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    10 Replies Latest reply on Jan 10, 2008 11:49 AM by roscocpa

    starting a second business

    Silver Newbie
      Hello,

      I am the owner of a small S-corp with one DBA. We manufacture a product, then sell it online both direct to consumer as well as through dealers (www.HGA-USA.com if you are curious). The product is extremely niche and I would like to start another business that would serve the local community. I would like to give a percentage of every sale to a local charity, one chosen by the buyer from a list of local charities. This will both satisfy my need to give back to the community in which I live, as well as provide some publicity for the new venture through the charitable organizations that stand to benefit from sales.

      My question is this- how should I set up this new company from a legal standpoint? Another DBA under my current S-Corp? LLC? Sole? Non-profit?

      I have 4 employees including myself that run the current company. I would like to utilize their "down-time" during the slow season or slow days to help run the new company. Other resources such as computers, space, etc. that belong to the current company would be used as well.

      Any advice or resources appreciated.

      Silver
        • Re: starting a second business
          Lighthouse24 Ranger

          My first thought would be to create a new division within your existing company, rather than creating a new business entity. In what state are you located (and was your S incorporated in that same state)?
            • Re: starting a second business
              Silver Newbie
              Thanks for the reply. I just want to be sure I am not going to miss out on any tax advantages to diversifying the company. The S was set up in Virginia in 2001 and we are still here! Why do you ask about the state?
              Silver
                • Re: starting a second business
                  Lighthouse24 Ranger
                  I asked because corporate law varies from state to state. Also, Virginia has both a personal and a corporate income tax, right? (I think even registered non-profits have to file state income tax returns there.) So as you noted, the specific tax advantages or disadvantages would be different there than in a state without income taxes. I thought it would help people who may respond to your post to know that's a factor in your decision.
                    • Re: starting a second business
                      Lighthouse24 Ranger
                      P.S. My first thought (just create a new division) was exactly that -- and it came from someone in a state without a personal or business income tax. So someone else might have a better answer (and the rationale behind it) given that additional information.
                        • Re: starting a second business
                          Silver Newbie
                          To Lighthouse,

                          Thank you for considering my question. In Virginia, an S-Corp profits pass through to the owner's personal taxes. The benefit in setting up a sole for the new company may be that I can claim a deduction on the percentage of my house used to run the business. I only go into my office location one day a week as it is, and do the rest of my work from home. I don't claim use of my house at this time, however, because the current business maintains a physical location with employees, inventory, etc. and I was under the impression that I shouldn't. Profits will be taxed the same however I set up the new company, but if I run the new company from my home (to claim business use of home) and pay my current corp for services it may provide....is that do-able?

                          Best regards,

                          Silver
                            • Re: starting a second business
                              roscocpa Newbie

                              Hello,

                               


                              I am a licensed CPA in both CA & AZ (not in VA though) and have a couple of suggestions for you on your business organization and other questions you had in this post.

                               


                              The answer to your first question about whether to do another DBA for your spinoff business vs. a separate legal entity really depends on many different factors which really ONLY your CPA, knowing your overall financial picture can advise you on (if they are any good of course). Not all CPA's are "out-of-the-box" thinkers so be sure you truly "believe" that your CPA is the best and brightest you can afford. A good CPA can save you big $$$ in your annual tax bill, so be picky! Your personal financial situation may dictate changing business entity structures over a period of years. For example, IF you have any other sources of income or write-offs/expenses that fluctuate significantly over a given period, OR, if you expect them to fluctuate in a particular year, you need to work closely with your CPA to optimize your tax strategy to create a synergy between both your personal tax picture, as well as your business tax picture. Unlike many CPA's in the biz, I typically recommend a C-Corp structure vs. an S-Corp structure for my clients with Net Operating Income below $250K, and that have only a few employees like yours. Many would argue the double taxation rule against the C-Corp., but I can typically show (especially for individuals over 50) significant tax advantages, both long and short term for the C-Corp structure (not ALWAYS of course, but MOST of the time). This was not your question though. The answer I have for your initial question about doing a dba vs. separate entity is that you really need to work closely with a skilled accountant IF you expect either of your "businesses" to post significant profits or losses, and especially if you have significant personal expenses (like medical for example), or if you expect to have these in the future. As for the question about writing off a portion of your home for business activity, your entity structure really makes no net tax difference UNLESS you have a C-Corp that leases the space from you personally, in which case, this is a nice way to transfer money out of your corporation without incurring "self-employment" tax in the process. A little complicated to explain this concept thoroughly here though. The trick with a C-corp is to figure out ways to transfer money/profits to yourself without incurring the dreaded 15% SE tax. There are PLENTY of ways to legally do this if you have a sophisticated or interested enough accountant. Last plug for C-corps... C-Corps allow you much more flexibility in managing how much income/loss you pull onto your personal tax return each year, allowing you to manipulate/manage (legally) your earnings/writeoffs so you don't get whacked on AMT for a given year if you happen to have a really great year, OR, better still, so you can "bank" your losses in the corp without losing schedule A deductions in the process. Sorry this is likely way more info than you were looking for, but hopefully it will be helpful to some.
                                • Re: starting a second business
                                  Silver Newbie
                                  Now that's what I'm talkin' about! What a great answer! It has reassured me that there is no "obvious" answer to my particular situation and signals that I need to either cultivate my relationship with my accountant or go elsewhere. The firm I am with is huge and charges a ton to put all the information I give them into a program that tells what I owe the government!

                                  Thanks again, roscoinc. I will dig further into some of your suggestions, and may post again with deeper questions.

                                  Silver
                                    • Re: starting a second business
                                      roscocpa Newbie

                                      If you would like the name of a very creative tax accountant who has a Master's degree in taxation from Golden Gate University in San Francisco, go ahead and contact me at mcrauschkolb@yahoo.com for his name. Fewer than 10% of all CPA's nationwide bother to obtain a Master's in taxation (myself included). Although he is not licensed in your specific state, he can certainly be useful on the federal side of the ledger. And, he loves to travel and takes the time to contact his clients throughout the year so if interested let me know. He has clients on the east & west coast as well as points in between. He typically does a free consult to help you determine whether there's the right chemistry.

                                      Best of luck!
                        • Re: starting a second business
                          LUCKIEST Guide
                          Silver, Do you have an Accountant??, a Lawyer?? These would be good questions to ask them.
                          as I understand what you are saying you should set up a separate (STAND ALONE) company.
                          The format of the company DBA, S-Corp, LLC? depends on how you want to structure the company.
                          Again you should check with your professionals. You mention "Non profit" to help the community??
                          Interesting, Good luck, LUCKIEST
                            • Re: starting a second business
                              Silver Newbie
                              Luckiest,

                              Thanks for the reply. Yes I have an accountant and a lawyer but thought it prudent to go about educating myself before expending the resources of time and money to have the professionals educate me on what is probably readily available information. I came across this forum and thought it a convenient place to post the question. The new company is in the concept stage.

                              My graduate degree is in Molecular Biology, and work experience primarily in Genetic Engineering, so all business skills and knowledge have been self-taught. Again, thank you for the advice. The paid professionals are worth having.

                              As for starting a non-profit to benefit the community- that was not the context in which it was intended. The business would contribute to the community and if properly set up may qualify as a non-profit. If there are business reasons for doing this, they are worth exploring.

                              Silver