Firearm Legalities

Firearm Legalities

Firearm and Business Legalities

This section is not intended to be legal advice of any sort; but it should help you when looking for an attorney. Find a competent, licensed, general-practice attorney within the state in which you will be instructing. A general-practice attorney will have a wide depth of exposure to legal issues you may need to address. Try to find an attorney who shares your passion for firearm ownership and responsible safe handling. If you are planning to teach NRA Personal Protection Courses, you’ll need an attorney to teach Lesson 3: Firearms and the Law. If your state requires and attorney or a POST officer to lecture on the law, this would be another opportunity to utilize their services. Lectures are kept short and to the facts – the attorney should not interject personal or political feelings.

Specialists

If you seek out an attorney who “specializes” in a particular field, their bill rate will be considerably higher. You are paying for that specialization.

The NRA maintains a list of attorney’s who have expressed an interest in firearm laws. Visit local firearm dealers and ask them who they use for their business. Naturally, ask friends and family if they know of a good attorney. Join a social site, such as LinkedIn, which is designed to make connections to others with similar interests. You can search local news worthy events for attorney’s who defend our right to bear arms. If you have a good customer relations management (contact management) software program, you can look up attorneys who have attended past classes. Draft a letter of inquiry and email it out. As you receive responses you’ll find those who are legitimately interested in helping you out.

Once you have narrowed down your list of candidates, check the local state bar association for reviews, complaints, disciplinary actions and the attorney’s membership status. Perform a Google search and dig into that attorney’s background and reputation. If there have been disciplinary actions, suspensions, or other negative reports, you might want to pass on that particular attorney and find another.

Find an Attorney Before You Teach

One point you have to remember, as a business person, you are always at risk! Before, during, and after training has taken place. Don’t wait until you are in trouble and need an attorney. If you wait to find an attorney when you’re in trouble, it may be too late. The risk factor may be very small or it may be very large. For example, in New Mexico, your training follows your student. If your student makes a mistake, you may be partially responsible. There are several conceivable ways this can occur – perhaps you forgot to teach something during class. Did you give accurate opinions when they can shoot? Did you say something that was incorrect? Remember, you are always at risk! 

Legal Structure

Choosing your legal structure is a serious decision that will involve an attorney and an accountant. There are essentially six different business models available to choose from. Some may not be available in your state; others may not be advantageous for your financial circumstances. This is an important step in the business process. It requires thoughtful, deliberate consideration. We will outline the general pros and cons. The information is in no way complete. Remember, this is an area where professional advise must be sought.

Sole Proprietor:

This is the least expensive of your options but it also comes with the greatest amount of risk. A sole proprietor business is not a legal entity on its own. The sole proprietor is responsible for all the debts the business incurs. While a sole proprietor can create a business name (d.b.a. Acme Firearms Training), this does not create a legal barrier. Should the business get sued, the owner is responsible for all its debts. Because it is not a separate legal entity, owners are allowed to freely commingle business with personal funds. Loans are taken out with the owner personally guaranteeing they will repay the debts.

As a sole proprietor, your personal assets are at risk should a student bring a lawsuit against you. When we speak of all your personal assets, we mean everything you own. From your car to your house and everything else in between; literally.

You Could Lose Everything

If a student were to bring a lawsuit against your business, you could be subject to paying the award and most likely their legal fees. If this is the outcome, the court can compel you to sell your car, boat, liquidate bank accounts, or “tap the till” (confiscate future sales) to satisfy the settlement. Once resources are exhausted, the court can place a lien on your home. This guarantees a future payment of your debt (plus interest) when the house is sold. Finally, your personal credit will be ruined because you are liable for the debt.

From an operational standpoint, the sole proprietor has the least amount of paperwork and business filings. Profits are taxed at a personal rate. Profits and losses are included in your personal income statements at the end of the year. The most basic accounting procedures are utilized. A program such as Quicken or Quickbooks will be all you need. Basic accounting means tracking money in and money out. Deducting expenses as allowed and the end of the year. If the business suffers a net operating loss, the owner can deduct the expenses from other income earned, such as their income from work.

Imagine the worse case scenario: The sole proprietor or one of their instructors are involved with a business-related accident in which someone is killed. The resulting negligence case would be brought against the owner of the company and all their personal assets will be at risk to pay for the settlement.

Advantages:

  • Sole propitiatory businesses are easy to set up and are inexpensive to begin.
  • Sole propitiatory businesses carry little or no ongoing formalities.
  • A sole proprietor does not pay unemployment tax during the year (employees are different).
  • Owners can mix business with personal assets.

Disadvantages:

  • Owners are subject to unlimited personal liability resulting from debts, losses, and lawsuits.
  • Owners cannot raise capitol by selling an interest in their business.
  • Sole propitiatory companies rarely survive the death or incapacity of their owners, therefore, the value of the business is dependent on the sole owner.

General and Limited Partnerships

A General Partnership is a collection of individuals who agree to go into business. Similar to the sole proprietor, the individuals agree to be responsible for all the debts and obligations the business incurs. In a Limited Partnership, investors place money into the business but have no operational control; they are more or less “silent” investors. With the Limited Partnership, limited partners are not subject to the same responsibilities for profits and losses – the General Partners assume that risk. So unless you expect to have many passive investors, a Limited Partnership is probably not a good option.

One of the advantages of a General Partnership is the tax treatment it enjoys. A General Partnership does not pay tax on its income. Instead, profits and losses are passed through to the individual partners. At tax time the partnership files a Form 1065; each partner reports their share of the income and losses on a Schedule K form.

A business formed as a partnership must have some sort of formal agreement detailing how business decisions are made. This would include how disputes are resolved, how buyouts occur, who can bind the companies assets or take out a loan. The agreement would spell out the purpose of the business, who has what authority, and who is responsible for the many aspects of business operations. Some of the items for consideration include:

  • How will the ownership interest be shared?
  • How will decisions be made?
  • When one partner withdraws, how will the  purchase price of their interest be determined.
  • How is the partner who is leaving going to get paid?

S Corporation

A S Corporation is often an attractive opportunity for the small business owner. S Corporations have some appealing tax benefits and still provides owners with liability protection. S Corporations allow for income and losses to be passed through to the shareholders and are included on their individual tax returns. Because of this, there’s just one level of federal tax to pay.

A S Corporation must meet certain conditions to be eligible. First, the corporation must have no more than 75 shareholders. In calculating the shareholder limit, a husband and wife count as one shareholder. Additional restrictions are that only one of the following entities may be shareholders: individuals, estates, certain trusts, certain partnerships, tax-exempt charitable organizations, and other S corporations provided they are a solely owned S corporation.

S corporations that do not have inventory can use the cash method of accounting. Under this method, income is taxable when received and expenses are deductible when paid.

S corporations are subject to the same requirements as a full corporation. This generally means higher legal and tax service fees. They must formally file articles of incorporation, hold director and shareholder meetings, keep corporate minutes and allow shareholders to vote on major corporate decisions. The legal and accounting fees are similar to setting up a formal corporation in the beginning. S corporations can only issue common stock which can hamper raising capitol for the company.

Limited Liability Company

The LLC is a popular form of protection among many firearm instructors. The concept is the company owns its assets and debts, separate and removed from the personal assets and debts of its investors. It is a combination of a partnership with corporate forms that allows the liability protection of a corporation while maintaining the tax advantages of a corporation. The tax consideration/liability is spread among the owners or investors based on the percentage of the business they own.

The key benefit to the LLC is the amount of exposure from a lawsuit that is available to the plaintiff. If a student brings a lawsuit, they are only entitled to what the business owns and nothing more (provided debt is not personally guaranteed). If they win and bankrupt the business, only the business files bankruptcy, not the owners, which protects everyone’s credit rating. LLCs are also popular because the tax filing requirements with the Internal Revenue Service (IRS) are far less complicated than the full-blown “C Corp” and “S Corp” models.

A LLC offers many advantages over the S  corporation. S corporations can only issue one class of company stock. LLCs can offer several different classes with different rights. LLCs are allowed an unlimited number of individuals, corporations, and partnerships as members. S corporations are limited to 75 members.

The LLC receives significant tax advantages over a limited partnership. Unless a partner in a limited liability partnership assumes some sort of active role, their losses are considered passive losses and cannot be used as a tax deduction to offset active income. Owners of a LLC can take the losses and use them as a tax deduction against active income.

One disadvantage for LLCs is that the stock cannot be easily transferred. This makes LLCs less attractable to investors because the stock cannot be easily exchanged on the stock market.

Another advantage revolves around health insurance benefits. If you are paying for a private health insurance plan or one that is covered by the American Healthcare Act (AHA) you may be able to deduct those expenses from your profits. This is a huge advantage if you think about it – you’re essentially receiving free health insurance provided you report premiums as expenses of the LLC.

Corporation

A corporation offers you the same protection as the LLC but becomes quite burdened with IRS tax filings which must be filed in a timely manner. Miss a deadline and Uncle Sam hits you with a hefty fine and interest fees.

A corporate structure allows the business to be treated as a complete, separate entity. Corporations have all the rights of a real person with the exception they cannot vote; as well as some other limitations.

Like a S Corporation, corporations must go through a formal process of filing paperwork. Corporations are owned by shareholders, not partners. Corporations have an elected Board of Directors, shareholders, annual meetings and committees. Shareholders must meet once a year to elect officers, discuss the direction of the company, and vote on various operations. For this reason, smaller business owners may shy away from the corporation structure. If the corporation consists of only a few owners, then meetings can be held annually with the understanding the “owner” – the Chief Executive Officer (CEO) can continue to be elected every year.

Corporations properly formed and operated, limit losses to the investors solely to the amount of stock they own. A corporation can be sued; shareholder cannot (in most cases). This protects the shareholders personal assets.

Salaries are paid by the corporation, therefore, when an officer takes a salary, personal taxes are withheld. At the end of the year, the corporations profits and losses cannot be claimed by the officers, leaving them with other ways to reduce their personal income tax. Dividends paid to shareholders are not tax deductible to the corporation and therefore does not lower the corporations tax burden. Corporations must end their tax year on December 31 if it derives its income primarily from personal services.

Smaller corporations should prepare a shareholders buy-sell agreement. This will likely include a clause if a shareholder were to die or wants to sell their share of stock. The agreement may state shares must be offered to existing shareholders first. There should be an agreed stock evaluation process so the stock is being bought and sold at a fair market rate. If the corporation is large it may need to register its shares with the Securities and Exchange Commission (SEC) and/or other state regulatory bodies. However, most corporations are not publicly traded and private sales and transfers can be arraigned based on less restrictive rules.

Local Requirements

Local business licenses and other permits may be necessary to complete the legal side of your business.

In some states, you can conduct business in your home provided it does not increase or inhibit the normal flow of traffic. If you conduct classes in your home and twenty-thirty persons show up, you are defiantly impeding the normal flow of traffic of your neighborhood.

Some cities or counties may say you must absolutely meet certain health requirements (wheelchair access, bathroom access, fire extinguishers, etc.). A work-a-round for this is to rent a local conference room at a motel or gun shop which creates value without the headaches associated with the stereotypical home-based business restrictions.

The Internal Revenue Service (IRS)

Don’t forget your “silent partner”, Uncle Sam a.k.a.: The Internal Revenue Service (herein referred to as the IRS). You’ll need to plan for your federal tax withholding’s regardless which legal entity you choose to operate. This is where a Certified Public Accountant (CPA) is worth their weight in gold. A CPA, together with a good tax attorney can help you determine the best deductions for your business and your personal finances.

The largest expense you will face are federal taxes – you have no control over how much taxes will affect your bottom line. The more you make, the more they’ll take. The average firearm instructor is taxed at the rate of approximately 33% of their income, give or take a few percentage points. This means if you charge $100.00 for a class, you’ll be paying around $33.00 in income tax (income tax, social security, Medicare, etc.) leaving you with a net profit margin of $67.00 before deducting state and local taxes. You’ll be able to off-set some of these taxes by leveraging deductions, the size of your family, interest payments and so forth. Consider yourself lucky if you can get yourself into the 28% tax bracket after it’s all said and done.

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