Comments on: How to Start and Setup an LLC – Checklist

By: Derek Chamberlain

Derek Chamberlain — Sat, 26 Mar 2016 17:58:58 +0000

Clyde,

You can in fact perform most of these steps before getting your package from LegalZoom. Some of the steps you will need to wait for will be the EIN, ficticious name, business license, state tax id. These will need to wait until the state corporation commission actually records your LLC on the record. Good luck!!

By: Clyde

Clyde — Fri, 25 Mar 2016 16:46:55 +0000

Can I do all of the above before I get my package from Legal Zoom?

By: Elie Fabros

Elie Fabros — Tue, 09 Jun 2015 06:09:05 +0000

Thanks for the info, it’s easy to understand.

By: Derek Chamberlain

Derek Chamberlain — Fri, 07 Jun 2013 11:28:08 +0000

Rob, Not an expert here, but I think you could probably expense it vs. depreciate it. "As of 2012, the IRS allows you to directly write off expenses up to $139,000, rather than depreciating them over time." I would call the tools "supplies". See here: http://smallbusiness.chron.com/should-expense-depreciate-purchases-assets-business-income-taxes-46561.html More info from the IRS website: "Section 179 deduction. You can elect to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. This deduction is known as the “section 179 deduction.” The maximum amount you can elect to deduct during 2012 is generally $139,000 (higher limits apply to certain property). See IRC 179(e)." See here: http://www.irs.gov/publications/p334/ch08.html I believe you are allowed to expense it up to the amount of income earned... So, if you made $1000 in 2014, you could deduct this amount in tools with no issues. If you are trying to buy $10,000 in tools and only showing an income of $500 annually for the long run you will most likely run into problems no matter how you slice it... With an LLC without any special tax elections, it will be considered pass-through. So, you only have to fill it out with your tax info once a year vs. every month! You can setup your LLC for $100-$200 and save several hundred a year in tax deductions it seems to me...

By: Rob Lang

Rob Lang — Fri, 07 Jun 2013 01:23:05 +0000

The depreciation tool would get very tricky at the end of the useful life of my tools. If I only make let’s say $500 in a year with my very small workload, I could only depreciate my tools something much less than that to “show profitability” which means I’m nearly working for free. By the end of 8-10 years when I need a new drill there would still be value left in the tool on paper but not in reality because I depreciated it slower than I should have. At that point I would have to figure out the tax implication. What’s annoying is there is no “law” that says you have to be a good businessman, so the 3-of-5 rule seems lame. My ideal situation would be to reduce my tax liability by using my garage/workshop as a woodworking business and be able to deduct “business related” expenses…especially that new tool I’ve been eyeing. Filling out the monthly state forms would be worth it if I’m saving $1000+ in taxes per year through my “business losses”.

By: Derek Chamberlain

Derek Chamberlain — Thu, 06 Jun 2013 12:31:22 +0000

Hmm... As I understand it, the 3-of-5 test is just a simple screening tool to decide if you need to be audited. If you are actually trying to run it as a business vs. a hobby and can demonstrate this, I think you would still be OK. One other thing to consider that you could depreciate just enough to show profitability in 3 out of the 5 years. This might avoid closer scrutiny if you're nervous. Also, even if it is a hobby, you are allowed to deduct expenses up to the hobby income. If you are trying to go the business route, there are other ways you can show the IRS that you're operating a business (besides the 3-out-of-5 rule) in a FOR PROFIT MOTIVE that include:

Creating an LLC
Getting business cards
Setting up a separate business bank account
Advertising or Marketing
Obtain a EIN
Amount of personal pleasure you gain from the activity. Repeat after me, "I gain no personal pleasure from this woodworking activity Mr. IRS agent. It is purely a business endeavor."

See these links for more details. Read up on the third link which shows you the 9 tests the IRS applies to determine if your business is being run with a FOR PROFIT MOTIVE:

-Good luck!!

By: Rob Lang

Rob Lang — Wed, 05 Jun 2013 21:48:16 +0000

Looks pretty good. I have seriously considered starting an LLC for my woodworking hobby. I would be taking custom job orders on a variety of projects using both traditional techniques and my CNC router (for business signs as an example). One benefit a friend mentioned is all of the TOOLS I have bought, will buy, or receive as a gift could be depreciated on my taxes and thus lower my tax liability. Very appealing since I have inventoried over $10k in tools in my workshop. My concern is to prove to the IRS its not a “hobby” you have to show you’re profitable for 3 of 5 years which, combined with my depreciation, I wouldn’t show profitability…ever. I don’t see enough business to make a good case.