Starting a LLC to fund a hobby?

[njdevilsfan87]

I ask this question, because this is the extreme of what may happen. I am wondering if it is legal to start a LLC for something that may turn out to not be profitable, and thus end up as nothing more than a hobby? It involves drones, expensive cameras, and computer hardware, and a new website.

I'm considering it, becuase the tax savings on the up front cost would be pretty large. I could wash out any short term gains I've made trading Litecoin recently, and reinvest those directly into a new business, as opposed to losing something like 43% of the profits. Plus, having the LLC may light the fire under my ass to start venturing into my own thing.

 

[Ns1]

Look at tax implications in your state. In CA it's a $400 $800 minimum tax for LLC's. You'll also be expected to eventually show a profit on your hobby eventually (unless you can prove its a legitimate business) or the whole thing will fall apart under audit.

Of course your odds of audit are minimal, so there's that.

You could start a business, incur 3 years of losses, then close up shop and start another losing business I suppose but I have no idea how the IRS feels about that.

 

[njdevilsfan87]

I don't have an issue with the $400/year cost when the tax savings would greatly exceed that.

I also plan to purchase property in another state as an investment soon, but that could be a 2018 thing, as I'll know exactly what I have to play with after Uncle Sam gets his cut this year. So I think another I could do is start my LLC this year as I described in the original post, and then add rental property to it in 2018. But then I'll have a LLC doing two very different things. I'm not sure to what extent that is allowed, or if it would be necessary to setup two separate LLCs. My goal would be for "njdevilsfan87 LLC" would be to starting making a stream of money in any way, while receiving the tax benefits of having the LLC. You need money to make money, and if I could effectively have non-taxable income to spend on the LLC, that's a pretty big deal.

 

[Thebobo]

What's the hobby?

 

[dullard]

A business can do as many things as it wants. It can have rental property and it can have drone flying. There is nothing legally wrong with that. You do, however, risk jeopardizing the whole point of the LLC. The point of an LLC is to separate risks. You don't want to build a highly successful drone flying part of your business and then be sued into the ground to lose all of that just because something bad happened on the rental side of the businesses (or visa versa). Having two LLCs eliminates that possibility.

LLCs add a lot of paperwork and expenses. I would do it only if you are serious. Not as a way to encourage you to be serious. Have proper professionals set the LLC up and pay a tax accountant to do your first year's worth of taxes properly (and all necessary quarterly filings). Then you can use that as a guide to do the rest of your paperwork yourself if you wish (or keep using the professionals if you are happy with their service).

You can only have losses 3 out of every 5 years (2 out of every 7 if your business is with horses). Otherwise the IRS will call it a hobby.

Whether or not you start an LLC, you still owe your short term capital gains taxes on your other trading.

 

[Ns1]

The secret is to make it look like a business and not a hobby.

https://www.irs.gov/uac/newsroom/five-basic-tax-tips-about-hobbies

 

[Slew Foot]

Man, I loved when I incorporated my baseball card hobby as a business. Saved crap tons of money on taxes and such.

 

[Darwin333]

Look at tax implications in your state. In CA it's a $400 minimum tax for LLC's. You'll also be expected to eventually show a profit on your hobby eventually (unless you can prove its a legitimate business) or the whole thing will fall apart under audit.

Of course your odds of audit are minimal, so there's that.

You could start a business, incur 3 years of losses, then close up shop and start another losing business I suppose but I have no idea how the IRS feels about that.

Shrug, don't something like half of all businesses fail in the first 3 years? I'd think that if the tax dollars are relatively small they won't look at him much.

 

[Darwin333]

Some tips:

• Create a business plan to show how you expect to make a profit.
• Conduct your activity in a business-like way. Keep good records and maintain a separate business bank account and charge card.
• Use the formalities of a business. Use a separate business phone line. Have stationery and business cards. Maintain licenses and permits. List yourself as a business in the Yellow Pages.
• Run the activity as you would any business from which you expect to make money.

 

[Fern]

I ask this question, because this is the extreme of what may happen. I am wondering if it (1) is legal to start a LLC for something that may turn out to not be profitable, and thus end up as nothing more than a hobby? It involves drones, expensive cameras, and computer hardware, and a new website.

I'm considering it, becuase the tax savings (2) on the up front cost would be pretty large. I could wash out any short term gains I've made trading Litecoin recently, and reinvest those directly into a new business, as opposed to losing something like 43% of the profits. Plus, having the LLC may light the fire under my ass to start venturing into my own thing.

1. Yes, it's legal

2. Be careful here. Although there is insufficient detail provided, it does sound as though this may fall under the PAL rules (passive activity loss) thus limiting your ability to deduct expenses. Additionally, there are the Hobby Loss Rules.

I'm guessing that the (tax) deductible expenses you are anticipating would come from sec 179 expense deduction. Again, be cautious. If you the equipment you write-off (or deduct) under section 179 is removed from service etc before it's useful life is over, the deduction taken under section 179 will be recaptured (i.e., added back as income) in whole or part (depending on long it was used in your 'trade or business').

Fern

 

[Red Squirrel]

This has kinda crossed my mind too. I would want to do it not so much for the taxes but for liability. If someone tries to sue me I could then just go bankrupt. But does that actually work? What if they target you, the owner, specifically and not the company?

I have a drone myself and while I'm not that heavy into using it, I do kinda want to toy with the idea of long range stuff like weather balloons so there is the potential for issues to happen. I also want to get more into electronics and potentially build and sell stuff so could do it under the same company as well. It would also be kinda cool to start it off as an aerospace company, just because it would be cool to be able to say that I run one. Red Squirrel Aerospace Corporation(RSAC) has a nice ring to it. (actually I might get sued by RSA for that so in reality I'd probably use my real last name or something)

I presume something like this would be highly illegal though, it's basically fraud. Though just doing a LLC without pretending to be an aerospace company, maybe that would be ok?

 

[ImpulsE69]

non signed Bands do this all the time.

 

[AznAnarchy99]

Look at tax implications in your state. In CA it's a $400 minimum tax for LLC's. You'll also be expected to eventually show a profit on your hobby eventually (unless you can prove its a legitimate business) or the whole thing will fall apart under audit.

Of course your odds of audit are minimal, so there's that.

You could start a business, incur 3 years of losses, then close up shop and start another losing business I suppose but I have no idea how the IRS feels about that.

It's $800. I know because I made the mistake of making my business an LLC.

 

[Ns1]

it's been awhile; I corrected my post.

 

[Exterous]

LLCs add a lot of paperwork and expenses. I would do it only if you are serious. Not as a way to encourage you to be serious. Have proper professionals set the LLC up and pay a tax accountant to do your first year's worth of taxes properly (and all necessary quarterly filings). Then you can use that as a guide to do the rest of your paperwork yourself if you wish (or keep using the professionals if you are happy with their service).

Depending on the structure (Sole Proprietor and I believe Spousal Joint Venture) and scope its possible the entire business could fall under Schedule C of his 1040 so something like TurboTax deluxe could handle business taxes and quarterly filings may not be required if he expects to make a loss the first couple of years (IIRC you only need to do this as a SP if you owed over $1k the previous year or expect to owe over $1k the coming year). Paperwork requirements vary by state and in the state of MI was quite easy to form a SP LLC. LLC license applications cost $50 and yearly renewal is $25. No minimum LLC tax. Its been a couple of years since I filed the paperwork but it was straight forward and didn't take long. YMMV by state and structure though

 

[PowerEngineer]

I set up an LLC for my part-time consulting "hobby" in order to shield my personal finances from any liabilities arising from my consulting work. In the simple single proprietor setup I am using, there really are no tax benefits as all income and expenses find their way onto my regular 1040 form. FWIW, the process (in my state) for setting up an LLC along with the ongoing accounting (using QuickBooks) and taxes (using H&R Block) have all been simple enough for me to handle myself. One LLC expense not mentioned so far is business insurance. My understanding is that courts do not smile kindly on claims of limited personal liability in cases where the business has made no arrangements to pay liability claims. YMMV.

In your case, there might be tax benefits for incorporation but that gets complicated and you would be wise to consult a tax accountant.

 

[Thebobo]

You guys...

 

[Blackjack200]

I set up an LLC for my part-time consulting "hobby" in order to shield my personal finances from any liabilities arising from my consulting work. In the simple single proprietor setup I am using, there really are no tax benefits as all income and expenses find their way onto my regular 1040 form. FWIW, the process (in my state) for setting up an LLC along with the ongoing accounting (using QuickBooks) and taxes (using H&R Block) have all been simple enough for me to handle myself. One LLC expense not mentioned so far is business insurance. My understanding is that courts do not smile kindly on claims of limited personal liability in cases where the business has made no arrangements to pay liability claims. YMMV.

In your case, there might be tax benefits for incorporation but that gets complicated and you would be wise to consult a tax accountant.

I have a rental business and read a lot of online forums (FatWallet is good for this) about liability and such. One thing that people stressed was that you can't just put something into an LLC and be shielded from liability. A plaintiff will try to show that you intermingled your personal and business finances. If they can convince the judge, the judge can simply decide that your personal assets are not shielded.

The experienced landlords said they mostly don't bother having LLCs, they rely on liability insurance policies to protect themselves.

Note, this is not a comment on your situation, PE, just something I wanted to bring up in general.