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Sawmill business structure - Incorporate or not?

Started by kjsifer, April 10, 2014, 02:00:25 PM

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kjsifer

Hi all,
New to the forum and looking at buying a mill. I am a little worried about liability when cutting on someone else's land, or just having the customer near the mill when sawing, or just having someone get hurt on my place. We do have an umbrella policy with our insurance company. These days you just can't be too careful and I want to protect against frivilous lawsuits and protect my personal assets.

I like the corporate stucture for the protection aspects, but I don't like it for the paperwork, taxes, etc. Cash is king in my book. :>) I have two teenage sons that I would like to have help me and I will pay them. I suppose if I reported that, then I have to start paying state unemployment benefits and all that jazz. Maybe I'm better off just treating it as another toy?

Do any of you that saw for other people use a corporate structure for your business? What type, LLC, S-Corp, etc? Any advice for the beginner?

Thanks,
Kevin

m wood

Good topic kjsifer, I'm interested in others opinions on this subject as well. Thanks
mark
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thecfarm

I think it's a good idea to separate your business and your home. Can't be too careful the way people just love to get a free dollar. And some don't care how much pain they cause to get it either.
Model 6020-20hp Manual Thomas bandsaw,TC40A 4wd 40 hp New Holland tractor, 450 Norse Winch, Heatmor 400 OWB,YCC 1978-79

JSwigga

LLC would probably be the best.  You should look into sawmill insurance.  It's much cheaper then you would think.  I pay $100 a month for liability and mill insurance.  Only thing that isn't covered is acts of terrorism!  I guess if I hit a IED with my mill I would have much worse things to worry about then a destroyed mill.
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tmarch

Granted a mill is dangerous, but is it any more dangerous than any other machinery used for farming?  As far as hiring your sons, unless the deduction for wages is worth more than the cost you will probably find by the time you pay social security, unemployment and all the additional costs it may be cheaper to rent them your mill or let a customer pay them directly.
Retired to the ranch, saw, and sell solar pumps.

t f flippo

kjs, Also a good question for your CPA and attorney.Mine are pro on LLC's. I have two. #1 is for a 'shield' for liability.
#2 The tax advantages are better than sole prop. #3 Has some flexibility. For ex; You could be the Managing Member
and your sons just Members of the corp. Your draws($) would be subject to income tax but not necessarily subject to payroll taxes.

Or you could become Amish and hire 'family' only and not be required to pay payroll tax.

tmarch, I'm with you.I don't find a bandsaw sawmill business any more dangerous than farm equip. or working construction. Setting roof trusses and sheathing on a three story building is a much higher risk to me. I think more in terms of 'risk' than 'dangerous'. These days going to a 7/11 or ATM after dark is high risk( dangerous)

Magicman

Knothole Sawmill, LLC     '98 Wood-Mizer LT40SuperHydraulic   WM Million BF Club Member   WM Pro Sawyer Network

It's Weird being the Same Age as Old People

Never allow your "need" to make money to exceed your "desire" to provide quality service.....The Magicman

5quarter

I'm sure it has happened, but I have never heard of someone get injured/killed from a bandsaw mill. by contrast, you hear of table saw and chainsaw accidents all the time. Most accidents on the mill site happen while handling boards and logs.
Just starting out solo, go SP. Minimize your liability by remaining stationary and pay your boys a weekly allowance Based on how many "chores" they had.  ;)
What is this leisure time of which you speak?
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pine

I also have an LLC and find that it works very well.  There are things that you have to do to ensure that a court can not find that you have corrupted the protection that an LLC gives you but it is not that hard to ensure that separation.

Beaudeane

My take on it is dependant solely on income genererated by the business. If u do over $170k a year u may want to talk to a good CPA about incorporating. Ask one anyway depending on your deductions. It's more of a tax break once u reach a certain threshold than a liability thing. Yeah, someone could sue u & take ur mill I suppose if u were incorporated but u as an employee could also be liable in a frivolous lawsuit so I think shielding ur personal assets thru incorporating is kinda a false sense of security. Get insurance. This opinion is based on my trucking business as a service business much as a sawmill biz would be. U can still operate a biz as a sole proprioter & write off tax deductions from the business. Good luck. But get insured
Don't think of it as `gun control', think of it as `victim disarmament"

Kingcha

First I would say is talk to a CPA and maybe even a lawyer.

Years ago I was in the Restaurant/bar business and thought I needed to incorporate for protection.  My accountant(cpa) told me it really did not matter in my situation as I managed the day to day operation and worked there almost every day.   If I incorporated they would sue both me and the corporation.   I do not know if it has changed since then, but I would ask those questions.   Incorporating when you have a manager and you don't do day to day makes sense.   But In a situation where you run the mill it is my understanding is they can still sue you the person.   That all being said, contact a lawyer and ask those questions.    If your protected legally then an accountant can can help you with the tax questions.

Matt
a Wood-mizer LT15 10hp Electric, 45hp Kioti tractor, electric smoker, wood-fired brick oven & yes a custom built Solar Kiln

ethanbrush

Quote from: kjsifer on April 10, 2014, 02:00:25 PM
Hi all,
New to the forum and looking at buying a mill. I am a little worried about liability when cutting on someone else's land, or just having the customer near the mill when sawing, or just having someone get hurt on my place. We do have an umbrella policy with our insurance company. These days you just can't be too careful and I want to protect against frivilous lawsuits and protect my personal assets.

I like the corporate stucture for the protection aspects, but I don't like it for the paperwork, taxes, etc. Cash is king in my book. :>) I have two teenage sons that I would like to have help me and I will pay them. I suppose if I reported that, then I have to start paying state unemployment benefits and all that jazz. Maybe I'm better off just treating it as another toy?

Do any of you that saw for other people use a corporate structure for your business? What type, LLC, S-Corp, etc? Any advice for the beginner?

Thanks,
Kevin

Yes, I highly recommend a LLC.  It is a great thing to have.  They are very flexible so you can bring people, such as your sons, in as members and then they are not employees and you eliminate all the hassle of payroll.  I think almost any CPA will tell you they can reduce your tax liability much more with an LLC than as a sole proprietor.  I am an electrician by trade and I dont pay any income tax because of my LLC.  Think of all of the stuff you can call business expenses too........Check that your CPA or perspective CPA uses the "rents" strategy:  You only get a small "salary" from the LLC and the rest is "rent" for tools, equip, etc.  This avoids most of the 7.2% self employment tax.
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Magicman

One other related/unrelated point.  My customer and I always sign a Sawing Contract that contains a liability statement:

5.  It is understood by the Customer that log handling and cutting may be hazardous.  Customer shall be responsible for the conduct of helpers and observers and agrees to hold Sawyer and Wood-Mizer Products, Inc. harmless for any injury or damage whatsoever to helpers or observers arising out of the operation of the mill and the handling of logs and lumber.  It shall be the Customer's duty and obligation to keep all children and observers out of the work area.
Customer represents that he is the owner of the logs and/or has the authority to enter into this
Agreement on behalf of all interested parties.  Dated this ___day of ______________, 20___

Sawyer:________________________________Customer:_______________________________
Knothole Sawmill, LLC     '98 Wood-Mizer LT40SuperHydraulic   WM Million BF Club Member   WM Pro Sawyer Network

It's Weird being the Same Age as Old People

Never allow your "need" to make money to exceed your "desire" to provide quality service.....The Magicman

Kingcha

I hope you don't mind if I borrow  ;D that Magicman.   I hope to be back sawing by early May

Matt

a Wood-mizer LT15 10hp Electric, 45hp Kioti tractor, electric smoker, wood-fired brick oven & yes a custom built Solar Kiln

scrout

Incorporation separates legally your personal estate from your business.  I think it is essential for liability purposes.
The LLC has other bennies different from a C corp, mainly the ability to pay yourself partially with dividends, avoiding SS tax on some portion, although I heard that the IRS was going to tighten up that loophole.

terrifictimbersllc

Single member LLC's are disregarded by the IRS for income tax purposes. Taxation/business expenses are the same as a sole proprietor. Both use Schedule C and the net profit is put on the front page of 1040.
DJ Hoover, Terrific Timbers LLC,  Mystic CT Woodmizer Million Board Foot Club member. 2019 LT70 Super Wide 55 Yanmar,  LogRite fetching arch, WM BMS250 sharpener/BMT250 setter.  2001 F350 7.3L PSD 6 spd manual ZF 4x4 Crew Cab Long Bed

SLawyer Dave

I am not licensed to practice law in any state other than California, (so this is legal information NOT advice).  One thing to keep in mind is that LLC's are strictly enforced and regulated at the state level.  The requirements, benefits, and procedures for such vary greatly from state to state.  While Corporations also have some variance between states, generally there is very little.  So if you are going to be working in other states, a corporation may be a better fit.  Also depending on whether you will need or potentially apply for any state issued licenses.  Here in California, the first question I ask someone when they talk to me about business entities is whether they will have any licenses issued by the state.  If they do, then they CAN NOT be an LLC.  The state simply refuses to issues licenses to such business entities. 

Another thing to keep in mind, one of the main reasons most people want to have an LLC or Corp is for the "liability protection".  Keep in mind that while this is a good benefit, IF you are the person doing the activity, (i.e. running the mill), and someone gets hurt, no amount of corporate or LLC protection is going to protect your personal assets because "YOU" personally, will be alleged to have been negligent.  The law does not want to isolate or protect you from your own negligence, (they want the fear of such to motivate you to be as safe as possible).  Instead, corp and LLC liability protection is really about protecting you from your employee's negligence.  If you don't have employees, then this aspect of a corp or LLC really isn't going to help you under most circumstances.  That is also why having good liability insurance is so important.  If you get sued, often times it is not the judgment you need to fear, but the cost of defending yourself.  So having good liability insurance gets you both a paid attorney to defend you, and potential protection even if the judgment goes against you.

You also might want to talk to a CPA about whether such a business entity may reduce your tax exposure.  As a sole proprietor, ALL of the profits of the business become your "wages" for tax purposes.  This means you pay the full portion for all employment taxes on every dollar.  If you are an LLC or Corporation, then you may be able to set yourself a "reasonable wage" based on the work description you actually fulfill for the business.  In this way, you are paid this "wage", and taxed fully on it.  However, any additional moneys earned, could then be potentially treated as "owner's income", which under many circumstances will be treated as investment income rather than employment income.  The tax difference can run 7% or so. 

Good luck to ya.

Dave

Sixacresand

"Sometimes you can make more hay with less equipment if you just use your head."  Tom, Forestry Forum.  Tenth year with a LT40 Woodmizer,

MAI

Hi kjsifer,
Whether to create a Corporation or LLC are questions for your Attorney and CPA.  As a Sponsor on the FF, I can help you with physical loss and liability insurance on your mill. 

As far as homeowners insurance that is a very questionable area:  I received a call from a band saw owner in OK just 2 days ago who was informed by his insurance company (State Farm) that his homeowner's policy was being cancelled because he had a band saw.  I hear this quite often, insurance companies will either cancel or non-renew a homeowner's policy unless the homeowner secures insurance elsewhere to specifically cover the mill. 
We wrote a policy to cover his mill and he was able to secure homeowners insurance with another company.  I stress this all the time with owners, you need to double check and get it in writing.

I look forward to your reply,
DJ
Margeson & Assoc.



SawyerBrown

Quote from: Sixacresand on April 13, 2014, 09:34:14 AM
Good infomation.  Thanks SLawyer Dave.

I agree.  Especially about personal liability not "protected" by an LLC, and liability insurance.
Pete Brown, Saw It There LLC.  Wood-mizer LT35HDG25, Farmall 'M', 16' trailer.  Custom sawing only (at this time).  Long-time woodworker ... short-time sawyer!

schmism

as for paying the sons.

Id get creative in how i paid them.   make them partners in the business Give them a $1 per year salary then pay them dividends instead of a regular salary.  They would still have to report the income, but it would be dividend income and taxed at a much lower tax rate.
Quote2014 long-term capital gains tax rates, which also apply to qualified dividends, are as follows:

    0% if you're in the 10% or 15% marginal income tax brackets
    15% if you're in the 25%, 28%, 33%, or 35% marginal income tax brackets
    20% if you're in the 39.6% top bracket

so if they dont make enough off the dividends to get out of the 15% tax bracket (up to $36K a year) then they have to pay 0 tax on there dividends.
039 Stihl 010AV  NH TC33D FEL, with toys

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