The Business of Cabinetmaking
|This article is an excerpt from the DVD-ROM Box Making Bonanza which features three box making books on one disc.
If you dream about going pro –building cabinets for money instead of just family and friends –the biggest obstacle isn’t your lack of woodworking skills, it’s a lack of business acumen. In this book, Jim Tolpin shares how he turned a near-broke cabinet shop into a roaring business. He’ll share with you his personal secrets to help you succeed where thousands of others fail: everything from arranging your shop for efficiency to pricing and billing clients. If you want to take the next step to become a professional cabinetmaker, this is the book for you.
At the outset, you must decide just what you expect to get out of cabinetmaking and where you wish to go with it. There is a big difference between the avocation of working with wood and the occupation of woodworking. When you ask people to pay for your work, you must define the shop as a legal entity. You must procure all the necessary business permits and licenses, and you must register with the Internal Revenue Service (IRS). Financial records must be carefully maintained to satisfy the bureaucrats and to benefit you. Written contracts should be sound for the sake of all parties involved.
Next the goal is to get the business to generate work for itself. You must provide a product or service that enough consumers wish to purchase for a price they are willing to pay. Thus one of your most necessary, and likely most difficult, jobs will be to define your market: who they are, where they are, what they like to buy and how much they can and will spend. As if that were not enough, you will have to learn how to draw a modest but steady portion of that market to your product.
Once you’ve carved out your niche, it becomes critically important to foster the growth of a good reputation. Contrary to advertising propaganda, this precious commodity cannot be created by words alone. Only by working harmoniously with clients and trade professionals and by honoring all guarantees of craftsmanship (both written and implied) will your name become synonymous with honesty and quality. If you have a name like that, the world will indeed beat a path to your door.
For many woodworkers, all this might seem too tall an order, but be assured that you already have the raw materials necessary to become a successful businessperson. In creating that well-oiled cabinetmaking machine, you have engaged in forethought and planning, paid painstaking attention to minute details and experienced a deeply rooted desire to produce the best results with only the necessary effort. If the one-third of your being that will act as the businessperson continues to make use of these attributes, the two-thirds of you that anxiously waits to work in the shop will be kept busy indefinitely.
Entering into a partnership or incorporating is usually considered in response to a perceived need to grow. While the temptation to do so is very great from the standpoint of profit, growth usually entails certain sacrifices. The mere act of taking on employees, for example, can quickly transform a formerly independent woodworker into a wood monger and an administrator whose primary responsibility is managing people rather than projects. There are other complications. Any employee will have to increase shop profit to the point where you can afford to pay a decent wage plus an additional 30 percent for workmen’s compensation insurance, federal unemployment tax, your share of the Social Security and Medicare taxes and an increase in liability-insurance premium. Remember that paying these bills, filing quarterly statements, preparing payroll ledgers every pay period and managing the employee gets done on your own time — or someone else’s time that you must pay for. Finally, if you hire one or more employees, you must run your shop in accordance with the equipment and safety standards formulated by the Occupational Safety & Health Administration (OSHA) or risk a substantial fine.
Forming a general partnership brings another worker onto the shop floor without the complications and expense of becoming an employer. Working with another person on an equal basis is often a real shot in the arm, bringing in a burst of creative energy, new ideas and perhaps a larger clientele. Before you say “howdy, partner,” consider some of the disadvantages. Working productively with another person means learning to get along together, not always an easy task. Decisions concerning design and production routines become negotiable, and the products of the shop will no longer represent your talents alone. In a general partnership, you are legally liable for all of the work and services of the shop. If your partner produces a lemon and a client responds with sour grapes, both you and your partner must eat the loss.
Although there is no legal way to limit the sharing of liability, you should draw up a written agreement that at least clearly defines the relationship between the partners. In addition to defining the responsibilities of each partner, the agreement should stipulate how income will be drawn from the business, how profits will be shared, the amount of capital to be invested by each partner and the way in which the business may be sold (including buy-sell provisions within the partnership). Neglecting to address these issues in advance can lead to a long, bitter round of negotiations later, which may be impossible to resolve without fattening the wallets of several lawyers.
Because of the increased liability, partners often opt for corporations. (Sole proprietors may incorporate to protect their personal assets from business-related liabilities.) In a corporation, an individual’s personal liability is limited to the amount paid for his or her share of the stock. Corporations also offer distinct tax advantages, such as the ability to fully deduct the cost of life and health insurance. (These deductions currently are not available to unincorporated businesses.) A subchapter S corporation is specifically tailored to small businesses: Because shareholders can claim profits, called dividends, as ordinary income, double taxation is avoided. Be aware that a corporation is expensive to set up and maintain, and the reams of paperwork require professional expertise.
In the creation of any business, it makes good sense to seek the advice of qualified professionals. While some lawyers specialize in business law, you can also work with a certified public accountant (CPA). CPAs are usually less expensive than lawyers and often more receptive to small-scale business matters. Find a good CPA by asking other small shop owners for recommendations. An accountant should help you set up the books unless you have expertise in this area.
License, Registration and Reporting Requirements
Most counties and municipalities require businesses that operate within their borders to be licensed. If you operate under a name other than your own, you will probably have to file for a “doing business as” (dba) or “fictitious name” designation. Obtain information on these requirements from city hall or the clerk at the county courthouse.
Your state probably requires registration of a business, especially if the government collects sales tax on the exchange or sale of tangible property (like cabinets). The state will issue a permit to sell taxable property, which also allows you to purchase raw materials and supplies tax-free. (Most wholesalers require tax-exempt customers to file their permit numbers with them.) In addition, your state may require you to register as an employer if you qualify as such. In either case, the state will require you to file quarterly income reports. Obtain state registration information from the taxation agencies located in the capital or from branch offices located in the larger municipalities. Check the Internet and the government section of the phone book.
Last, but far from least, consider the federal government, which will insist on knowing all about your little business. If you run a simple sole proprietorship without employees, your Social Security number serves as identification; otherwise, you are required to file for a Federal Employer Identification Number (FEIN). If you have no employees, your contact with Uncle Sam will be simplified. Any profit from the business is treated simply as income (which is summarized on Schedule C: Profit or Loss From Business) on your personal income tax return. Social Security tax is collected as a self-employment tax, computed on Schedule SE: Self-Employment Tax and filed with your Form 1040. The government requires quarterly payments against your tax liability if it exceeds a certain level.
If you have employees, you will be in touch with the government on a regular basis, depositing federal unemployment tax, Social Security and Medicare taxes and withholding tax, and filing quarterly earnings statements. A corporation must renew its license in the state of registration on a yearly basis and file its own tax returns. (This is the extra paperwork I warned you about.)
Help Without Hiring
If you find yourself sharing the work with another cabinetmaker in your shop, legally you have to hire him or her outright or form a general partnership. You have some ways to get help in the shop without becoming an employer. There is nothing illegal about someone working there without pay (excluding minors, of course). This someone will be either crazy or your spouse (or, more than likely, both). With a spouse’s help, the business will generate more income without the headache of additional tax liability and paperwork. There may even be some tax advantages in hiring a spouse, including the ability to create a 401(k) that can shelter a great deal of pretax money. (These laws are constantly changing, so consult an accountant before you decide.)
The other strategy, which I occasionally use when faced with impending deadlines, is hiring subcontractors. The federal government defines subcontractors as people in business for themselves who sell their services to you. A subcontractor can supply you with components, such as drawers and doors, or perform special milling operations, such as running molding or sizing panels, and simply bill you for the work. (If your annual payments to any one subcontractor exceed a certain amount, you will have to file a Form 1099 on the subcontractor at tax time.) As long as subcontractors work on their own time, in their own way (not subject to your management) and on their own equipment, the federal government will not classify them as employees. If you have any questions about the specifics of this relationship, ask the IRS before they ask you.