Business Structure for Independent DM

[Jcp2]

That’s mainly what I’m looking for. As it is, I do spend a lot of my time and money maintaining gear traveling to meet with people, etc. So it would be nice to be able to deduct some of that as business expenses since that’s legitimately what I’m doing. Even if it’s not producing much income, I’d still consider it an entity with my name on it. LLCs seem sufficient for that at least.

If you create an LLC and undercapitalize it or commingle personal and business expenses, there is no veil of protection as it would not be considered a legitimate business in a lawsuit. A business is supposed to have income. Otherwise it’s a hobby. But you’ll get to use cool business cards.

 

[berndo]

If you create an LLC and undercapitalize it or commingle personal and business expenses, there is no veil of protection as it would not be considered a legitimate business in a lawsuit. A business is supposed to have income. Otherwise it’s a hobby. But you’ll get to use cool business cards.

I was wondering about that. I don't know about the US but in Germany you can't have a LLC or any other business just safe money when doing your hobby. You can technically start one and keep it for a couple of years but when there is an issue and it turns out that there never was any change to make any money you might get in trouble with the tax man.

 

[Zef]

If you create an LLC and undercapitalize it or commingle personal and business expenses, there is no veil of protection as it would not be considered a legitimate business in a lawsuit. A business is supposed to have income. Otherwise it’s a hobby. But you’ll get to use cool business cards.

Good point. The business must function as its own entity...business check for expenses as opposed to personal expenses, business loan to capitalize as opposed to a personal loan, credit card for the business instead of using personal credit card....the "veil of protection'" is established and maintained by the business functioning as an entity unto itself.

-Z

 

[Zef]

I was wondering about that. I don't know about the US but in Germany you can't have a LLC or any other business just safe money when doing your hobby. You can technically start one and keep it for a couple of years but when there is an issue and it turns out that there never was any change to make any money you might get in trouble with the tax man.

Kind of the same in the US...the business must be legitimate, but because income and expenses are reported on one's personal income tax filing, the "tax man" doesn't care much unless they think you are deducting personal expenses as a business expense. It is important to establish records and keep receipts because one has a higher potential to be audited by the "tax man", and penalties and interest for under reporting/wrongful reporting can be steep. Remember, Al Capone didn't got prison for all the gangster stuff he did, he went to prison for tax evasion.

-Z

 

[Jonnyola87]

If you create an LLC and undercapitalize it or commingle personal and business expenses, there is no veil of protection as it would not be considered a legitimate business in a lawsuit. A business is supposed to have income. Otherwise it’s a hobby. But you’ll get to use cool business cards.

Good to know, thank you for spelling that out. So my plan would be to get a business credit card and separate out all business/personal expenses.
For some clarity: I spend a few nights a month and a few weekends a month traveling for ReActivate "classes" and leading local dives generally organized through an online group. Essentially discover local diving. There is a nominal fee usually or people just leave tips, which I save and keep in a separate account. I use that income to maintain gear, get air fills, get gas for required travel, etc. My old instructor basically mentioned "hey, you could save a little bit on taxes if you make this official. Won't be much, but it's something"
So essentially that's my idea. I don't want to make this into a major undertaking, but I do use a good amount of personal money to then go and make a small amount of side income as a DM.

 

[Scuba Scott]

Good to know, thank you for spelling that out. So my plan would be to get a business credit card and separate out all business/personal expenses.
For some clarity: I spend a few nights a month and a few weekends a month traveling for ReActivate "classes" and leading local dives generally organized through an online group. Essentially discover local diving. There is a nominal fee usually or people just leave tips, which I save and keep in a separate account. I use that income to maintain gear, get air fills, get gas for required travel, etc. My old instructor basically mentioned "hey, you could save a little bit on taxes if you make this official. Won't be much, but it's something"
So essentially that's my idea. I don't want to make this into a major undertaking, but I do use a good amount of personal money to then go and make a small amount of side income as a DM.

So do you plan to have income that exceeds your expenses or are you going in to this knowing you will never make a profit?
If you plan to make a profit you have a business. If you never make a profit you have a hobby.

 

[Outbound]

In general, I think the benefits of forming an LLC for a dive pro outweigh the cons. But definitely do your research. As others have pointed out, having an LLC does not protect your personal assets from legal claims of negligence should an accident happen while you are acting as a DM/dive pro. That being said, so long as you run your LLC properly, and if you adhere to the standards, common sense, and good judgement while acting as a dive pro, having that LLC might help establish that you do indeed take your dive business seriously and might be looked upon favorably in the event of a lawsuit.

The taxation issue may or may not be a benefit. It will depend on your personal financial circumstances. As others have said, a single-member LLC will be considered a disregarded entity and will be taxed as a pass-through, meaning on your personal income taxes. Yes, you can deduct qualified business expenses, but whether or not that benefits you will depend on how much LLC income you make, how many expenses you have, and whether it makes sense for you to take the standard deduction on your income taxes or to itemize. You will need to file a Schedule C for your LLC. Also, if your expected taxes on your LLC revenue meet a certain threshold you will need to file quarterly. Lastly, you'll need to show a profit at some point. That, of course, can be fudged a bit by simply not claiming some business expenses against your revenue, thereby showing a profit.

All of this means you will want to have a separate business bank account. There may be monthly fees associated with that. You'll also want to keep careful ledgers of your revenue and expenses. You might also want to apply for a business credit card. It is also possible to use a personal credit card for expenses and then reimburse yourself from your LLC account, but make sure you do it legitimately and keep careful records.

 

[Jonnyola87]

So do you plan to have income that exceeds your expenses or are you going in to this knowing you will never make a profit?
If you plan to make a profit you have a business. If you never make a profit you have a hobby.

Understood. I'd say at the end of the day, there is a modest profit against what I end up spending.

In general, I think the benefits of forming an LLC for a dive pro outweigh the cons. But definitely do your research. As others have pointed out, having an LLC does not protect your personal assets from legal claims of negligence should an accident happen while you are acting as a DM/dive pro. That being said, so long as you run your LLC properly, and if you adhere to the standards, common sense, and good judgement while acting as a dive pro, having that LLC might help establish that you do indeed take your dive business seriously and might be looked upon favorably in the event of a lawsuit.

The taxation issue may or may not be a benefit. It will depend on your personal financial circumstances. As others have said, a single-member LLC will be considered a disregarded entity and will be taxed as a pass-through, meaning on your personal income taxes. Yes, you can deduct qualified business expenses, but whether or not that benefits you will depend on how much LLC income you make, how many expenses you have, and whether it makes sense for you to take the standard deduction on your income taxes or to itemize. You will need to file a Schedule C for your LLC. Also, if your expected taxes on your LLC revenue meet a certain threshold you will need to file quarterly. Lastly, you'll need to show a profit at some point. That, of course, can be fudged a bit by simply not claiming some business expenses against your revenue, thereby showing a profit.

All of this means you will want to have a separate business bank account. There may be monthly fees associated with that. You'll also want to keep careful ledgers of your revenue and expenses. You might also want to apply for a business credit card. It is also possible to use a personal credit card for expenses and then reimburse yourself from your LLC account, but make sure you do it legitimately and keep careful records.

Great explanation, I appreciate that.

As a few people have mentioned, I also do want some sort of "officiality" to better establish myself in the dive community. I have also considered offering hull cleaning, anode replacement, etc. on a freelance basis, which I would also like to make a bit more official. Could end up muddying the waters, but if it all falls under the auspices of "dive services" is there any reason I can't just establish myself as a more legitimate entity in order to have better recognition, etc?

 

[berndo]

If you never make a profit you have a hobby.

That's likely the case for DMs and the vast majority of part time instructors.

Understood. I'd say at the end of the day, there is a modest profit against what I end up spending.

I don't know anything about your local market but I'd be really surprised if you can make any profit by being a DM when you actually tally up all your cost. In another thread your fellow Mericans were talking about how crazy expensive insurance is in the US. Maybe check that one out.
Even with cheap insurance, making money as a DM is not really a thing, AFAIK.

 

[Outbound]

That's likely the case for DMs and the vast majority of part time instructors.


I don't know anything about your local market but I'd be really surprised if you can make any profit by being a DM when you actually tally up all your cost. In another thread your fellow Mericans were talking about how crazy expensive insurance is in the US. Maybe check that one out.
Even with cheap insurance, making money as a DM is not really a thing, AFAIK.

Yeah, I tend to agree. It might be possible to eke out a small profit, but it's really going to depend on the individual circumstances. If you have to drive far to get to dive sites or have to pay for lodging for open water weekends, that definitely eats into profits. Pools destroy neoprene, so that's another expense. Liability insurance is expensive, but some shops cover that. But at least with an LLC it is possible to claim legitimate expenses, shifting the balance a bit.

OP: I just thought of this - and you might already know it - but if your shop covers your insurance but you also take on extracurricular dive pro jobs that aren't sponsored by your shop, their insurance won't cover you. In that case you will need to have your own liability policy.