reason other than liability to incorporate. I have no employees and very little product liability issues to worry with, so he recommended that I stay on a DBA account. I wholeheartedly suggest you have an accountant. but If your business is building and you are the only one working in your shop. I would at least start as a DBA till you know that you are going to stick with it. Now if you are planing on doing a lot of repair work which will put other peoples instruments in your shop, or anything else that will increase your liability then an LLC is a good idea.[/QUOTE]

Everybody who sells a product has a product liability issue that needs attending to, in order that you can not worry about it. If you are selling a product, your personal liability insurance does not cover it, and you are at risk. You don't have to end with a judgment against you for the effect of being sued to be disastrous. There is no amount of product liability exposure that is too small to bother insuring.

I think your accountant may be misadvising you (in addition to his having given you dubious legal advice, which he shouldn't be doing at all). One hears a lot of false things about whether the IRS will allow you to treat something as a business. You do not need any specific volume, or even to make a profit (not true that you must make a profit withing 3 years, or something like that). What you need is to be making a bona fide attempt at making money, and not claiming your hobby as a business; there isn't a black and white border on that. It's true that certain things lend credibility to your claim, like a separate business location. But so does a business license, seller's permit, business checking account, doing advertising and trade shows, AND having separate business insurance. Also, if you have the idea that you need to be incorporated to treat your tools as business equipment and depreciate them, etc. (not clear from your post), that is wrong. A sole proprietor or partnership can do those things, too.

I can't see that liability for people's guitars is any reason to incorporate. Any small business insurance policy is going to provide ample coverage for your liability for customers' guitars. Howard Klepper39084.6204861111
Author:  Michael Dale Payne [ Tue Jan 02, 2007 6:30 am ]
Post subject: 
[QUOTE=MaxBishop] Hi David,

I am planning to do custom work and possibly some repairs. Where can I find out about tax benefits of the DBA?

I would love to get together sometime and I will check on the MGL meeting.

Thanks,
Max[/QUOTE]

There is no added tax benefit of a DBA. All earnings are earned income. You must track via your books all material usage and pay yourself out of the DBA account. The taxes will be your personal taxes. The DBA is not a separate entity from you personally. It is only a set of books on your business. The DBA account never shows a profit as the profit is paid to you and is claimed on your personal income as earned income.
Author:  David Collins [ Tue Jan 02, 2007 8:11 am ]
Post subject: 
Right, there is no tax issues involved with a DBA. All it does is allow you
to use your business name as a legal alias, so to speak. In my case it
would simply allow me to open a "Collins Luthiery" bank account and
accept checks written to that name, but there is no difference in terms of
liability or taxes. It's really just a piece of paper you get for $10 at your
local county offices.

If you're working on others instruments or allow anyone else to work in
your shop, then liability can become a concern. That's when incorporation
can become all the more necessary, although I've heard LLC's can be
pretty easy to pierce through in court for a sole proprietor. This means
you're personal assets (like your house) would not necessarily be
protected in event of a lawsuit. My wife is self employed as well, and we
are going to incorporate together, although I'm not really sure how it all
works. My expertise is in instruments, and I'll gladly hire an expert in that
field to handle the legal and accounting stuff.
Author:  McCollum [ Tue Jan 02, 2007 9:27 am ]
Post subject: 
Max, 1 year and you want to start a business? Are you nuts,
Do you realize how saturated the new guy market is? I hope you have a working spouse! Or your what I like to call
Gentleman luhiers, the kind that have lots of money
and need something to do in their early retirement!

But open a account with a DBA, get a resale permit, get busieness cards and a brochure, start advertising, saturate
your area. go to festivales, concerts guitar shows all the stores, build as many guitars as you can ! Work atleast 16 hours a day in the shop, and say goodby to vacations.
And if you suvive 2 years you have a chance!

Lance
Author:  Steve Saville [ Tue Jan 02, 2007 9:49 am ]
Post subject: 
[QUOTE=McCollum] Max, 1 year and you want to start a business? Are you nuts, Do you realize how saturated the new guy market is? I hope you have a working spouse! Or your what I like to call Gentleman luhiers, the kind that have lots of money and need something to do in their early retirement!
[/QUOTE]
Lance,
I think he fits the profile -

[QUOTE=MaxBishop] .......and recent my retirement allows me to do it at last without many of the concerns of making a living at it that you have........
[/QUOTE]

Author:  jhowell [ Tue Jan 02, 2007 12:15 pm ]
Post subject: 
Max--

Welcome to the forum! This is a great on-line community. I'm afraid that I can't help with the commercial end as I am a hobbiest builder. You have already received sound advice and I want to extend the best of wishes to you in this endeavor.

--Jim
Author:  Kelby [ Tue Jan 02, 2007 12:34 pm ]
Post subject: 
Incorporating generally will not relieve you of the kind of liability some here are suggesting.

You are always liable for your own negligence, period. Forming a corporation will never eliminate your liability for your own negligence. Incorporating can help you out if you have liability that does not arise from your own conduct, such as liability for the negligence of employees. If those employees work for you personally, you are liable for their negligence, but if they work for your corporation, then only your corporation is liable.

Let's walk through two examples. Suppose you are so optimistic about your lutherie business that you incorporate. You drive down to the lumber store to shop for some zoot. On the way, you read the newspaper. You run over a kid on a bike. Who is liable? Answer: Both you and your corporation. You are liable because you were negligent. Your corporation is liable because its employee (you) was negligent while on company business.

Next example. A customer brings you a valuable old D-45 to repair. You decide to try the latest greatest "Crisco" repair technique in whicy you perform all your work with Crisco all over your hands. You drop the guitar and cause $5000 in damage. The customer sues. Who is liable? Answer: you and the corporation are both liable. As with the kid on a bike example, you are liable because your own personal negligence injured someone. The corporation is liable because its employee (you) injured someone while on company business.

So, you ask, if incorporating doesn't really help, why does anyone do it? Well, the simple answer is that it can be helpful in the right situation --- namely, where liability is based on the acts of other employees. Say you hire an apprentice who drops the priceless D-45 and does $1 million worth of damage to it. If the apprentice is your personal employee, you are liable. If the apprentice works for your corporation, though, your corporation (not you) is liable as the employer.

There are other examples where incorporating is helpful, and perhaps some may apply to the solo luthier. But by and large, I don't think incorporating will relieve the average luthier from much responsibility unless you are doing something more than a one-man shop.
Author:  Brock Poling [ Tue Jan 02, 2007 12:50 pm ]
Post subject: 
[QUOTE=McCollum] Max, 1 year and you want to start a business? Are you nuts,
Do you realize how saturated the new guy market is? I hope you have a working spouse! Or your what I like to call
Gentleman luhiers, the kind that have lots of money
and need something to do in their early retirement!

But open a account with a DBA, get a resale permit, get busieness cards and a brochure, start advertising, saturate
your area. go to festivales, concerts guitar shows all the stores, build as many guitars as you can ! Work atleast 16 hours a day in the shop, and say goodby to vacations.
And if you suvive 2 years you have a chance!

Lance[/QUOTE]

Yes, but this is pretty typical in launching ANY new business venture. It takes a total committment.
Author:  SniderMike [ Tue Jan 02, 2007 12:56 pm ]
Post subject: 
Kelby, I've gotta try the Crisco technique
Author:  MSpencer [ Tue Jan 02, 2007 1:50 pm ]
Post subject: 
Kelby, well put, there is plenty of case history that involves the "piercing of the corporate veil" around the country relating to direct and indirect liabilities. Litigation in today's world operates along the "Bubba Smith" theory, grab everyone and everything and then throw out the ones of no value.

Mike
Author:  MaxBishop [ Tue Jan 02, 2007 3:16 pm ]
Post subject: 
Thanks for the kind words, Lance    Yes, my wife works, but I have seldom been accused of being a gentleman. I have retired (not early) from gainful employment. Anyway, I am going to make guitars. Whether I make any money is another question. So, I thought I would see if I could make a buck or two and shelter some income. I have already sold one guitar that I made (my brother bought it for his son). I really don't see what's so hard about this business

Thanks for the input.
Max
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