I Want to Lawyer Up

Sew Sweetness
I don’t have any cool pictures of me visiting the lawyer…
perhaps I should have brought him a little mug rug to thank him for his help, lol.

So I’ve been whining a lot lately about the legal and tax-related mumbo-jumbo that comes with setting up a small business. I started selling pdf sewing patterns about a week and a half ago, and my husband requested that I look into some form of liability protection, so that in case of the worst-case scenario, our house and cars do not get taken away. “Just Google it,” he says.

Well, I admit that anything non-creative just makes me frown, and when I started looking into some of this stuff, I panicked and felt like I was trying to read French. So today, I went in search of some answers, and I’d like to share some of those with you here.

Disclaimer: I am not a lawyer. Anything contained in this blog post are just things I was told by a lawyer, and findings from on-line legal websites. I am not suggesting you do any of these things; if you need more information, check with your local government.

I wanted to talk about this on my blog because there seems to be a lot of confusion regarding this kind of issue, and there must be other people out there that have the same types of questions that I did. My viewpoint on this is from someone who has a business where you make some form of craft (in my case, it is intellectual property in the form of a pdf sewing pattern).

I live in Chicago, and the city of Chicago has a great resource called the Solution Station, which is available to small businesses. They have one-on-one guidance available 3 days a week, in 3 different areas (tax-related questions, legal advice, and how to obtain funding), and this service is free. I went on the legal day, because that is the area that I needed the most help with. I actually went downtown to City Hall, which is not the most fun thing in the world, being how there is no parking (unless you’re prepared to pay at least $20). I didn’t have to wait, and the person that helped me was really nice and didn’t laugh at my stupid questions.

Basically, for someone that is the owner of the business and only employee (like I am), there are 2 main options in order to be protected from liability: an s-corp and an LLC (limited liability corporation). I would be considered a sole-proprietor, but that just means I am the only owner of the business. Both the s-corp and the LLC will protect you in case someone sues you, but as I understood, there were a couple of differences between the two. I found this nice little article about it that I could actually understand.

The lawyer that I talked to said that there were more requirements from the business owner, if they decided to use an s-corp. The example that he gave is that even though you might be the only employee, you would still be required to keep weekly (I think he said weekly) ‘minutes’, which would be a meeting among the shareholders. Mine would probably go something like this, “Sara, how’s that pattern writing going?” “Hi Sara, it’s going great! When do you want to do some advertising?” “Sara, I’m not sure…maybe in another month or two?” He said that this might sound ridiculous, but stressed that if all the requirements/paperwork of the s-corp were not accounted for, that you still could be sued, even though you had an s-corp.

The fees for setting up either will depend on your city. The fees for Chicago for an s-corp are $181.25 to start, and the fees for setting up an LLC are $500 to start (my friend has told me that in California, the fee is around $800). Despite the cost difference, I felt more comfortable in deciding to go with an LLC, because it sounded more flexible.

So, what else did I find out? Even though I would be a sole-proprietor, I would need to obtain a DBA (doing business as). This is basically the name that you call your business. I did a check online to see if my intended name was available, and it was, so I printed and filled out the form that was available on my county’s website, and it will be signed by a notary public tomorrow. I had already applied for a business license, but the lawyer said that that would need to be changed over to the DBA name instead of my own name. He said all accounts used by the business would also need to be changed to the DBA name (website hosting, e-mail, bank account, any other accounts associated with the business). Once I obtain the DBA certificate in the mail, I will be able to apply for the LLC. There is a yearly fee for the LLC (my yearly fee after I first apply would be $250).

As a side mention, I had also read something online regarding liability and working from home…I asked the lawyer, since a room in our home is dedicated to my sewing (and my husband’s computer), do I need to be concerned with anything regarding that (heating, electric, whatever) and the LLC? Because the business was being conducted at home, should I be worried about our home still being able to taken in the event that something did happen? He said that that would be getting a bit ‘out there’, but that if I used my car to drive to purchase supplies (say, at Joann Fabrics), that I should keep track of the mileage. I order most of my supplies online, so I’m not really worried about that, but I do pick up the odd thing at Joann’s once in awhile.

In conclusion, even though the fee to set up an s-corp or an LLC may seem significant, especially to someone just starting out in a craft-related business, I think about how hard my husband and I have worked to have our own home. I can’t even fathom what would have to happen for me to get sued over something I have created (does someone have the same purse strap configuration as me?? lol), but just because I can’t imagine it, doesn’t mean it can’t ever happen. I’d rather just pay the yearly fee and have piece of mind.

Hopefully this has helped you! Again, like I said, please investigate this more thoroughly with your local government. I am still trying to get the tax stuff straightened out (hey, I only bought Quickbooks last week people, basically I installed it and put my name where they ask for it, haha), I will probably do another post talking about my experience with that. ;-)

I’m really looking forward to seeing in the comments of this post, if anyone else has anything to add, or a personal experience.

P.S. My overseas readers…I’m curious if your process is easier? Or more difficult?

 

34 thoughts on “I Want to Lawyer Up

  1. Thank for this info. I live in the NW Suburbs and just started blogging and an extremely small Etsy shop and although I sell products created from patterns that give permission I am still weary of the legal aspect.

  2. Sara,
    In CA the business taxes are super steep for an LLC as well. It is really prohibitive to very small businesses. And in case anyone in CA wants to know the process, our DBA is called Fictitious Business Name. We also have to purchase a Sellers Permit to sell anything. Even if it is once a year at a boutique or on etsy. AND we have sales tax to collect for online purchases so we have to keep track of that for each of the different zip codes/rates and pay those. Ugh. It’s overwhelming!

  3. I have owned my interior design business since 1984. I was a sole proprietor until 1993 and only became an S corp when I expanded, bought a building and employed several people. Up until that point, the sole proprietorship was certainly adequate and we had ample business insurance to cover any liability. I think you should start off as a sole proprietor until you get going and then, only go into an S corp when you are big enough. At the rate you are going, selling a few patterns, you won’t be making much money paying all of those fees. Yes, you do need to register your business name with your county, buy a county license and if you live within city limits, you might have to buy a city license as well. I have both. Yes, you need to protect yourself but the likelihood of a pattern exploding when opened or someone’s arm getting yanked off by a purse handle is slim to none. What I’ve gone through in my business would send chills up your spine but I have always been adequately protected. You might consider writing a business plan also. I work from home as well and have ample protection. You also need to get yourself a fire extinguisher for emergencies. When I walk into my cluttered with fabric sewing room, I need to take mine for a recharge. Would hate to lose everything. Didn’t I see that Studiokats was a new supplier of yours? You might want to consult with her as her business is certainly large enough to be an S corp. Carol

  4. P.S. A sole proprietor is just that, one person who owns a business. YOu are not a corporation as yet. You can stay a sole proprietor indefinitely. You will have to collect and pay sales tax as to your states requirements. Keep in mind, that on whatever profit you earn, you will have to pay FICA tax as well as income tax. It gets steep if you make a lot. And if you have employees you have to collect and pay their tax as well. Quickbooks is a good program but it is tricky to set up. Thankfuly, I own a franchise so my chart of accounts was provided to me. There are bookkeepers and accountants who specialize in quickbooks who could help you with this. Quicken is a much simpler to use version which would probably be adequate for your needs at this point. Hopefully I fixed my no reply blogger problem so feel free to contact me. I have 29 years business experience in Florida. Carol

  5. I agree with Carol. I think an LLC or S-corp is a great choice for when your business really expands and especially when you take on extra responsibilities/ liabilities like employees, large contracts, and renting/ buying workspace. It is a little cost prohibitive for mico businesses (like small Etsy shops and pattern designers) to start out as an LLC or s-corp, so sometimes it’s a great idea to remain a Sole Proprietor at least initially and then hold the option of becoming an LLC or S-corp for later on. One thing that small, creative businesses should do to protect themselves is to register your copyright. There are certain legal benefits to doing this and it doesn’t cost much. Here’s a link to a document explaining copyright law in the U.S. http://www.copyright.gov/circs/circ01.pdf and another link to the U.S. Copyright site http://www.copyright.gov/.

  6. I operate as a sole proprietor. Kansas does not have/require a “general business license”, and my city also does not require me to have a business license since my work is home-based. I am registered with the state and have a sales tax registration number. I have to remit sales tax only for purchases that *land* in my state, and I have to track the sales by zip code and each specific jurisdiction’s tax rate, but that’s really not too hard. I choose not to collect sales tax through my shop sales because I think most people shopping online see it as a deterrent. Therefore I just have to build that cost into the price of my fabric. As Carol said above, Quickbooks is a really good program for organizing all of your business expenses and income, but it is VERY confusing to get set up. I tried to do it myself and messed things up so badly that my accountant gal had me go back and delete everything line by line and start over. There are way too many different categories and designations in that program, and they aren’t always named in such a way that you even know what to put there or if you even need that category. I would definitely recommend consulting a tax professional or accountant next.

  7. It would indeed be a very sad day if someone chose to sue you having purchased one of your sewing patterns. I’m not sure I can realistically think of any reason someone would have to sue but maybe that’s because we don’t have much of a culture of suing people here in the UK.

    My husband runs a small business web developing. Here in the Uk we have sole trader, Public limited company (Plc) and Limited Liability (Ltd). He started as sole trader where all the profits went directly to him. Now he’s grown to the stage that his income tax is headed for the higher rate so he’s gone limited which requires registered office, company directors, secretary etc and the money that is made is the companies. We have liability insurance specifically in case any of the work that my husband does results in the customer making a loss but it was fairly easy to set up. We’ve got a book keeper and accountant who deals with our tax now we’re limited but other than the finances, nothing much is complicated for us :)

    Maybe this is why I’m finding it really hard to believe someone would sue you when they’ve purchased your pattern. I hope they never do!

  8. I am in the same boat Sara. For the past week I have been filling out forms and setting up to sell online. I decided to incorporate as an LLC too as I work alone and it suited my business needs better. Florida’s fees are not as steep as I’m reading from your responses, but still not cheap.

    Have you looked into Trademarking of your name/business? If your name is not ‘officially’ trademarked with the government, it could be at risk.

    Keep us posted on your journey with this! It’s good to know that I’m not the only sewist going through the process.

    Cindy

  9. I’ve owned a business in the past and if I were to do it again, I’d create another LLC. Plus I’m an accountant and use Quickbooks every day. If you have any questions or need help, just ask.

  10. You might also want to write a post on taxes. Here in Canada, you can claim a portion of your home, electrical usage, other utilities, supplies, etc… against your profits. You can also make up to $3,000.00 tax free in a year. I know the tax laws are much different in the U.S. but in any country, money should be set aside in a dedicated bank account for tax purposes!

  11. I don’t own a business, but my husband does, I’m in the UK by the way. He has a Limited company, which sounds like your LLC. It cost £100 ($160) to register the business and that’s it. Clearly he has to do his accounts and pay taxes, but there’s no business licence or yearly fees, just that first one-off fee. Also, I think you’re considerably less likely to get sued in this country as we just don’t have that culture over here. He has to have public liability insurance as he works in shopfitting. I’m not sure a crafter/pattern writer would need that here.

  12. I was going to comment same as Tabatha. You should look into tax breaks claiming a portion of your home and car (another reason to keep track of mileage). I used to sell something (Arbonne, still kind of do but not as “serious”) and I kept a separate bank account with the money earned from that and kept track of expenses etc for tax purposes. Good luck girl. I have a feeling you are going to do really really well :)

  13. Wow – have I learned from just reading your post and all the comments. Thank you for bringing this topic up and I will be checking back to read any more comments.
    Sara – I just bought one of your patterns – and it’s great. I look forward to making the Dot,Dot, Dash soon!

  14. Phew, I’m so glad I don’t have to do that here. My only thing I do is self-assess on my tax each year (you guys do that all the time, but here our taxes are taken directly from our salary if we work for a company) and because I have a day job too, the company works out that chunk for me, I just need to submit my ingoings/outgoings etc. I could claim for fractions of my electric and heating bills in my house, but that just seemed painful to try and work out lol If I sell at fairs, some require one day insurance, some provide it, so I get to avoid that as well. We do have a small business insurance supplier though, so I might investigate further if I eventually get to selling more stuff. You know, when I have time…

  15. My husband is a attorney – I’ll ask him about your information. I have my own “craft” business (www.bluedaisyconnection.com) and a business license in my name — I can’t remember what else he has told me or I have done! Want to check this out – thanks for an important reminder.

  16. It is simpler in the UK I think- I’m a Sole Trader and I very kindly let an accountant deal with the tax as tax does my head in,even when fairly simple. have to have a thing called Public Liability Insurance for doing fairs- many fair operators demand you are covered for up to a million pounds- it isn’t so much of a suing culture in the UK, but I guess Fair organisers just want to ensure you are covered in case someone trips over you/your stall/your fabric…

  17. Hey Sara – just wanted to tell you that you rock. Thanks for sharing your experience and thoughts on your blog. It makes it a little less intimidating to know that everyone goes through something like this!

  18. I live overseas and basically if you work from home you get to keep anything you make. Sounds like paradise hey!!! LOLLL Thanks for sharing this article. I had no idea there was so much to selling patterns in your neck of the woods.

  19. This stuff absolutely terrifies me and makes me want to throw in the towel completely. I am glad you found a resource for some answers. I have tried, but everyone tells me something different and now I am in a pickle because when I called the state and asked a question, that person didn’t know what they were talking about. Best of luck with your new business!

  20. Interesting read, to find out what you need to do to set up business in the US. I would love to own my own business one day. I am just grateful that i live in the UK, and as complicated as it is, i think you have it far worse.

    Best of luck. Wish you all the best.

  21. I agree with Carol above – Quicken was more user friendly for a small business without payroll. We use Quicken Home and Business (PC version, Mac version is not recommended) and it helps segregate business and home expenses especially if you used a personal credit card, for example, when buying something used for the business.

  22. It sounds like a licence for some people to print money if you ask me! I can see the tax side (well I would, wouldn’t I?), but the liability thing – bonkers. Life is so much simpler here; good luck my friend xxx

  23. Hello Sarah! My husband and I own a catering business (Dewings Catering & Confections), out of our home (we converted one of our rooms into a commercial kitchen) and we are a Sole Proprietorship (I also own a quilting business, “Patches of Grace”, and have an Etsy store). Until you make a certain amount, and have employees outside of your immediate family, it really doesn’t make sense to become a corp. of any kind. Esp. with the kind-of business that you have. We do, of course, have to be state licenses to sell food, my husband has to be a certified food manager, and have other hoops to jump through, which are things you don’t have to worry about. But even so, it’s just not cost effective to become something other than a SP.

    Even though people are more likely to get food poisoning (God forbid!!!) from a catered meal, when we looked at all of the requirements for each category, SP, s-corp, and LLC, SP made more sense for us. We don’t have any employees, no work-mans comp., no rent (due to us working out of our home), etc. We do, of course, have business insurance and good coverage on our vehicles (we have the 2013 contract for our county’s “Meal on Wheels” program, which requires lots of delivering food. Plus the other functions we do.). Because our kitchen is 13% of our house, that is the amount we can claim as a business expense (meaning 13% of our gas bill, electric bill, water bill, and even our mortgage.). We live in WI, so IL may be different, but most states are similar. Due to dealing with deliveries of food, we have a separate business account, with checks and debit card. While my husband doesn’t keep track of the millage on the delivery van, he only purchases gas for that vehicle with the business debit card, so he keeps track of that business expense in that way. It’s a good idea for you to consider having a separate account for your business. Any purchases you make on-line or anywhere else, if you use only that card/check, then your exact business expenses will be easier to track. Even if it’s gas for your car when you’re out on a supply run, there will be no need to separate the recite.

    My husband has used H and R Block on-line program for years and when we started our business, he continued with them. There is an $85 fee, but it is totally worth it! They tell you what information you need, you plug it in and fill out whatever forms they say to, and they do the math for you. This year, my husband wanted to see the difference between filling with them or doing it himself. By filling with them, we got an extra $2,000 back that would have been missed! It’s not hard, there is no software you need to have, and your information (like SS #, business #, etc.) are all saved in a file, and are there for next year (so you don’t have to punch in the same #’s year after year.) It’s worth checking into, at least.

    I agree with the other comments above, for the size of your business, what you are doing, and the amount you will be making from it, being a SP makes more sense (expense wise anyway). Of course, you and you husband have to be comfortable with the direction you go in.

    Good luck with everything!!

    BTW: I have (soon to be!) 8 children and I see many things through the eyes of a “mother of many”. This may seem weird (and hopefully not insulting!), but from the pictures that I’ve seen of your Dot Dot Dash bag, I think it would make a very nice diaper bag.

  24. Well, there are four different concepts that are worth exploring. The limited liability of a company is what you have explored here. You might also want to speak with an accountant about income tax issues, which also play out in making the best choice for your business structure. The next concept is insurance, especially to cover you and your actions while you are out and about showing, teaching, selling etc. your patterns, products, fabric, etc. My business insurance will cover the loss if I somehow cause a building to burn down while I am off site doing work there, for example. The last important concept is copyright and trademarks of your business and also of your products. That is best discussed with another lawyer who specializes in those areas as they are fairly complex. It is great that you are taking the time to explore all of this, none of it is that obvious but there should be professionals who can help you with each part.

  25. Very interesting post. I can’t help much in the way of the S-corp/LLC stuff, but as far as taxes go, you can definitely deduct household costs since you work out of your home. I work for a tax firm/financial advisors office. Basically the form is called an 8829, “Business use of your home.” You calculate how much of household expenses you can deduct (utilities, rent/mortgage/property taxes, etc.) based on a percentage of how much of your home (in sq footage) you use for your business. Also, since you use your internet for shopping for supplies and for advertisement and all that, you can deduct some of your internet fees as well.

    And yes, do keep track of your mileage when you are doing business related things, or the trips you go on like to quilt con and stuff, because that can be deducted as well. All of these deductions greatly reduce your tax liability, which can be a real pain in owning a business. Hope that helps and good luck with everything!

  26. What an informative article, thank you. This is my first time reading your blog and I was wondering if you have information on applying for the business license. I too am in the process of setting up a corporation for a from home craft business in Chicago and would love the information.

    Also, I have experience in the legal field (not a lawyer) and wanted you to know that the minutes you speak for the ‘S Corp’ are an annual thing. You can get a form/template for the minutes online and just change the dates each year then keep it in your record book. Treating your corporation like a corporation is the key to keeping your personal assets separate from the business entity. Good choice on the LLC, they are by far and away easier to account for.

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  28. I am in the middle of deciding whether or not I want to continue with starting a crafting business and this post was VERY helpful. I am in California and based on what I’ve researched thus far not at all lucrative. Good luck to everyone who moving along!!

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