I've done some reading online but am getting somewhat overwhelmed and could really use some advice on this one! Basically, I am trying to game my husband's very small business to be as tax-efficient as possible.
My husband has started a maker-based (think crafts) side business. For now, sales are very low -- less than $1K this year, probably. The dream is that in a few years this will allow him to drop back to part-time in his day job, and eventually will supplement our early retirement, but for now he's just getting off the ground and learning the skills. He will likely never hire any employees, and we're not in a position where we need more retirement savings space. He won't be taking loans or selling shares.
We want to formally register the business with our state (MD), primarily because we have a bunch of potential write offs: materials, product donation to a nonprofit, insurance, and we are eligible for the home office deduction which in itself should offset the cost of filing.
Some more details that may be relevant: We are in the 25% tax bracket, and we are also in the first year of owning a rental property (so are not sure the effect that will have on our taxes this year, although it is certainly operating at a loss after a month of vacancy).
The SBA has a helpful table on this website, but I don't really understand the different tax implications:
https://www.sba.gov/business-guide/launch/choose-business-structure-types-chart. I'm less worried about insurance as we do plan to purchase that regardless (his product could theoretically result in personal injury if it fails, so better safe than sorry). I'm starting to lean towards a sole proprietorship, but want to make sure this is the right call.
I have a few specific questions I'm trying to figure out:
1) Does a sole proprietor have the same available write offs as an LLC, in our scenario? Or can an LLC take advantage of more tax write-offs?
2) My thinking is that a C-corp wouldn't be worth it (at least at this juncture) because his profits are so low, so the actual taxes he is paying on the business are negligible, but is this correct?
3) If we do an LLC over a sole proprietor and have to pay FICA taxes, will that suck or will we be tied to profit and therefore minimal?
4) If we do a sole proprietorship, can liability insurance make up for the personal asset risk we'll be taking? I'm really only concerned about being sued if a product fails and causes harm (again, not really likely at all, would require kind of an insane perfect storm of events for this to happen, but still better safe than sorry).
5) Once we select a structure, are we tied into it forever, or can we change it at any yearly filing?
6) We can't even figure out if we need to be charging sales tax for his products. I assume the answer is yes, but I am not clear on if him operating out of our home counts as a "physical presence" in the state - or if claiming the home office deduction would change this?
7) If he does need to be charging sales tax (which probably yes he does), is there any requirement to keep the money separate (like you would with a security deposit) or can you just take all the money your customers give you and then just pay the quarterly taxes out of your general account?
8) Lastly, if he sells online to someone out of state, does he charge them MD sales tax?
I know that filing quarterly taxes are a thing, but I'm not going to worry about that until we figure out these other questions.