Combining two businesses under one

[Colmatt]

I have an LLC client that currently in in the entertainment field : Disc Jockey -DJ Services

He has just started a comic strip that is being published in a local paper as well as selling some of his artwork.  He is wondering if he can just combine all activities under his current LLC.  These are all relatively small amount at this time.  

Thank you for you  advice!

[TaxGuyBill]

While it could be done, why does he want to do that?

From a business perspective, it makes sense to know how each business is doing by keeping track of the income and expenses separately from other businesses.  That way they can analyze how each business is doing.

If everything is being tracked separately, what is the purpose of then lumping them together on the tax return?   It could also hypothetically increase audit risk if the expenses are significantly off from the 'usual' expenses for the type of business code.

[sjrcpa]

And who owns the copyright to the comic strip? Who gets paid when it is published? Does it get signed by the LLC?

Who owns the artwork? Who gets paid when it is sold? Is it signed by the LLC?

[PATAX]

not 100% sure on this, but check to see how the attorney set up llc with state, i.e. I think I have seen here in pa "for all legal business purposes" or something similar on business activity description for corporations I believe.

[BobKamman]

How much did he pay for the seminar that convinced him he needed an LLC in the first place?

I hope he went to the one that showed how to set it up in Nevada using a Delaware corporation. 

Now we know why there aren't any DJ's in California doing a comic strip.  They couldn't afford the cost of multiple LLC's.  

[qbteachmt]

It might help to point out that DJs (and/or the venue) can have royalty claim issues (he's not performing original work), and having this in its own LLC isolates any claim from other revenues he makes from different activities. He may not need another LLC for "art and publishing" but at the least, keeping the DJ separate is not a bad way to manage this revenue stream.

[BobKamman]

That's the kind of nonsense that LLC vendors spout.  The fact is, if the LLC is sued, the owner will be sued.  It's difficult to imagine a situation where one would be liable and the other, not.  Once the owner has a judgment against him, all of his assets can be attached, including the other LLC.  

For small business, the best defense against liability is a good insurance policy.  The advantage is often the payment of legal fees.  Otherwise, even if the business wins, it incurs losses that can shut it down.  Not that I know of a good source for insurance against ASCAP and BMI claims.  

[Colmatt]

Great answers and questions to all.  Cleanest for sure will be to keep it separated.  Income from the comic strip and the art work will come in his personal name so schedule C's for them sound good.  

He hasn't really started to sell artwork yet but has amassed a hundred or so pieces of woodwork and other pieces to put on a show in the spring.  What about 2022 huge costs?

[qbteachmt]

"What about 2022 huge costs?"

What are these huge costs? If that is materials and supplies, that isn't a cost until the products sell. If that is start up costs, such as legal (trademark lawyer), that is not ordinary operating expense. If that is expense such as shop space build out, that is improvement asset, perhaps.

It depends on what the expenditure is for.

[Colmatt]

Shop equipment like saws etc. that he only uses for artwork.   Art supplies like wood, paint, etc.  Shop in home.  Computer for design.  To him a lot of upfront costs because these add up to about $5000.

Thanks

[qbteachmt · Accepted solution]

"To him a lot of upfront costs because these add up to about $5000."

That doesn't make them expense. That's why I use the word expenditure.

These costs need to be broken out and categorized for their tax treatment:

Supplies used in the production of the art are Cost of Goods Sold, which get matched to what is Sold, each year, giving you profit on sales. Until then, they are part of the art still on hand as inventory asset, such as wood, paint, hardware, etc. If you are new explaining this to the client, point out that the material costs are invested into the for sale items, which are still on hand; that means the value is still right there.

Tools are part of assets unless they are small cheap tools or consumable parts. Example: He might go through handheld jig saws three a year, so that makes them cheap and disposable, along with the blades as consumables. But chop saws and band saws can last 40 years, so they are going to be some class of asset to depreciate. That means the value is still right there, but wears out a bit over time ( = depreciation expense).

The same is true for shop improvements, or furniture and fittings, such as lights, shelving, compressed air systems. Still right there, can be wearing out over time.

Along with any other tax year-specific provisions, such as bonus depreciation. It all needs to be categorized.

[Colmatt]

I understand all of that, thanks.  All my small businesses came already established so I've lost the knowledge of starting up...you brought it right back. Thanks again