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The Business of Knife Making A forum dedicated to all aspects of running, managing and legal operational issues relating to the custom knife making and custom knife selling industry.

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  #1  
Old 07-22-2003, 09:59 AM
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Business vs. Hobby

Hi,

I was curious, how much could you make from the sale of knives before it's considered a taxable business instead of a hobby? I'm not talking about making $1000's, I only want to make enough to Very slowly outfit a shop and pay for materials on the next couple of blades.

Now I know a reasonable profit is not going to happen. Time will be less than $10/hr if not less than a quarter as I'm new with no customer base.

Last question, if I charge $150 for the blade and sheath package I will be making $50 profit. Do I report it as $50 profit or as a blade sold for $150?

Thanks for your time,
Jim


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Old 07-22-2003, 10:25 AM
fitzo fitzo is offline
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I can't comment on your questions, per se, but will offer one nugget to consider:

Many years ago, I decided that perhaps it would be nice to set my knifemaking up as a business so I could deduct the large expense I was investing for tools in my basement shop. When I investigated this, I was promptly stopped in my tracks when I found out that knifemaking would be considered "light manufacturing", and would thus be an illegal business to operate out of my home because of zoning laws. It was ok as long as it was a "hobby".

You probably have a different circumstance, but this is something to consider if you live in a zoned municipality.

Another thing to consider is, if one operates as a business, what are the concerns in terms of product liability? If you operate out of facilities on your residence, what effect does this have on your homeowners' insurance? It is probably a good idea to consult with someone who has a good grasp of business laws specific to your locale before you make a leap into knifemaking as a registered business.
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  #3  
Old 07-22-2003, 10:34 AM
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Thanks for the quick reply

I don't want to have it as a business, just a hobby, but I also don't want to cross some imaginary line of "you made $XX dollars and that exceeds the allowable amount for a hobby" by an IRS tax auditor. I don't think this will be a problem anytime in the near future, but I also find it costs a whole lot less to know up front instead of paying the fines when "I didn't know" plea failed.

Thanks also for the liability issue information. I hadn't thought of that in the slightest. Is there a difference on liability between knives made as a hobby and those made by a business?

Thanks again,
Jim


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Old 07-22-2003, 11:05 AM
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Jim,

The absolute best thing you can do is spend the money and get a consultation with a CPA.

Yes, if you make the knife and someone cuts themself. You can be sued. Doesn't matter if your a hobbiest or in business.

One of the benefits of becoming a business is that you can limit your liability from law suits, especially frivilous ones.

If the knife is sold by a business (which is seperate from you), then they have to go after the business assets. If you don't own the assetts and have minimal money in the bank. There will only be minimal payment to the idiot who didnt know that knives were sharp.

Of course enclosing a warning sticker with each knife (As in: This is a knife, it is sharp, it can cut you and other around you. Failure to use this knife in a responsible manner could lead to serious injury or death.) Will also help to limit your liability.

Best bet, talk with the CPA. Making this a hobby instead of a business could cost you Tens of Thousands of dollars in the long run.


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  #5  
Old 07-22-2003, 11:16 AM
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Thanks for the eye opener Les,

Once I'm setup I'll check it out. My father-in-law has been a CPA for about 20 years but I don't think his area is business legalities. Most of his is experience is corporate finance. I'll look into also a recommendation that I should have the tools in my name and the business should rent them from me to limit them from being part of a lawsuit.

Unfortunately as Mike said the zoning laws may not allow for this. Add into this a HOA and I could have even more problems.

Jim


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Old 07-22-2003, 11:27 AM
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Hi Jim,

You need to talk with a CPA who is familiar with the different types of business configurations. Each has pros and cons.

It's not really for the leagalities of the business.

Also, if you own the tools and rent them to the business...you are the one they come after.

I was speaking of if you buy tools or a machine and are using a credit plan to pay for them. Technically the company that sells the tools owns them. If miss a payment you no longer own them. Also, you don't want to get these machines in you name, you want to get them in the business name for two reasons.

First, to establish credit for your new business.

Second, if you were to be sued and could not make the payments and/or had to file bankruptcy. This goes against the business credit and not yours.

Do not use your name in the business name.

My coropration is Edgewise Enterprises.

Again, it's best to check with a CPA.

Also, I know of one maker you wasn't zoned for using machines in his area as a Light Manufacturer. So he listed his business with the last word of "Design".

His main business was listed as a Design business with some manufacturing to produce prototypes and limited models.


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Old 07-22-2003, 11:37 AM
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Quote:
Originally posted by Les Robertson

Also, I know of one maker you wasn't zoned for using machines in his area as a Light Manufacturer. So he listed his business with the last word of "Design".

His main business was listed as a Design business with some manufacturing to produce prototypes and limited models. [/B]


Now that's an interesting take on it...
Thanks, Les!
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Old 07-22-2003, 11:41 AM
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Wow,

That is going to take a lot of time to get sorted out even with the help of a CPA. Thanks for taking the time and helping out.

Jim


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  #9  
Old 07-22-2003, 11:44 AM
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Guys,

It is almost always better and cheaper to ask questions before you start filling out the paperwork.


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  #10  
Old 07-22-2003, 11:56 AM
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That's why I'm glad you guys are around to at least point us in the right direction.

One thing it adds is whether I can continue even making knives. I enjoy it as a hobby but I need it to pay for itself. I really don't care about making money but I can't drop the cost on the house funds. This hobby can be expensive in material cost alone not counting equipment cost.

How ever if I can't sell without risk to my family, it's just not something I am willing to risk over a hobby. It's no one fault here except these people that are too stupid to relies that knives cut things.

Jim


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Last edited by Drac; 07-22-2003 at 12:09 PM.
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  #11  
Old 07-22-2003, 01:46 PM
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SharpByCoop SharpByCoop is offline
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Glad you brought this up.

I'm in a similar situation. I want to turn my knife hobby(ies) into a business to start to be able to write off the expenses. Equipment, transportation, etc.

My primary focus right now is photography, but I don't want to limit myself to this. Good tip, Les, on the name being separated from the personality.

I have to go this week into my local town clerk's office to 'register' myself as a business. This is where it starts up here in CT.

I have much to learn, including writing a business plan, which Les has talked about and drafted in another thread.

Thanks,

Coop


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  #12  
Old 07-22-2003, 02:19 PM
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Hi Coop,

I used Enterprises in my corporate name exactly for the reason you stated.

Under Edgewise Enterprises is:

Robertson's Custom Cutlery

Impress by Design (my wife's graphic arts business)

Edgewise Consulting (a consulting business).

I found that using Enterprises in the corporate name. It provides an "Umbrella" under which you can put any business.


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  #13  
Old 07-25-2003, 10:12 PM
matkins101 matkins101 is offline
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sorry to post this

but...

what is a CPA

mike


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  #14  
Old 07-25-2003, 10:28 PM
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CPA = Certified Public Accountant


When I was doing this as a hobby I called my county clerks office and asked the question; "How many knives can I sell before being considered a business?"

I expected to hear that ANY sale would be considered a business. Instead, I was told to just say I sold a knife at a yard sale. She said every time you sell a knife, call it a yard sale. We don't get involved in yard sales.

Well, I decided to set up the business anyway but thought that was an interesting take oin it.

I did, however sell knives for 8 years without even thinking about it. Just made and sold them.


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  #15  
Old 07-26-2003, 12:40 AM
MPMetal MPMetal is offline
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other than going to a CPA one option is to call SCORE, SBA or in CT the CSBA, all of these offer Free business addvice to small businesses they can't give legal or tax addvice but they can help you to find the right person to get that from and the can give you tons of good ideas.
MP


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