Tin Man

Posts: 31 Member Since: 07/08/2015


Feb 22 16 7:27 PM

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I've been writing up a business plan for a startup mastering studio. This will help when/if I pursue some financing for startup costs, and has been a really helpful way take a detailed look at expenses and revenue needed to go into business. 

Anyone care to share their accumulated wisdom on how to approach tax filing in the U.S.?
Let's start with business type: I had assumed that forming an LLC was most appropriate. But, a friend in a different line of work told me that an S Corporation worked better for him. Advantages (this is hearsay) being that you only pay tax on the money you pay yourself out of the overall business. However, setting it up and keeping it running seems a bit more complicated. 

This (S-Corp) approach seems attractive to me, because I wouldn't expect to pay myself anything for some time. Paying off some debt, keeping the lights on, and saving up for gear would be all I would hope to accomplish initially. (Quitting my day job comes later, hopefully).  In theory, if your S Corp charged a customer $100 for something, you could pay yourself $10 of it (and pay about $2 income tax on that), and put all of the remaining $90 back into operating expenses. Or, another way of saying it is that until you actually pay yourself some money, you can put 100% of your hourly rate back into the business. I believe that with an LLC, you would be taking out 20-30% in taxes off the top before counting how much you have left to pay expenses. No?

And on a similar topic, what has proved the best way to set aside money for taxes? Setting aside a share of each invoice paid? Trying to set aside a targeted percentage of income each quarter/year? Or just trying to keep some money around for taxes when the time comes? I suppose you can always use the Willie Nelson method (aka, worry about it later)...
Thanks for reading.
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Platinum Blonde

Posts: 1,008 Member Since:22/02/2011

#1 [url]

Feb 22 16 8:23 PM

I rely on an accountant, and for years now I've been paying quarterly estimated taxes in advance. Generally I'm overpaying and seeing a refund, which might be rolled back into the next year's taxes.

I don't try to get around taxes by incorporating, but I do keep meticulous records of everything, and I also stay firmly aware that music/gear stuff can be written off when running a sound engineering type business. For me, that means there's a lot that I can get if it's 'operating a recording studio of the type my products will serve' or 'buying hardware effects of the type I might imitate with plugins'.

I'm given to understand if you're a cartoonist, for instance, any comics/movies/etc YOU consume can be written off as 'feeding the creative process'. Less so if you're an accountant :)

Chris Johnson, airwindows.com

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Platinum Blonde

Posts: 1,532 Member Since:27/01/2011

#3 [url]

Feb 22 16 9:27 PM

compasspnt wrote:
I've had all types, S, LLC, Inc, S.A., whatever.

Now I am operating as a sole proprietor with no incorporation; it's easier and cheaper for me.

My book keeper has told me that the differences between LLC, S corp and sole proprietor are dissappearing. I am a sole proprieter. It's moving toward either being a C corp or not a C corp. I recentlychanged heath care coverage to getting it through the Affordable Care Act. At the doctors office they said that the options are much bettter if you are an LLC. There are apprently no tax advantages for me being an LLC but if the healthcare is much better I might switch.

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Platinum Blonde

Posts: 1,697 Member Since:02/02/2011

#6 [url]

Feb 23 16 9:02 AM

I've been sole proprietor from the start, but did flirt with changing over to an LLC or S-corp at one point, but that seemed a bit more complicated and involved more paperwork and fees to set up initially.

I/we our my taxes done by a mom and pop company that's been around for a long time and doesn't charge an arm and a leg. Keeping good records of operating expenses and spending is key but not too difficult. Finding decent liability and health insurance is important. I've never really had or written a business plan but do think it's important to start on the ground floor and expect to grow slow rather than go all in from the start. Either way, it's hard to imagine a start up in the present day's musical climate as it was a very high risk venture before everyone that owned a computer owned a studio. gl

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Platinum Blonde

Posts: 1,615 Member Since:27/07/2011

#7 [url]

Feb 23 16 7:10 PM

I was part of a corporation that converted to an S and all was well until we sold it. We really took a screwing on capital gains and the accountant who convinced us to make the change all those years ago said that it had probably been mistake to convert to an S chapter corp. after all. Lovely. My company is an LLC now.

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bob olhsson

Aqua Marine

Posts: 3,353 Member Since:25/01/2011

#8 [url]

Feb 24 16 6:33 PM

Sole proprietors have lots fewer restrictions and bookkeeping requirements. A highly respected accountant told me years ago to not even think about being anything other than a sole proprietor operating on a cash basis unless I have significant assets to protect from lawsuits.

www.audiomastery.com Bob's room 615 562-4346 georgetownmasters.com Georgetown Masters 615 254-3233

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Ruby Baby

Posts: 5,684 Member Since:26/01/2011

#9 [url]

Feb 25 16 7:47 AM

If I understand correctly, before Roth IRAs an S corporation allowed you to shelter more pre-tax income for retirement than a sole proprietorship. That's not true any more.

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Posts: 131 Member Since:17/11/2012

#10 [url]

Feb 25 16 8:35 AM

LLC that elected S status here.  The two terms are not mutually exclusive.  If you set up as a single member LLC the IRS requires you to file just as a sole proprietor would.   I elected subchapter S treatment the first time I was asked by a customer to provide a W-9.   W-9s are used by businesses to collect your information and ID numbers in case they have to send you a 1099.   The instructions on the W-9 clearly state that the Social security number of LLC's single member, NOT the LLC's Federal ID number, be provided on the form; because, remember, the single member LLC is treated by the IRS as a sole proprietor.   They do recognize an LLC who has elected subchapter S status as a seperate entity.  I probably could have gotten away with just ignoring the instructions and put the LLC's ID number in, but you never know when your customer's person in charge of handling W-9s and 1099s is going to be a stickler for rules and details.   I will not give any customer my social security number.

I like operating as an S Corp.  I like getting a regular paycheck, albeit very small, as opposed to just taking money momey out.  Also, I dont worry about filing quarterly estimated income tax returns because in December, if it looks like I haven't had enough taxe withheld from my checks, I can pay myself a bonus and withhold the shortage from that.   Income taxes withheld from payroll checks are deemed to have been paid in evenly throughout the year.

There seems to be some confusion or misinformation in what you've been told.   Subchapter S is a "pass-thru" entity.   What this means is that, after paying yourself a salary, dedcting depreciation and expenses, the corpration will have either a loss or a profit, and you will get a Schedule K showing the amount of that loss or profit.   Whatever that number is it goes straight to your 1040.   So it basically works out the same between sole propritor status or subchapter S status.

The thing that's biting me right now is a business personal property tax levied by the county in which I operate.  Whether I have a good year or a bad year I am taxed on every mic, pre, headphone, monitor that I own.  So dont ignore local stuff, because it can be much worse than the federal stuff.

Earl Norris www.fourloudbarks.com

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Posts: 162 Member Since:02/02/2011

#12 [url]

Apr 3 16 8:35 PM

One issue with S corp is you keep more money now, but you aren't paying in what you would for SS, so come retirement time the SS checks will not be as large.

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Aqua Marine

Posts: 3,211 Member Since:23/01/2011

#14 [url]

Apr 4 16 5:06 PM

zmix wrote:

compasspnt wrote:I am operating as a sole proprietor with no incorporation; it's easier and cheaper for me.

Me too... 

Me three, except it's really me four, since that's also what Bob does.  

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