When COVID-19 forced millions to stay at home, board game sales exploded. Unfortunately, so did Daniel Arnold’s tax bill.
“I hadn’t paid any real taxes on my business for the first several years, because the revenue was so low,” he says. Arnold, an ad agency strategist, started Tabletop Monthly in 2016 as a way to create add-ons for one of his hobbies: Catan, the popular board game with a cult-like following. He sold the extensions on Etsy, mainly to friends and family, making less than $6,500 in total revenue in the first four years.
Then a pandemic rolled in.
Tabletop Monthly’s revenue boomed. But because Arnold had registered the business as a sole proprietorship instead of an LLC, he was hit with an unexpected $7,000 bill when he filed his taxes for 2020. Arnold says the bill “was a big shock.” But taking the time to form an LLC also helped him treat his passion project more like a business. He added more products, and expanded his distribution to both Amazon and Walmart.com. Tabletop Monthly made $500,000 in revenue in 2021, according to documents reviewed by NextAdvisor, and the board game enthusiast has kept his full-time job along the way.
Having an LLC protects Arnold’s personal assets, and working with a professional has helped him ensure his passion project, which piggybacks on an existing trademark, follows proper intellectual property guidelines. Here’s his inspiring (and cautionary) tale of when to form an LLC as your hobbies start to make you money, especially if you look to a tool like LegalZoom to help you do so.
Turning a Hobby Into a Side Hustle
“I’ve always loved board games; my wife and I used to play a lot before we had kids,” says Arnold, who to this day is active in the r/Catan subreddit.
Catan has been around for 27 years and, as of 2020, has sold more than 32 million copies in 40 languages. But Arnold had ideas on ways to expand gameplay, and initially created his add-ons for family and friends. He later decided to replicate this version and sell it on Etsy to earn a little extra money.
“For the first ones, I was cutting out the games with one of those big board cutters to get everything straight and sent the games in a postcard with a piece of cardboard, so they don’t get bent,” he says. Arnold didn’t have upfront cash, so he funded the initial inventory with 0% APR credit cards, and created and shipped the games from his home.
After making $100 in sales on Etsy in 2016, Arnold found manufacturing partners to do the printing and cutting to make the board game look nicer. Tabletop Monthly’s revenue in the first four years was:
- $100 in 2016.
- $408 in 2017.
- $1,900 in 2018.
- $4,000 in 2019.
Stay-at-home directives in 2020 renewed interest in board games, which led to Tabletop Monthly making $20,000 in revenue. However, not having the business registered as an LLC during this period of growth led to an unexpected $7,000 tax bill and important lessons learned.
Sole Proprietorship vs. LLC, Explained
If you conduct business activity, but don’t formally register a business, the IRS will classify and tax your side income as sole proprietorship if your net income from the effort is over $400. Because of this automatic classification, sole proprietors make up the majority of non-employer companies in America — 86.6%, according to a 2021 report from the SBA Office of Advocacy.
“2019 was the first time I had to file taxes for the business, because I hit the [net income] threshold,” says Arnold. “Then, in 2020, the business exploded, and I knew I needed to register an LLC. I went online and Googled ‘accountants near’ me because I didn’t have many business professionals.” Arnold says his accountant told him “in a friendly but forceful way” that he needed to register an LLC and start using Quickbooks immediately. “He told me not to do it next week or month; I needed to get the business registered today.”
Registering the business and speaking to a CPA made Arnold realize he needed to prepay taxes quarterly and not spend all his money. He also opened separate business bank accounts for the LLC, and took advantage of signup bonuses when opening new accounts.
“Anyone serious about owning a business and being in business needs to consider some type of legal entity formation,” says Chika Obih, a CPA, tax strategist, and founder of Obih Collective. “Whether it’s an LLC or corporation, a legal entity formation is important to protect yourself.” Obih says that, when it comes to taxes, a legal entity structure helps you save; sole proprietorships’ profits are subject to a 15.3% self-employment tax on top of regular income tax. “You end up overpaying on your taxes with sole proprietorships,” she says.
Sole proprietorships are subject to self-employment taxes on top of required taxes within a state. Register your business or side hustle as an LLC or corporation to save on taxes and create more legal protection.
But Isn’t Catan Trademarked?
Tabletop Monthly is an extension of a copyrighted game that is already in existence. “I had an idea coming into this that I had to do it in a way that would not get me shut down,” Arnold says. “Amazon has clear guidelines on what you need to do and have in place if you want to sell something using someone else’s brand.”
The entrepreneur is able to sell Tabletop Monthly as an extension of a trademarked brand because he is following “compatible with” rules, which say you can use someone else’s trademark when making truthful statements that a product is compatible with the trademarked product.
Despite this, Arnold has been flagged six times for intellectual property (I.P.) violations from the company that owns Catan, because their I.P. violation search software is automated. Arnold’s response to I.P. violation flags is to respond with a form letter showing why he’s within I.P. guidelines. Amazon provides the format for branded “compatible with” products on its I.P. explanation page, and these guidelines hold for other e-commerce platforms.
The Side Hustle Helps Him Create Financial Independence
Arnold maintains both his job and the business because they help him create financial independence. 100% of the salary from his job goes into his retirement accounts, and his job provides health insurance for him and his family. All of the family’s bills are paid through the side hustle; he thinks of it as having two full-time jobs that fund his financial independence goals.
“I enjoy doing this side hustle and love that we’re building something meaningful,” Arnold says. “I want my kids to grow up and not worry about where the money will come from. I want my kids to grow up and have financial freedom. I’m hoping they look up at their dad and say, “Hey, I want to be like that.” I’m hoping they walk away with an entrepreneurial mindset.”
If you’re passionate about a certain hobby, and are exploring ways for it to make you money, it’s good to learn about LLC business formation sooner rather than later. Lay groundwork today so that, as your passion project grows, you have your ducks in a row and keep more of the money you make along the way.