Becoming a Business, Part 3: Financial Matters (July 2019)
The previous two articles in this four-article series addressed Planning Operations and Establishing the Business Entity. This article presents a discussion of the financial matters that were addressed as Play It Again, Paul, LLC was being created. As before, these articles are intended to reflect what I encountered and accomplished, not to act as a guide to establishing a business.
Financing
When approaching investors or a lending institution for a business start-up loan, one typically needs a full description of products and services, an operations plan, a marketing plan, and a financial plan. Each of these was framed out conceptually in my mind, and the portion of the financial plan covering start-up costs was the easiest: I would use my own funds. Overall, about half of the start-up expenses were for upgrades to my audio equipment and software, and I would have made each of the purchases anyway for my personal use. Almost 40% went to attorney, web site, and business registration costs. The remainder was spent on courses, consumables, and heavy-duty shelving for my equipment.
Establishing business checking, credit card, and PayPal accounts was straightforward. The only prerequisites were to obtain an Employee Identification Number (EIN) from the Internal Revenue Service (IRS) and register the business with Virginia’s State Corporation Commission (SCC), also easily accomplished. One thing that took considerable digging was trying to find an appropriate business code among the thousands in the North American Industry Classification System, which is run by the U.S. Customs Bureau to assist other agencies and countries in producing statistics about businesses. And it’s required by several tax forms. The closest I could come (though not that far off) was the code for “Audio recording restoration services,” which is buried under the more general heading Sound Recording Studios (Figure 1) and shares the same code number.
Figure 1. NAICS business classifications within Sound Recording Studios.
Fairfax County also requires the NAICS code before issuing a business license, specifically the code entered on one’s federal tax return. The instructions for Form 1040, Schedule C contain a list of NCAIS codes that for many occupations don’t differentiate beyond the first four digits, and I was left with “512200—Sound Recording Industries.” Close enough, and I used this on both Schedule C and the county’s license application form. When I received my license, however, I noted that the code had been changed to “812990—All Other Personal Services,” which aligned Play It Again, Paul with astrologists, fortune tellers, and numerologists; shopping, singing telegram, dating, and escort services; and a host of other miscellaneous callings. Obviously, I don’t identify with any of these services. When I called the county to inquire about the change, I was told I should have used the county’s list of codes, which is different than the national NAICS codes. Despite the application’s instructions and the absence of any published list of county codes, I realized my request to correct the code was falling on deaf ears. The only good news coming out of this experience is that the tax rate for “All Other Personal Services” is the lowest one used by the county.
Taxes and Fees
I’ve always done my own taxes, and accounting for business operations didn’t strike me as a significant challenge. For the most part, it hasn’t been. The IRS has numerous publications dealing with businesses, expenses, recordkeeping requirements, et al., and these provided me with guidance on what I would need to attend to and the data I would have to capture and map to various tax forms. For federal tax purposes, the IRS labels single-member LLCs as “disregarded entities.” I felt a bit diminished by this label but got over it, as it ended up facilitating dealing with federal and state taxes.
Virginia imposes no additional income tax requirements, but the SCC requires an annual fee. I am required to collect sales tax on tangible property delivered to customers (CDs, jewel cases, etc.), as well as filing a sales tax return and paying the tax to the commonwealth every month. One nice thing I discovered is that Virginia does not intend to collect sales tax on the same items more than once. Accordingly, I can fill out a form exempting the business from paying sales tax and present it to vendors when I purchase stock for my business (like CDs). That tax will be collected when I sell the CDs.
Fairfax County imposes its own business taxes and license fees, some of which come into play only if gross sales cross a threshold. (I keep an eye on this, as approaching the threshold might be motivation to take a vacation for the rest of the year.) The county does nail me with the Business Personal Property Tax, which is assessed not only on the equipment that I purchased solely for business use (like a portable voice recorder), but also on all equipment and furniture items that are primarily (but not only) for personal use (like my computer, which has far more use for surfing the Internet, email, and watching cute cat videos). So, I end up paying the county for all sorts of stuff, including a surplus desk that I bought in Pennsylvania in the late 1970s. Annoyingly, the county requires that the sales tax paid on equipment and furniture purchases be included in the items’ value, so one ends up paying an annual county tax on previously collected state tax.
One last item I needed to attend to was to acquire a Home Occupation Permit from the county—and pay its fee. There’s a list of prohibitions that need to be honored to maintain the permit in good standing. Only one item affects my operations, and that is its prohibition against seeing customers in my home (hence my offering free pick-up and delivery in Northern Virginia). Comically, Virginia issued me a certificate stating that I’m authorized to collect sales tax, and they require me to display it prominently in my place of business. At the same time, Fairfax County prohibits customers from entering my home to see it. Following what I deem to be the spirit of the rules, I take a copy of Virginia’s certificate with me to show customers when I meet them for the first time.
Insurance
I had the foresight to check with my insurance agent to ensure that the equipment I had purchased for both personal and business use would be covered under my homeowners policy. It turned out that my gear would not be covered whenever I use it for my business, and so I needed to get a business insurance policy. This turned out to be an adventure.
In addition to consulting with my own agent’s company, I contacted several other agents who represented different providers. The first thing I discovered is that many companies don’t offer anything tailored to very small businesses, but at least I received a few policies for consideration. I suspect a lot of people have never read their homeowner or auto policies, but those of you that have will appreciate what I had to go through in thoroughly digesting and comparing a half dozen business policies. Things lurking in the minutia could prove to be disqualifying. For instance, one policy looked particularly attractive until I discovered that it would cover my equipment for the exact amount of money I had spent on it. Any upgrades would necessitate getting the policy updated, and aside from that being a recurring pain in the rear, it could result in a larger premium.
I had one requirement that I insisted be present, and that was for a policy endorsement to cover customers’ media while in my possession. I thought this was a reasonable thing to ask for, but it knocked several policies out of consideration because the endorsement wasn’t offered or was prohibitively expensive. Oddly, they appear to have been written with dry cleaning establishments in mind, including the policy I eventually selected. I made that choice only after getting a written statement from the insurer’s representative that my customers’ audio media would indeed be covered. Special thanks is due to my insurance agent, who put up with all my questions during this process.
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