Hobby, Business or Legacy – what are you building?

In today’s challenging environment of COVID-19, many small business owners are looking for financial support to maintain their enterprises.  Some of these enterprise owners are finding that the way they have been operating, is less than what can actually be considered running a business.  That brings up the question … Is your enterprise a Hobby, a Business or are you building a Legacy? While there is no right or wrong answer to this question, your vision for your enterprise should be crystal clear in your own mind and on paper.

HOBBY … If you make a small quantity of something that you enjoy making and mainly give/sell it to family, friends and close associates for a little extra money to be able to afford a new bag, buy Starbucks every day or eat out more, you are likely dealing with a hobby.  As an example in this post and, while I’m sure the government will rightfully disagree with me on this point, this is a structure that really doesn’t require much of a formal business structure.  Again, I’m sure the IRS and local sales tax agency will rightfully disagree because as we all know, if you sell anything, your income should be reported (and properly taxed).

BUSINESS … If you’re past the stage of having a hobby and you’re building something to sustain yourself and your family, congratulations, you have likely graduated to the point of having a business.  A business, of course, comes in many varieties.

Many people start out testing the waters by running their business as a Sole Proprietorship.  There is absolutely nothing wrong with running your business under that structure, providing you actually complete all the steps of being a sole proprietor, i.e. filing a Fictitious Business Name Statement, getting a business license and, if you sell a product or service, securing a Seller’s Permit.  If you sell a product or service (some are taxable), your business needs to charge sales tax.  You will need to do a sales tax return (in California) with the Board of Equalization.  It costs nothing to get your Seller’s permit, the sales tax returns are easy to file online (I’ve been doing them for 11 years) and, if you properly put the sales tax monies aside as you collect them and pay your Sales Tax to the properly local tax agency, you will keep yourself out of hot water. There are two scenarios here that you will want to stay away from.  First, if you don’t charge sales tax and local tax agency catches up with you, you’ll be in trouble.  Second, if you do charge sales tax and you don’t give that money to the tax agency, you are in even bigger trouble.  When you run a proper and hopefully successful business, you don’t want to get into trouble, especially tax trouble – ever!

There are also two major drawbacks to running your business as a Sole Proprietor.  First, you cannot build business credit.  Business credit is what your business can build and use for things like inventory, equipment, real estate and other necessary items WITHOUT you, the business owner, using your personal social security number to qualify for and secure the loan.  In order to start this process, your business needs to be a standalone entity.  That means it needs to be an LLC or a corporation .  Second, your personal assets are fair game to anyone who sues your business if something goes wrong.  Even having business insurance can protect you from having your assets attached in the case of a law suit.  For these two reasons specifically, I recommend establishing at minimum an LLC (Limited Liability Company) to avoid those two pitfalls.

The LLC (Limited Liability Company) is the next business structure step up for your enterprise.  It’s sometimes referred It provides a level of asset protection, called a corporate veil, that keeps your personal assets from being seized if your business is sued.  It also is the minimum requirement for setting your business up for business credit.  LLC’s, unlike  S-Corps and C-Corps, have no limitations on the number of members  they have as part of the corporation nor does it have restrictions on where those members are located in the world.  LLC’s do not have stock holders, only members and managers. LLC’s are low maintenance corporations, requiring only a Statement of Information filing every two years and with pass-through taxation, members of the LLC file their portion of the income on their personal taxes on a Schedule C.  There are no boards, board meetings, keeping minutes or complicated corporate filings.  Depending on the LLC’s income, there may be tax advantages to having your LLC taxed as an S-Corp, but you should consult your tax professional to determine the benefits of that decision based on your personal financial situation.

Corporations (S-Corp, C-Corp and Nonprofit) are highly structured entities and require a Board of Directors, Board Meetings, Meeting minutes and specialized tax filings.  S-Corporations are for 100 or less stock holders, while C-Corporations can have unlimited shareholders and multiple classes of stock.  Most small businesses, unless they have investors who will get a portion of the business, won’t want to spend the time, energy and money to set up S or C Corporations.  Remember that you can always upgrade your business structure as your enterprise grows and expands.  Nonprofit corporations are a whole other ball of wax.  We are happy to consult with you if you have a passion you would like to turn into a Nonprofit organization.

BUILDING YOUR BUSINESS LEGACY … bottom line is that you can build a legacy using any business structure, IF you set it up properly, document every aspect of your business and maintain good business records.  As a Sole Proprietor or a Single Member LLC, it’s important to create an operating agreement that outlines how the business is to run, on a day-to-day basis and once it passes on to your heirs.  If you want your business to survive you, write your business survival documents like a will, being very specific about how you want the business to carry on when you’re no longer involved.  Let your heirs know what your wishes are so that they can potentially step into your shoes seamlessly and without any surprises.

MoorePark Enterprises is an Incorporation Service, a California Registered Agent For Service and a Small Business Development group that helps small business owners navigate business structuring and set-up, business accounting and financing, sales and marketing, and more.  Our team provides hands-on training, classes and incubator services to assist at every level of business growth.

9719 Lincoln Village Drive, Ste 504, Sacramento, CA 95827 | mpe@mpe-llc.com | +1 866-887-3737

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