If you’ve never owned a business and are are now super excited about starting your first business, breeding and selling mini cattle, you might rush into some decisions without fully understanding the long term impact or requirements.
I am not a CPA but I have been a business owner for nearly 20 years, even before I started my mini business. So I’ll share with you my experience, so that you have some level of working knowledge to discuss with your own CPA as you start down your new business venture.
First, it’s important to differentiate between you, the business proprietor, and the legal entity of your business.
What I mean by that is that anyone can buy a domain and market themselves under a business name, but to associate that name with a legal business entity such as a Limited Liability Corporation (LLC), create a business bank account, hire employees, or to file taxes under that business name, you must first apply for an EIN number with the IRS.
An EIN is a federal tax identification number required by all legal business entities in the US.
Will you need an EIN number right away? No, In fact you may not need to apply for an EIN, or form a legal business entity for many years, if at all, because until you make money at your business, you’re business is simply considered a hobby.
Think about all of the costs you’re going to incur over the next few years…
Cow purchases
Vet expenses
Maybe you’ll build a barn
You’ll need fencing
How about a chute?
Hay - they need food
Believe me, the expenses add up. Do yourself a favor and make your first business investment be a basic online subscription to Quickbooks.
Keep every single receipt, organized in a tax box, and enter those expenses into Quickbooks under the categories of construction, livestock expenses, medical expenses, and cattle purchases.
Assuming you start your fold with young calves, you may be three years out before you have any calves of your own to sell. When you do, keep those receipts as well and enter that income under a new category of cattle sales.
When your cattle sales income exceeds the amount of all three years of expenses, you will need to decide whether you are a business or a sole proprietor. If you’re a business, then apply for your EIN and decide what type of legal entity you want your business to be. If you are a sole proprietor, then you will simply report your earnings on your personal return or 1040.
Generally speaking, if you plan to have any employees, you will need to file the EIN and form a legal business entity. I strongly encourage you to discuss this with an attorney or tax professional before deciding. Depending on the investment you have into your business, there may be benefits such a depreciation costs that warrant creating a legal business entity, even if you have no employees.
But the main take away for today is that you are a hobbiest until you actually make money, and your tracking and recording of expenses until then will be the only way to know for sure.
