Catherine McGinnis, M.B.A., continues her training sessions with a discussion on resources available to help the beginning soaper turn their goal into reality with strategic planning, setting up a business, identifying their market, and more. Paul Clough, C.P.A., joins Catherine for a Q & A on business entities and useful information for establishing good accounting practices.
CM - So now we're going to go a little bit onto the business end of it. I know that you might have a lot more questions after this. I'm happy to answer them. This is kind of all-inclusive. The great debate. When can I start selling my soap? Everybody asks that. So, let me give you what I think about when you can start selling your soap. Unlike any other profession in the United States, there's really no governing body for this, and, let me back up minute, when I speak about this, I'm speaking only about soaps. Not lotions or bath bombs, this is just soap. Like any other profession, I guess because lotion, bath bombs, that can all move into more of a cosmetic, this is just soap. There's no governing body or federal certification for soap making. Anybody can make soap, but not everybody knows the science behind it or the chemistry behind it, or why you would use this oil instead of another oil, or why would you use this solution instead of another solution, this additive instead of another additive; and that's just a matter of experimenting and learning and listening to Kevin and all the other experts. So there's no federal certification. So how do you know when your soaps are ready for the market? To me, I think soap making is a learning process. I learn every single day, just like all of you do. I am by far, will never be an expert in soap making. I know a lot about how I do it and I want to tell you how I do it, but there's so much aspects to soap making, so I learn every day, just like you all. So I think of it as, when you first learn to ride a bicycle. Everybody learned to ride a bicycle. Maybe your Dad gave you a bike with training wheels, then he took the training wheels off one day and said do it. However you learned to ride a bike, you fell down a lot. You got scrapes, you got bruises, but you got back on because you wanted to learn how to ride that bike. Everybody else in the neighborhood had one, too. So soap making is a lot like learning to ride a bike. You dust yourself off and get back up. And it didn't happen overnight, and neither does soap making. You're not going to make a soap one day and it be perfect. You tweak your recipe, you tweak your oils, you tweak your additives and you make it perfect. Maybe not for yourself but for your end customer. So, if you're making it for your family, that's great. But I think everyone here really wants to go into business to make it and sell it. So you want to make a recipe that is balanced for the masses, rather than balanced for one person or another person. So first you watch the experts and that's why you guys are here today. There's tons of soap making videos. We have some on GreenerLifeClub.com, someone asked about, when Kevin was talking, about labeling. We have a video on labeling, that doesn't, what is the correct word, it doesn't take away from Marie Gale's book, but it gives you an overview. So there's some on fyi101, there's some on YouTube, there's videos to be had and they're on the Internet and they're great. You can watch them in your home, you don't have to go anywhere, you can just watch videos. But the trouble with that, is how do you separate the good videos from the bad. I'd like to say my videos are the best. But, that's a matter of taste. Um, one of the reasons why I think that mine are so good, and I think that maybe if you're going to watch some videos, to search out some that are similar, are good manufacturing processes. And then, Derek, wherever he went, is going to touch on that later on. That doesn't mean all videos are bad, but look for someone that's doing it properly. If you learn from someone that's not doing it properly, you're learning mistakes. And then, you're probably going to be in the habit of repeating those mistakes. Danger, danger, danger. Look for some that are complete, precise and thorough. So they tell you all the processes, walk you through it, what the ingredients are and then give you an end result. Hands on learning. That's what we're going to do here today. We're going to make soap this afternoon. That'll be really fun. But there's also other places you can find. Maybe you have someone in your area, if you've never made soap before, if you can find someone in your area that has and they'll take you on as an apprentice. A lot of soap making stores, like brick and mortar stores, they have classes that you can attend. Like one-day, two-hour classes. That'd be another great way, a place to learn about soap. Continuing Ed - I don't have any in my area but some of the bigger cities, the arts councils might have. So look for a structured setting that not only teaches you the basics, but also gives you the hands on supervised experience under a seasoned professional. The Handcrafted Soap Makers' Guild, any of you familiar with, they have a website and if you go on their website, it actually will list the certified, again, there's not governing body, so it's the Handcrafted Soap Makers' Guild that does the testing for these. But there are certified soap makers and certified teachers, and you can find a lot online there. So, my favorite line is, soap making is not a competition sport. It's not. You make soap, you make soap, everybody makes soap, but how many billion people are there in the world and everybody gets dirty. You're not competing against each other. You know, work together, have fun together, you're going to learn from each other. You're not learning against each other, you're learning from each other. So what else do I say. There are many experienced soap makers and online groups that are ready and willing to share. I have a Soaping101 Facebook group. Is everybody, is anybody on Facebook? So I can't monitor everybody that, I think there's four thousand-ish people in my group, I can't monitor every comment that comes in but it doesn't make a difference. Because everybody helps each other. So that's another great way, is to join a Facebook group or maybe join online chat, or I know there are Yahoo groups, yes ma'am? CM - On Facebook? It's called Soaping101 Study Hall, and you're all welcome to join and if I don't get back to you, shoot me an email or shoot me a message on Facebook. I'll definitely approve you all. Maybe, some of you are already in it, I know Amanda is. I can't stress enough about taking the proper time to study, research and experiment. So we're talking, the premise of this, the great debate, is when to start selling my soap. Can you sell it, can you sell the soap that you made, your first soap? Absolutely, but why would you? Because the longer you make your soap, the better you're going to get. The better your soap's going to get. So if I made a soap today, it's my first time making soap and I loved it and my mom said this is the best soap ever. Well of course she said that because she's my mom. But that doesn't mean it's going to be a good soap for the public. Because I know I'm going to get better. So, with time, you're going to get better, you're going to research more, you're going to know more about soaps, you're going to know more about the oils, so take your time. There's no rush, maybe there is a rush for you, but learn fast. So familiarize yourself with the properties of the oils, and how can we do that? Google. I'm sure there's other ways but Google's a good one. So, you should know the attributes of the fatty acids, each oil, soap making oils, they're not soap making oils but when you use them for soap making, has an SAP value, which is a SAP value, which stands for saponification, right? And so not only should you know the SAP value, you don't have to know them by heart, but you should know, which ones are similar? If they have similar SAP values, they have similar saponification values, which means they'll saponify at similar times. So research your oils, play with them. The right combination of oils is what separates a mild lathering and bubbly soap bar from a harsh, crumbly mess. It will take a lot of trial and error, but it will happen. Okay, testing your soaps. Everybody has a family and your family is probably one of your best testers. However, as I said before, they're very biased, especially your mother. So, should you have your family test it. Absolutely. You need to let them know that they need to be honest with how they feel about your soap. Because, negative critique is an opportunity to improve. So, if they say something bad about it, don't get mad. Take it as a learning experience. In fact, you kind of want them to say something, I don't like this color, I don't like this scent. Because if they don't like it, chances are who you are going to sell it to, isn't going to like it either. How many people here already are in business? One two three four okay five. CM - That's really what you want. You don't want them to say, oh, perfect, don't change a thing. Because, maybe you shouldn't, maybe it is perfect and you shouldn't change a thing, but maybe they're saying that just because they don't want to hurt your feelings. Okay, the reason why I asked if anybody's already in business is because I'm going to just talk quickly about, while you're in your testing phase, you want to search out a way to incorporate your business. You can be a sole proprietor, which means it is just you, you're using your Social Security number; or you can be an LLC, which is the best of both worlds because you're taxed as a partnership, you're incorporated as a partnership, but you're taxed as a sole proprietor. And if you're, by god, if you're sued, they're going to be able to sue the corporation, they won't sue you. I'm not going to tell you how you should incorporate, because I'm not an attorney, but I would say that, during the testing phase, talk to an attorney, or, talk with Small Business Administration - it's free. Well, I guess it's free, we pay taxes and that's what pays for it. Every city has some kind of an annex, even the small, tiny little city would have an annex. Some of the larger cities would actually have an office that you can go to and that's what they're set up for, to help people, small businesses incorporate and grow. Will they incorporate you? No, that's something you have to do yourself. But they will offer you any kind of resources they have to make it easier for you. They'll help you set, maybe put a contact with you, put you in contact with an attorney, maybe an accountant. All of that, or you can just go to SBA.gov. Also, in your testing phase, great time to seek out insurance. What if you didn't have any insurance and you were selling soap? Can you sell soap without insurance? Absolutely, why would you though? Because you're just asking for someone, I don't know if you've noticed but not everyone in the world is nice. They can be really mean and people can just be vindictive, and if something happens, they used your soap, and maybe they got a burn, maybe a rash, and maybe it was your soap. But maybe it wasn't your soap. Still, they're going to blame your soap. They're going to put the blame on you. If you have insurance, you are covered. So, the Handcrafted Soap Makers' Guild has a policy that's created just for soap makers. Do I work for them. Absolutely not. But is that where I have my insurance. Yeah. It's inexpensive or semi-inexpensive, but it is catered just for soap makers. But you don't have to get it through them, you might also want to contact your homeowners policy. They would probably point you in the right direction, are you covered? Yes? CM - They can come after you for anything. Can they win, probably not. But they can still come after you and do you have the money to fight that in court, probably not. So it's best to be safe than sorry. Did that answer your question? CM - I know you probably didn't like my answer, it wasn't the answer that you probably wanted to hear, but, yeah, you really, they can come after you. Will they, who knows, who knows what people will do? People are weird. CM - Right, but just as you told them to stop using it, doesn't mean they're going to. CM - Remember, years ago, the McDonalds coffee? Even McDonalds has so much money, they can fight it in court, they probably just settled, I don't know what happened. CM - But if you're sitting here today, that means that you probably have a small business or you're going to open a small business, so you probably don't have a multi-million backer to support you if you get sued. The insurance is cheap, I don't know how much it is, I think I pay maybe five hundred dollars and that includes my membership to the guild. Like five hundred < audience - In a year?> CM - A year. Yeah, and I don't know what the coverage is because again I don't work for them, I'm just saying that I know you can get it through them. Another one is RLC. But there's a cap with that, you can only sell so much. CM - Right, and I know you guys are going to sell way more than $5000 a year. So, I've heard many many times, I own a home, I have homeowners insurance, it's going to cover. It's going to cover you if you hurt yourself. But it's not going to cover someone else who used your product. It's not product liability. Okay, so we've done it all. We've learned, the fast track, we did it really, really quick, we learned it all, tested everything, we researched, we're legalized, we're incorporated, am I ready to start selling my soap now? There's no "time". It's when you feel you are ready. Do you feel you're ready, do you feel your recipe is perfected? Did you dot all your i's and cross all your t's? Yeah, did you miss one? You can still do it. It's a learning experience. There's no, I can't say when is the right time. You'll know when it's the right time for you. It's simply the nature of your niche customer base. Just like learning to ride a bike, it takes time to build up speed and momentum. A lot of soap makers put their soap on Etsy. You all familiar with Etsy at all? Their soap is the best soap, I mean, there's XYZ Soap Maker, no one makes soap like XYZ. She puts it up on Etsy, no one buys it. Why? Because that market is saturated. So she gets disappointed. Well, I put it out on Etsy and a month later no one's bought it, I'm not going to make soap anymore. You have to work at it. Just like riding a bike, you didn't get up and go. You have to continue and continue and persevere. Oh, I just read that and thought it said "Never take the time to rest." So with soap making, take the time to test, to study, research the market, and never stop learning. And you have a huge group of people here today, make friends with everybody, a lot of you are already in Florida. So maybe you're close to each other and you didn't even know it. You know, get together, make soap together. Share ideas. Again it's not a competition sport. Everybody gets dirty. CM - Sounds like you're all set up, you've got yourself covered. That's good, you should do your research, but have fun doing it. Soap making is... CM - Yeah, don't. I mean, if you have a bad batch. I have bad batches all the time. Do I put videos up? No. Why am I going to show you my failures? I just want you to think I'm the best soap maker ever. But I'm not. Everybody makes mistakes. Everybody has bad batches. Don't get discouraged. If you make a soap and you love it but it doesn't sell. Don't make it again. Yeah, give it to your family. CM - Exactly. CM - Miss Amanda? CM - Oh yeah, you can see where everybody else is, I called it a buddy map or something. CM - I think that it's fun to teach somebody something new. Doesn't anybody like to teach somebody something they don't know. CM - I think it's fun, and I think it's fun to learn and I think it's fun to teach. So, maybe take someone under your wing. CM - I say good for you! I also think that when you're teaching someone something, you know you're following the steps, you know, in youur mind, when you make it yourself, you know where it's going in your mind, but you have to verbalize it. So it makes you a better soap maker. Because you have to stop, break it down and explain it to someone else. But take on a buddy, or you know, don't take on a buddy. But I think soaping's more fun when you do it with someone else. DH - Catherine, Paul just walked in. You touched on the various types of corporations, how you can set up a business, types of businesses. Paul's doing an accounting session, Paul is probably going to run out of time during his session. I want to invite him to just step up and explain the different, just real quickly, of the top, in terms of when you're starting a business, your options - personal, LLC, incorporation, give us the plusses and minuses. I think Paul, Catherine touched on it. CM - I touched on it , I said there's sole proprietor, LLC, actually. PC - I do have some slides tomorrow during the tax presentation that I'm going to go over the different types of entities. I can do it briefly today, and then I'll go through it faster tomorrow or skip over it. Basically, you know the starter is the sole proprietorship. That's you doing business individually. That's fine, you do a Schedule C for your tax return. The problem with filing a sole proprietorship is that whatever income, net income you make, not gross income. Gross income minus all your expenses brings you down to net income. Whatever net income you make, you'll end up paying 15.3% self employment tax on that, which can be a lot. And many times people pay more in self employment tax than they pay in income tax. Okay? So basically from there you step up to some type of entity. An LLC, a corporation, and S-corporation. Today I don't see too many partnerships. Years ago, partnerships were kind of popular but today they're not. Partnership is basically two sole proprietorships together. Some of the problems with, besides the tax issue, with a sole proprietorship or a partnership is that the individual that has a sole proprietorship, they're liable for any liabilities of the company. So, if the company owes anybody some money, you're personally liable. If something happens with the product, and somebody sues you, you're personally liable. That can be a very dangerous thing to be. PC - Well, in Florida, they can't, but in some places they can. You know, in Florida, you have homestead. So, when you homestead, virtually no one can touch your homestead property. But in most states, they can, they can get anything they want. Anything they can find and attach. Okay, when you get into entities, like LLC's and corporations, it removes your personal liability in most cases. I don't want to say every case, because you could do something that would make you potentially personally liable. But, most of the time, 99% of the time, 99.9% of the time, you are personally, your personal liability is removed. When you do an LLC, LLC is the newest type of entity, and there is no tax form specifically for an LLC, like there is for a sole proprietorship and a partnership and a corporation. They all have their own tax form. LLC, the IRS said, ehh, we're not going to do another tax form, we're just going to use the ones we've got. So, if you, and this is the mistake most people make when they do an LLC, they file the LLC, then they file with the IRS to get their tax ID number, and the IRS then decides what they're going to be as an entity, okay? The IRS, this may surprise a lot of people, but the IRS is not your friend. They're not deciding what's best for you. They're deciding what's best for the government and collecting money, and what they say is, if you're a sole member LLC, you'll be filing as a sole proprietorship. In other words, you'll be filing a Schedule C. Bad news, you've got to go back to filing 15.3% self employment tax. Bad news for you. If it's a multi-member LLC, they set you up to be filing as a partnership, same problem. You're going to pay 15.3% self employment tax on all of your net income. Okay? So, and unfortunately, a lot of people don't understand that. They go and they do the easy filing online, they go online and they see one of these online services and, oh, it's only 200 bucks, and yeah, but they don't tell you the problems from a tax standpoint. So what do you do? You end up stuck again. PC - Well, you can. The best time of course is to change it, to set it up at the beginning. You have options to file certain forms and be treated differently. The best thing is to file the form to be treated as an S-Corporation. You file to be a corporation and then you file to be an S-corp, okay. When I set people up, I do all this at one time. And the best time to do it is at the beginning, but you can do it, and usually when you do it during the life of the LLC, it's going to take effect the next January 1. There are special cases where you can file and make it retroactive. It's a little more difficult, especially the rules for it, but listen, if you're going to save three, four, five thousand dollars in payroll taxes, it can be worth it. Now, LLC means Limited Liability Company. And this is true of all these entities, LLC, corporations, your S-corp is just a subset of a corporation. It's a corporation that filed special paperwork to be treated specially under the tax code. Now the best way, like I said, is an S-corporation. What that allows you to do is split your income. You have to take some amount of income. If you're working within the corporation, you have to set up so that you take some income. Otherwise, if the IRS comes in and they look at, okay, you've got this S-corp, you've made $50,000 in net income, and you took it all as a distribution, distribution means that you're still going to get taxed, but not income taxed, you're taking it as investment income. Think of it like that. So, you're going to pay the income tax, you're not paying any self employment tax. IRS says, whoa, wait a minute, you can't do that, you're an employee of the corporation, you're working in the corporation, you do all the work of the corporation, you've got to take some payroll. And we decide you've got to take it all as payroll, because you didn't do it in the first place. So now, they're going to hit you for all payroll tax, failure to file, failure to pay tax, on and on and on. They're going to hit you for a lot of money. So the best way to do it is, you take and split the net income, so that you pay payroll to yourself, pay the payroll taxes, and I usually recommend about 50%, so if you're making $50,000, you split it. So $25,000 goes to payroll, $25,000 goes to investment income, okay? Remember you always, there's less ways of getting out of the income tax, than there is of getting out of the payroll tax. You know, you're always going to pay income tax. Not always, but in many cases you're going to pay income tax, you're not going to pay payroll tax. But remember, the payroll tax is 15.3%, so that's a big chunk of money. You know, if you're making $100,000 in net income, and you split, the payroll tax on $100,000 is approximately $15,300. That's a lot of money. If you split it, you've just halved your payroll tax, now you're paying $7500 in payroll tax instead of $15,300, that's a nice savings. PC - Is the soap business a not-for-profit? PC - Is the not-for-profit filed as a tax exempt, 501(c)(3)? PC - Okay, then, you're essentially making a donation to the 501(c)(3) of all the profits. So, assuming that you passed muster as far as an IRS audit, you shouldn't be paying any taxes for the most part. <okay, just wanted to make sure I was doing it right> PC - They can still come in and say, you need to take payroll, however. < If you put yourself as a volunteer?> PC - Uh, you're doing the work, that would be tough. They're going to go through that situation with a fine tooth comb. You better be squeaky clean if that's the situation - use your own soap. Boy oh boy, they're going to look at that situation, and spend some time tearing things apart, so just make sure you've got all the i's dotted and the t's crossed and everything. KD - Is the payroll tax a complete loss or will it eventually increase your social security. PC - Well, it's going to increase your social security, but the thing is, if your option is, do I pay social security, or do I reduce my social security and take that money and put it into my own retirement account, you're probably better off putting it into your own retirement account; because you can decide how it's going to be invested, you can decide how much you're going to take and when you're going to take it and so on. Social security, okay, that's nice to have available, that's always going to be there, and no matter what happens to you, you're going to be able to get something. But, are you going to be able to live on social security when you're 65? Probably not. KD - My question is, the extra that you put in, does that increase the payment that you'll get out. PC - Sure, well, it depends on how much you put it. Probably it will. It's going to change how much you put in, how much you put in is going to change how much is generated in the calculation, when they do the calculation of the highest 40 quarters, and that's basically what social security looks at is the highest 40 quarters, so that's going to change how much you get when they do that calculation. However, again, it's probably to your advantage to save that money, as long as you put it into a retirement plan where it's going to benefit you individually in the future. But yes, it will change because what you're reporting is how they calculate the amount you're going to receive. PC - You cannot NOT pay into social security. If you have payroll, you're required to pay in 15.3%. Okay, so, um, it's not a situation where you can say, oh, I'm already subject to a pension, so I don't want to pay into social security. No, even if you're collecting social security and you're working, you've got to pay into social security.