Entrepreneurs who go into business for themselves have a wild road ahead, riddled with risk. Part of that risk can be mitigated by prudently navigating the associated tax landscape. Minimizing risks will help maximize profits for themselves and their stakeholders.
The first rule of growing the business: lay out a roadmap with help from a financial advisor, especially one who knows your industry. Take the example of Ron Fasick, Matt Potson, and Ben Lee, founders of Slow Play Brewing in Rock Hill, South Carolina. These poker night pals were tired of their regular jobs and loved craft beer, so starting a brewery seemed like a no-brainer.
By all appearances, it’s a terrifically successful enterprise. Visit any night of the week, Slow Play is a full house. Live music, lawn games, food trucks… the quintessential college town brewery. Behind the scenes, Slow Play has weathered more than a decade of rollicking profits and losses, yet the partners are still friends, partly because of that roadmap.
They began to refine recipes for their flagship beers around 2010 while also meeting with successful brewmasters to learn their stories, successes, and blunders. In addition to researching the industry, they researched the business of business to pitch funding from local investors.
It wasn’t long into the planning stages before they realized they needed to hire a certified public accountant with expertise specific to the beverage industry — particularly with silent partners involved. The CPA helped the team identify potential blind spots, especially around relevant tax codes.
For example, in the beer production business, a brewery pays federal and typically state tax, but the ways those entities assess tax liabilities differs: the IRS assesses real-time production by the barrel whereas their state assesses based on monthly sales. Furthermore, since their brewery features a popular tap room, they pay a municipal hospitality tax. The expert advice of their CPA helped the partners plan for these costs and draft a financial blueprint for the business.
At the heart of the plan is IRS Form 1120, known as the U.S. Corporation Income Tax Return, which incorporated businesses use to calculate their annual taxes. Some of the more common 1120s are the 1120-L for life insurance companies, 1120-H for homeowners associations, and in the case of Slow Play, the 1120-S for S-corps, a type of limited-liability company. Businesses that utilize the 1120-S can avoid double taxation, limit each partner's liabilities, and pare down FICA taxes.
Moreover, the 1120-S provides a roadmap for businesses like Slow Play. Ron and his partners share the revenue and the losses. This includes those silent partners who invested in the brewery early on and hold equity positions today.
The 1120-S is a great way to reduce taxable income and clarify the business plan, but business owners who use it to report earnings and losses for the purpose of securing a home or business loan sometimes encounter hurdles. For example, it takes some effort for lenders to be able to count that top line income; more effort than what’s required for an applicant who reports income on a W2. However, a lender who's talented with spreadsheets or even better, uses automated tools like Baleen Solutions, is enabled to lend higher amounts of money.
If you’ve thought about quitting your job and starting a business of your own, Ron offers this advice: planning and opening a business is a full-time job, so make sure you have savings in the bank to cover your bills in the interim. He planned for six months out, and it was nine months before Slow Play opened its doors. But the payoff, he says, is worth it. Slow Play Brewing is a success story of small-town partners starting a homegrown business, making products they love, and staying friends through the highs and lows.
Sam Campeau blogs about all things pertaining to finance and technology for Baleen Solutions. In his free time, he watches the whales swim from his tiny fishing town in the Pacific Northwest.
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