My 18 year old brother runs a small lawn business. He is currently making around $40k a year after expenses, before taxes, on 90 accounts. He works about 12 hours a week (plus marketing and estimates) and pays one worker $320 a month. He has never paid taxes on his own before. He intends to grow this business and do lawns for the next 30 years.
A lawn business can grow very easily, so he expects to be making $125k after expenses, before taxes in about 3-4 years.
Should he incorporate? And for what reasons, tax, liability, or both? What type of corp (S-corp)?
What are some examples of admin. costs and liability risks out there for him? Does he need to hire an agency to do the set-up or can he do it on his own, with some help from his dad and I? How much does it cost to set it up?
Incorporating doesn’t cost much (I don’t know where you are - IIRC, it was ~$100 the last time I did it here in Texas). He should get a simple bookkeeping program like Quickbooks.
He should also spend the money to have an hour or two with a CPA to get a professional appraisal of his business structure needs. Get recommendations from friends and acquaintance.
Having been down this trail a few times, I can’t stress enough how vital it is that he get his business setup correctly, so books are kept and taxes are paid. The CPA’s worth it.
As a lawer with small business clients and a non-practicing CPA, I enthusiastically second the advice that he talk to a CPA (and perhaps a lawyer, who will probably be needed to form the corporation or other business entity).
There are quite a few different options that he could chose, including corporation or limited liability company (and options may vary slightly depending on the state).
There are also related tax questions. If it is a corporation, it could elect tobe taxed under subchapter C or S of the Internal Revenue Code (commonly known as a C-corporation or S-corporation). If an LLC, should it be taxed as a corporation or a pass-through entity. There are also questions how the entity will pay compensation and employee benefits for the owner.
It is very likely that a law or accounting professional would recommend he form a limited liability entity (corporation or LLC) to reduce his personal liablility. However, he should discuss this with his own professional. The potential tax and liability benefits will be worth the inital cost of a consultation.
The answer is definitely yes if he intends on growing the business. Cost benefit wise he’s right on the income pivot point of incorporating making sense from a financial benefit perspective.
In my experience as an incorporated independent contractor - (real estate agent), in most cases if gross income is 40K or less there won’t be really substantive tax benefit savings by incorporating vs the extra 1K or 2K so extra in in accounting expenses and paperwork. Beyond 40K or so the benefits are considerably more tangible.
Any time you have a business with a good deal of physical danger involved, I would suggest incorporating. If someone gets hurt, the lawsuits go against your corporation, not you personally. Unfortunately, you have to consider all the negative scenarios when you run a business. A good lawyer and/or CPA can enlighten you on possible negative scenarios.
www.incorporate.com is one place you can incorporate. I’ve used them a few times and been happy.
I’m not sure your brother will get enormous benefit from incorporating today, but he likely will in a year or two. His growth plans are mighty optimistic (40% growth per year in a saturated market), but thinking big is the only way to get there. Best of luck!
