[MRM]

As was mentioned above, communications and expectations are the keys to success. Everything is friendly and informal now, but if you want to stay on good terms with the owners, you will want to put your business relationship on a formal basis ASAP. The reason is that when everything starts out informal and friendly, both sides do thing as favors to the other at first because they're friends or friendly. But as time goes on, if what started out as a favor becomes an obligation, one side (or both) starts feeling like the other is a burden or that they are being taken advantage of.

Here's what you do. You should enter into a real live written lease with the shop owners, giving you the space for the shop downstairs. You should pay an acceptable amount of rent, but you should have the lease set up so that you pay the rent monthly with money. Working out rent for services is a dicey deal unless you have a set hourly rate that is easy for both sides to evaluate. I think it's best that you just pay a couple of hundred dollars a month in straight rent. Rent should be negotiated to be pretty cheap because it is otherwise unusable basement space you're taking on as a sublease, but it has some value.

Now on the flip side of the relationship, they need to compensate you for what you do for them. You should not be an employee of the shop. I think you should have a 1099 relationship as an independent contractor for the shop. They refer business to you, you pay them rent; they have you smith their guns for resale, they pay you for your services. You pay them rent out of what you earn from running your shop. They deduct their payments to you on their taxes; you deduct your rent payments on yours.

You should set up as a legal entity. It works better that way for many reasons. It's just best to keep your business activities all under one roof so the taxes, paperwork and liability all stay under one roof. There are tax advantages and disatvantages to each kind of entity you could set up. I highly recommend looking into an LLC or C corp.

It isn't expensive to set up a lease and legal entity. You can do it yourself, but it's kind of like doing your taxes alone - you're never sure if you missed something that a professional would have caught. It's well worth having a lawyer set you up with a lease and company. That way you know you are protected and have the best tax advantages available.

If you go to a good lawyer who specializes in small business organizations, you should be set up with a lease, the LLC/corporation and all the state and local filing fees and business licenses for $1,500 to $2,500 bucks, start to finish. This is the kind of work where if someone wants to charge you more, it means they don't know what they're doing and will charge for their time figuring it out. A lawyer experienced in setting up small businesses can do this quickly and efficiently and will get the job done well.

So do some research here, get as many questions answered as possible, and then go to a lawyer prepared to show him what you want and why. He'll help you make the final selection of entity and get you set up right.