Getting started as a lutherie business.

Discussion in 'Luthier's Corner' started by gator payne, May 25, 2011.

  1. gator payne

    gator payne Senior Member

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    I have been building repairing and selling hand crafted guitars now over 20 years. I have made more than my share of business goofs along the way.

    Over the past couple of decades there has been a revival in the craft of lutherie. Many people have tried to go from a hobbyist to a business person in our craft. The truth is that less than 2% of those that attempt to make this jump succeed. While the failure rate seems daunting if you go in to it with an understanding of what is really required you have a fighting chance. Here are some things I seldom see talked about in posts when I read a post where a hobbyist proclaims they are going to start selling their work.

    First and foremost is to understand I am not talking about building a guitar for a friend. I will be talking about building and selling your builds to the general public. Also I in no way am giving leagal advise. I am only sharing my personal insight.

    Must do

    1. Understand if you start selling your work to the public you are in the eyes of the IRS or other taxing agency a business subject to business taxes, license and other such regulations. You can get away for a while hiding the income you make but sooner or later it will bite you in bum. If you know you are going to do this then set up at least (for those in the US) a DBA (Doing business as/sole proprietorship). An attorney will charge you around $400 or less to set this up in most cases and can be set up by your self if you know how but paying an attorny is worth the investment (trust me). A DBA pays its self at the end of each quarter all revenue above and beyond operating expenses and retail tax liabilities if applicable. The profit from the DBA will be earned income on your personal taxes. You will also be personally liable for the business and any liability it may accrue.


    2. Another option is set the business up as an LLC (Limited Liability Company) this option is more expensive to start, but separates the business from you personally. Depending on how you set it up you are a board member of the company and can be paid a salary that becomes earned income on your personal taxes and then at end of each quarter after the company has paid out all accounts payable and tax liabilities the company can choose to pay the board members and share holders if any a dividend that is earned income to the individuals or the company can hold this money as liquid assets for the company. An LLC shelters you personally (for the most part) from liabilities the company may accrue.

    3. Set up books for your company and keep them. No matter if you choose a DBA or an LLC you have to track all income and expenses. Learn what your true cost of doing business is. Know and understand the difference in the cost to produce an instrument and the cost of being in business.


    4. Learn how to market. This one skill can mean the difference in making it or not.


    5. Know your stuff before your start. Many luthiers have produced a good quantity of instruments at impressive rates then found that they cannot live up to a warranty program



    Must not do!

    1. No matter what don’t try to hide money earned from build and selling your work. There are many that have tried to do this under the table and have gotten away with it for years. IRS, State, County and Local taxing agencies may be slow but if nothing else they are persistent. When they do catch up to the fact you are doing business under the table, the price you will pay will be more than you can absorb and likely no just monetary.

    2. If you are just starting out don’t take on more than you can comfortably produce. I know it is hard to turn down work but we all have limits. It is far more important in the beginning to keep the business small and produce great work. Even if your volume is not turning a noticeable profit in the early stages keep in mind that reputation in the lutherie trade is everything. Due to the internet one disgruntled client can wreck havoc to an upstart’s reputation. This one thing has probably ended more attempts at starting a lutherie business than any other single issue.

    This is by far nowhere near all that needs to be considered if you are thinking of starting a lutherie business. But you would be surprised how many times the things I have just mentioned are ignored as hobbyist attempt to make the jump to a business person.
     
  2. Ace1432

    Ace1432 Senior Member

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    GATOR! thank you. my future goal is indeed to setup my own lutherie business, and this is the kind of advise you never see anyone else give out. i mean maybe if you are in an apprenticeship already, they would toss this out there, but the hobbyist may not take this stuff into account right away
    :thumb:
     
  3. The Refugee

    The Refugee Senior Member

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    Thanks for the helpful hints man. I still want to get started on a Junior style build... just need to find out where I can get some darn mahogany in NJ :laugh2:
     
  4. Freddy G

    Freddy G V.I.P. Member

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    Very good advice Gator!
     
  5. bruce bennett

    bruce bennett Banned

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    exotic woods
    444 Chews Landing Rd
    Sicklerville, NJ 08081-2701
    (856) 728-5555


    the owners name is Gidwani and he's a pretty nice fellow.


    Gator: Most excellent post !
     
  6. redking

    redking Senior Member

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    I can echo Gator's comments whole-heartedly on the business and tax side of things. As a tax consultant for most of my professional career, I can tell you that "they" (whether it be IRS or CRA) will eventually get you. The longer it takes them, the more it costs you to fix the problems after the fact when you consider interest, penalties, accounting and lawyer fees. The cost of fixing a "mistake" after the fact in terms of consultant fees is many times quadruple or more the cost of doing it right the first time. I know - as I have sent some ugly bills to my clients.... :applause:
     
  7. Freddy G

    Freddy G V.I.P. Member

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    I'd like to add that I often have customers who ask to do business "under the table".
    I can't tell you how many times I've heard "c'mon...how about just cash, no receipt". Aside from the points Gator made about it being illegal, it also makes you look like a hack, and not to be taken seriously.
     
  8. TKOjams

    TKOjams Senior Member

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    For myself, this is a very timely thread. Thanks gator.
     
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  9. Damian Probett

    Damian Probett Senior Member

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    Not "can" but "will make the difference"
    Without this everything else is irrelevant.

    Many quite terrible guitars are sold by people who are good at marketing.

    Many great guitars remain unsold by those who aren`t.


    How you learn how to market is another matter entirely.
     
  10. The Refugee

    The Refugee Senior Member

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    Thanks for the lead, but apparently it's about 2 hours away from me :hmm: I suppose if given no other option I could endure the trek...
     
  11. DRF

    DRF Senior Member

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    I've been waiting for a post like this for a long time. There are many things successful luthiers will not indulge-I'm not trying to take a negative approach to the topic but biz is biz and some things will not be aired out.

    But my point is,there are many things that are in the open and everyone should know but are never talked about because its not glamourous,ie: taxes.

    Gator-between this thread and the commission thread I'd like to see you and others expand.
     
  12. DRF

    DRF Senior Member

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    OK I can't help it I have to be negative for a moment as I was just the other day in my workshop bent over a project sanding and literally beads of sweat on my brow.

    You have business partners and they want your sweat equity. Right now some never employed guy is sitting on a patch of gov't land in a gov't house smoking pot and he f**king hates your guts but guess what? you have to cut him a cheque...cut him into your action...cut him into your ingenuity and enterprising get up n go,because if you don't you will get caught and fined or go to jail. OK that was a gey rant but I can't help it dammit.:laugh2:
     
  13. gator payne

    gator payne Senior Member

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    TKOjams I wrote this with you somewhat in mind. You see I have a friend that was once somewhat in the same position you find yourself in. he took his first commission for a friend, then another and another and on and on but never register as a licensed business. One thing lead to another and got caught up in a law suit over a warranty issue he could not make good on. This lead to local tax judgment, a federal tax judgment, 20K plus fines/fees and a divorce.

    So every time I read a post were hobby builder exclaims with pride that they have received their first commission I can't help but remember my friend and the despair the blind pursuit of his dream brought him and his family. Simply because of two things he did not think about before he jumped in head first. First being: not having the repair chops to up hold his warranty claims. Too often it is forgotten or just not mentioned that is far simpler to build an instrument than it is to properly repair it. Second: not forming a licensed business.

    I hate like hell to step on anyone’s dreams. I want to encourage everyone to follow their dream. But too often on forums like this one we give encouragement freely but forget to remind new builders that there is a big difference between logically following their dream and blindly chasing it.
     
  14. dougk

    dougk Senior Member

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    Timely advice. Kauer Guitars is actually Kauer Guitars Inc ;)
     
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  15. DGNRepair

    DGNRepair MLP Vendor

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    Hit the nail on the head right there. :thumb:

    I know in most cases, if you are building and selling say 1-2 guitars a year, this would more be considered a "hobby", but the income legally still needs to be reported. Any more than that, Gator is dead on, you have to have some type of basic business setup DBA etc. Personally I setup my DBA even when I was only doing like 1-2 repairs a month. Now I am "DGN Custom Guitars LLC" and growing. :D
     
  16. Fletch

    Fletch V.I.P. Member

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    Great thread and exactly the reason I avoid doing anything for money. I get offers here and there all the time for little stuff from just this forum and also offers to buy my replicas, finished and unfinished but I've found that as soon as you take in some money the fun gets sucked right out of it. For example, the neck I sold a few months back that turned into a big debacle... I just can't win at this when it comes to money so for as long as I have my day job I'm keeping it a hobby. If it was somehow compounded by a lawsuit or some tax inquiry from the Federales I think I would lose my mind.

    Also the repair issue is right on target. Building a glued together guitar and getting it apart and back together seamlessly a year later because something happened are two different things. I see the makeovers and really just can't get my head around it to be honest... for the time it takes to get a brand new R9 stripped, get the fretboard off and get the neck off so the work can begin, I could have a replica half done!


    fletch
     
  17. Freddy G

    Freddy G V.I.P. Member

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    That's beside the point... give people what they want, but charge them accordingly.
     
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  18. H.E.L.Shane

    H.E.L.Shane Senior Member

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    This is the option i chose...

    because i have no employees and no partners.... I'm defined as a single entity LLC and the federal reporting is fairly straight forward...

    HOWEVER.. the friggin State of Pennsylvania requires me to file CORPORATE INCOME TAX separately.. and THAT.. i cannot do on my own.. i tried.. the instructions require instructions and the calculations go in circles (single entity LLC's are much simpler under the federal reporting system)

    SOooooooooooo I have to pay a friggin accountant $350 a year to handle my taxes becasue of the friggin coporate taxes in PA.... If i was a sole proprieter.. It would be MUCH cheaper.. but NOPE.... I hate PA sometimes...

    Sooo think about THAT.. If you're chargin $30 an hour of labor... you have to bill out 12 hours of labor to pay for your taxes to be filed....

    being that i'm part time.. that might be two weeks worth of "Billable" time.... just to file some crap you dont want to deal with in the first place...




    HOWEVER... with the LLC comes some sort of legal protection.. and without it... I couldn't claim my tools as business expenses..... an thus wouldn't get a tax refund at the end of the year from all the tools i bought last year... and wouldn't be able to buy new tools this year.... blah blah blah....
     
  19. gator payne

    gator payne Senior Member

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    Here is one thing that is not often thought about by hobby builders that occasionally build for other people and take money for it. Let’s say you build 3 guitars within a year for a few friends. You charge each of the friend’s material at cost of cost of $500 + $500 for your labor, $1k total. So you have received $3k in funds for these three builds and you deposit 3 $1k checks into your personal bank account. Let’s also say for proposes of discussion you have not licensed a business in any form in regards to the guitar building.



    Now without getting into sales tax implications at all just to keep this conversation simple; the question then becomes how much earned income needs to be claimed on your personal 1040. This is really tricky one. Here is the deal. Let’s say you itemized and deduct the material cost for the three builds leaving earned income of $1.5k. if audited you could have a bit of a problem because the IRS could see this as commerce (which it is) and disallow the deduction of the material cost which gets you right back to the $3k as the earned income. The problem for you is that you did not earn $3k you actually earned $1.5k for services rendered the material is an expense but because you are not doing this as business you cannot claim a deduction for the material cost on your personal 1040. So more or less you just threw $1.5k out your car window. For less than $400 you could have had an attorney set you up as a DBA, kept books on the builds, figured in base labor rate as part of the unit cost and at the end of the quarter claimed much more than $1.5k as profit.
    My point is even if you are just doing a few builds a year it can be worth your while to do it right. That is not even taking into consideration the legality aspect, but rather just the how to legally make the best money out of the deal.
     
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  20. DRF

    DRF Senior Member

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    Remember when everyone had these little business's running out of their home-maybe they still do-and "writing off" a room office space. Well I'm guessing there is alot of write off expenses to running a business. But ya you gotta hire somebody...f**k my head hurts,this stuff is like algebra,I can feel myself mentally shutting down.

    Sooo I've got tone wood and been buying and saving and stocking it for 12yrs or so...yeah I probably have receipts for 2 recent things. I know hindsight is 20/20 but hell all these yrs not thinking of "business and taxes".

    All the tools acquired over the years,yrs of trials and learning knowledge,everything from driving to the store to buy sandpaper and glue,buying wood from freakin MS to OR and paying taxes on duties...everything! I know a guy who went to community college for a year and is still able to claim school on his tax form.

    The gov't did not and is not going to cut you any breaks so learning about this is a way of fighting for your rights and pocket book.
     

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