Monday, June 11, 2012

*Series* The business of being Mama, Part 4: Legal mumbo-jumbo...



(Part 1:  Is it a good idea to turn your hobby into a business?...)
(Part 2:  How to sell your wares...)
(Part 3: Pricing your handmade items...)

Do you remember back a few years ago when a lady sued Victoria's Secret because her bra snapped open and hit her in the eye, or when that person sued McDonalds because they got burnt on their (HOT!) coffee?  Unfortunately, along with all the good that comes from you having more cash flowing into your bank, something sucky happens too; people start to take advantage.  Once someone sees you as a corporation or business instead of just some chick selling a few cool things she made, then you need to start operating as one also for your own protection.  This is no joke, folks.  People will try to get money any way they can, except for earning it themselves.  So, for starters, please take some of the cash you've earned, hand it to a lawyer, and have them make you an official business entity.  You can do this on your own for way cheaper, but it's handy to have a lawyer make sure that everything is done properly.  Separating your business from yourself and making it its own entity protects you, your family, and your money.  Basically it means that if one of your products should injure someone, and they want to sue you for it, they can completely drain your business account, and that's going to totally suck, but they won't get your house, and that's pretty awesome.  Speaking of which... When your business is officially a business, you'll get a slip of paper either from your lawyer or in the mail with its Tax ID # on it.  You'll get one for Federal Taxes, and one for State.  As soon as you get that little piece of paper, put it in your hot little hand, march yourself down to the bank, and open a business account.  Then your personal dough is separate from your business's.  Use the business's money for business purchases, and the money in your personal account for personal purchases.  Sounds simple enough, but when you see the balance start to rise in your business account, it can be pretty tempting to go buy a new pair of shoes with it.  Don't! (Unless, of course, you can justify a pair of Jimmy Choo's somehow as a business write-off, and if so, let me know how you did it, because I want some.  Absolutely no idea where I'd wear them, but still...they'd feel stellar to cuddle with).  
Cut your taxes
The other official businesslike thing that's monumentally important is keeping good records.  Even if you don't become a big-girl corporation, or have an official LLC title behind your business name, you're still required to report your income (even from a hobby) on your taxes.  You should be keeping track of money out (supplies purchased, mileage to shows, fees incurred for the purpose of your business, etc.).  Just keep all your receipts, and an accountant can tell you whether the tab for a lunch meeting is applicable or not.  Maybe it's not, but if it is, and you don't have the receipt, then you don't get to claim it.  And you need to keep track of money in (that lovely cash you were handed for your wares, as well as any online sales that just floated into your bank account).  To make this easier on myself I do a couple things that I highly recommend:
~I have an inventory sheet of all my products.  I print one off before each market to keep track of how many of each item I started with, and then how many I have left at the end.  This helps me not only keep track of my earnings, but also how much I'm selling (or not selling) of certain products, and gives me something to compare my cash pile (over-exaggerating here a bit) after each market.
~I have a receipts folder in my file cabinet.  If you don't have a file cabinet, use a shoe box.  Just make sure they're all saved, and they're in relatively chronological order.  That way if you need to find one from January, it should theoretically be at one end of the pile or the other, but not in the middle.  If you make a lot of online purchases for your business, and you want to save paper, you can have a digital folder for those receipts.  Just make sure they're all in one organized, easy-to-locate "folder" in case you need to print them out come tax time.  Each time I make a purchase online for ingredients or packaging, I take the order-confirmation email, and throw it into my receipts folder in my Gmail.  Simple, organized, and effective.
~I made a cost-to-make sheet also.  This takes a ton of time, but once you get it done, it's pretty quick to edit from there on out.  Basically I have a list of all of my products and the ingredients (and amounts of each) and packaging required to make each one.  So I can easily tell what I should charge for each product, as well as having a visual reference of which ingredients I'm blowing through, and which ones are sticking around longer, so I can reorder stuff accordingly.  I did this mostly because the shipping charges on my ingredients are monumentally huge, and I don't like to have to reorder stuff often because of that.  If I have to place multiple orders for my ingredients, then I have to pay outrageous shipping charges multiple times, and therefore have to charge more for my products.  Customers don't understand poor-planning-up-charges, and don't like to pay them.  So I have to eat the cost when that happens, and that majorly bums me out.

For just a tiny bit more incentive to keep your checks and balances, well, in check, and balanced, you pay taxes on your profit.  If you spent a ton of money on start-up costs (and I don't know of many small businesses that didn't), and you made very little money to compensate for that (and I don't know very many small businesses that strike it rich in their first year), then you didn't make much profit.  You don't have to give to Uncle Sam what you didn't make (despite popular belief).  If you only keep track of your money in, and don't keep receipts for your money out, then you're screwing yourself every April.

Well, that was a good, long, dry topic, huh?  Just what everyone loves, right?  Tomorrow we'll pep it up a bit for some chat about marketing and networking.  Stay tuned!


Thanks for stopping by,
-Lindsey      

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