Leasing equipment

[ACP1]

My business partner and I have recently formed a CNC plasma cutting & milling business. The partner has already acquired the plasma cutter and the mill (both are used) and we're trying to decide whether or not to lease the equipment to the company instead of having the company reimburse him. What is a fair leasing price based on the cost of the equipment? I know there are different variables to take into account, such as maintenance (I think we're both open to either the company or the lessor providing maintenance), but what is a good rule of thumb? Is anyone out there leasing equipment?

[tlagnhoj]

My business partner and I have recently formed a CNC plasma cutting & milling business. The partner has already acquired the plasma cutter and the mill (both are used) and we're trying to decide whether or not to lease the equipment to the company instead of having the company reimburse him. What is a fair leasing price based on the cost of the equipment? I know there are different variables to take into account, such as maintenance (I think we're both open to either the company or the lessor providing maintenance), but what is a good rule of thumb? Is anyone out there leasing equipment?

BAD MOJO to lease the equipment from a partner IN the business. What do you do when the equipment breaks and the responsible party can not afford to fix it without the equipment working? That is a slippery slope that will destroy your business relationship with your "partner" and your business in general. Starting from there I would be surprised if your business lasts the first year.

I lease nothing and have NO outstanding obligations in my business... I pay cash for all materials and supplies and give no more than net 30 terms to any customer. I have run the business this way from day one! I have done business with companies worth BILLIONS of dollars. Why should I be financing companies worth several thousand times more than mine? It makes no sense (and no cents).

If all work were to dry up tomorrow I could turn out the lights and go look for more work with NO ill effects to the business.

[newarkprecision]

You are so correct... Being debt free is the way I do it. I am not a bank and i do not purchase customer material. Alot of times I require a down payment to cover materials and other expenses along the way.. At one time I purchased materials for customers got burnt and said it will never happen again. Plus if they give you a down payment the have skin in the game and will many times pay on delivery.

[harryn]

If the machining company you and your partner own is a partnership, and it fails, then you both risk everything you own, including the equipment. It does not matter that much if it is rented, leased, or owned. If the business goes bankrupt, the equipment is gone.

If your machining company is instead a C corp and you both own shares in it, this helps a lot. In fact, it is a a good idea for you to diversify your stock holdings in the company not only to you, but also individually to your wiv's and kids as shareholders.

Let's assume that your machining company is a C corp and your partner (or you) formally rent / lease equipment to the C corp, and clearly tag the equipment with a permanent label stating its ownership. If the C corp fails, then the equipment owner still retains title and ownership of the equipment. The owner can legally take the equipment home, to the chagrin of the other debtors.

There are two ways to rent / lease equipment back to the company, monthly, and usage time. Banks of course want a steady, predictable income flow, so they will always force a fixed monthly cost. From a business perspective, the value of the equipment to your machine shop is really dependent more on the variable hours it is used each month, as that directly relates to how much revenue the shop is generating, and the value of that operation.

I suggest that you set it up that your C corp is renting the equipment for 1 / 2000 th of the new value per hour. ( 1/ 2000 th ), and your C corp is responsible for all repairs. This means that if the machine is running 2 000 hours, you could buy a new one with your rental payment. You should also agree that 1 000 hours is the maximum rental payment for any given year. Example, a machine that sells new for $ 100,000 would rent for $ 50 / use hour, up to a maximum payment of $ 50,000 per year.

There are some people who believe that you should instead use 1/2 of that hourly rate in order to be more competive in your bidding - so $ 25 an hour, but still pay a max of 50% of the new equipment value each year. Both approaches are viable, depending on what you can charge for your machining time. Consider your local competition, the equipment rental cost cannot be more than 1/2 of the price of what your competitors are charging for work or you are in trouble.

If you structure it this way, and there are problems with the existing equipment keeping up, then it will be easier to find people willing to either buy stock in your firm for more capital equipment, or to finance higher productivity equipment.

BTW, this model is routinely used at Universities and other group settings to finance equipment purchases. It does take some out of the box thinking, but it works.

Taking it all one step further, you could even structure your business as a non-profit and rent all equipment this way, but it does involve some extra structural complexity.

Harry

[red triangle]

ok, You have got to tell me more... I have always wanted to run a non profit... in fact, I have may have just figured out how to offer daycare for employees (their childeren..not the employees) without taking a loss.... How do you technically rent equipment to yourself without looking like a douche?
Sorry about the language... I spent too much time in the navy.

[harryn]

Red Triangle.

First, it helps a lot to have a legit local business tax preparer involved. If you have not setup a company / corporation before, it also helps to have a local general attorney help you, but it is usually not required.

A "C" corporation is effectively a "taxable person" who just happens to be fully "artificial". It has a "start", a "life" and an "end". It can conduct business the same way as any other "person". The main difference, is that it must have a "group" or "board of directors" telling it what to do.

You are also a "taxable person" who just happens to be a human. From an IRS perspective, it makes no difference.

One "taxable person" can do business with another "taxable person" and do any legal business transaction, including leasing equipment to the other.

It is one of the great ironies of the United States that the average person (including me) was never really taught in school how capitalism is supposed to be setup and run. Nonetheless, there is a lot of banter throw around about how capitalism is "good" and communism is "bad" - then we all run our small businesses like communistic structures. Pretty funny.

I have less experience with non-profits, but the idea is similar, in that it is a "taxable person" who is given a tax exemption for operating in a very narrow way and purpose. You should make sure that you understand exactly how this is done, and follow it, or it can be very problematic. If you choose to do this kind of structure, find someone locally who either teaches about non - profits at a college, or someone who is directing one. It is an interesting, specialized field.

The IRS is really a lot less concerned that you follow every detail about running a small "C" corporation, as their main concern revolves around getting paid their rightful taxes. The perfection of running a "C" corporation comes mostly if you are sued. If you have done a perfect job of keeping your "corporation" separate from your "personal" business, then the "c" corporation will insulate your personal assets from the lawsuit. If there is any hint of imperfection, then it won't.

[tlagnhoj]

You are also a "taxable person" who just happens to be a human. From an IRS perspective, it makes no difference.

Interesting theory... Have you ever looked up the "definition" of the word "person" in Title 26 and the IRC??? I suspect not.

The IRS is really a lot less concerned that you follow every detail about running a small "C" corporation, as their main concern revolves around getting paid their rightful taxes.

LMAO!!! You have no clue what the law says! If you did you would understand that the IRS doesn't give a hoot about "rightful taxes" They care only about collectable taxes.

I'm sure glad I don't follow your advice!

[harryn]

Interesting theory... Have you ever looked up the "definition" of the word "person" in Title 26 and the IRC??? I suspect not.

LMAO!!! You have no clue what the law says! If you did you would understand that the IRS doesn't give a hoot about "rightful taxes" They care only about collectable taxes.

I'm sure glad I don't follow your advice!

The point is not if my definitions in this post are perfect or not, I simplified things to help the general person, not to worry about about perfect semantics.

My point is that an individual can legally lease equipment to a corporation, even if they own a substantial armound of the corporation.

[tlagnhoj]

The point is not if my definitions in this post are perfect or not, I simplified things to help the general person, not to worry about about perfect semantics.

My point is that an individual can legally lease equipment to a corporation, even if they own a substantial armound of the corporation.

And my earlier point was that although a partner can lease equipment to a partnership (or a shareholder to a corporation) it is BAD business practice. The majority of businesses fail in the first 5 years... Partnerships at an even higher rate...

Although there is nothing immoral, illegal or unethical about leasing equipment to your partnership. It is just one more place for friction to brew. Just because something is lawful does not mean that it is wise.

[harryn]

And my earlier point was that although a partner can lease equipment to a partnership (or a shareholder to a corporation) it is BAD business practice. The majority of businesses fail in the first 5 years... Partnerships at an even higher rate...

Although there is nothing immoral, illegal or unethical about leasing equipment to your partnership. It is just one more place for friction to brew. Just because something is lawful does not mean that it is wise.

I agree with you completely that partnerships fail at a much higher rate than C corporations, and part of this is the inflexibility of the business structure.

You are also right, that the leasing can cause friction, and you will notice that I suggested a very specific structure to this lease vs. a conventional bank lease. The reason for that structure, is that it takes advantage of human nature and the desire to optimize both their business and personal income.

If the equipment is highly productive and highly utilized, everyone will make money. If the leased equipment is not able to keep up, everyone will be motivated to lease or buy something else, even the owner of the leased equipment.

If the owners are married, the wives will drive this even harder, which is a real motivation for business owners.

If more equipment is needed, then they will have a working business model for how to do it, or not do it. More capital can be brought into the company for equipment purchasing using this lease model without diluting the business ownership, a common concern among owners. In theory, even employees could group together to buy equipment and lease it to the company, which is highly motivating.

There is nothing easy about business, but if the owners are not (legally) financially creative, they won't last anyway, especially in today's world.

[topincentives]

In today’s business world, you need to always be looking for new methods of saving money and trying to get an edge on the competition. One thing you can do in some cases is to go through lease financing instead of purchasing new equipment for your machining business. This is especially helpful for new companies who do not have a lot of extra money to throw around. If you would like to find a way to get new equipment for your business without paying full price for it right away, then leasing is definitely an option that you are going to want to keep on the table.