by beautyschoolremix

The ABC’s of LLC’s

A few years ago I vividly remember starting a things-to-do list and “Form a LLC” was at the top. I have learned a lot since then. If you are an independent salon owner like me (or are planning to become one) you will need to figure out a few things about the type of business you are forming and operating. I am not the person to guide you through all of the options, but I can share with you the options I chose, why I chose them, and how much they cost. Here’s what I’m talking about:

LLCs
S Corps
Registered Agents

First I created a LLC

The very first step to starting my business was creating a LLC (Limited Liability Corporation) for it. My LLC releases me from being personally liable for my business’s debts and obligations, and keeps me legally separate from my business. How so?

Let’s pretend my business has taken a turn for the worse and it owes it’s creditors much more money than it can pay. The salon (my business) is solely responsible for paying that debt, and even though I own the salon am not personally responsible for it. So my personal bank accounts are safe, my home is safe, my kids college funds are safe. Sure, it would be horrible to lose a business, but it would be much more devastating if that loss of a business also wiped out my personal savings as well.

Without a LLC, I as the business owner accept all responsibility for my business’s debts and obligations. In a worst case scenario, if my business was tanking (or a disgruntled client was suing my business) my personal assets could be used to collect on business debts.

With a LLC, even though it is my business, I am released from personal liability from it. I have my SSN and the business has it’s EIN. We are separate entities.

- Need an LLC? I used LegalZoom to form mine. But be careful with LegalZoom, they have a lot of fine print that leads to a whole slew of auto-renewing memberships that you (if you’re small like me) don’t need. Your LLC formation, including obtaining an EIN should cost $200 or less depending on your state. If it starts creeping up into the $500’s, they are ripping you off. After the initial filing fee, it will cost $50 per year to have your LLC in the State of Virginia.

Oh, fun fact: Your LLC does not need to have the same name as your business, I formed my LLC before I knew what my salon would be named, so by the time I opened my salon (and finally named it) all I had to do was file a DBA (Doing Business As) for my LLC.

Then I Added an “S” to my Corp.

Let’s talk about taxes: Prior to 2016, I had only known a life of being a W-2 employee in a salon. Which meant when I was an employee, my salon owner was paying half of my Social Security and Medicare taxes, and the other half was taken out of my paycheck. When you are your own boss, you pay the whole thing yourself. Which means you must calculate self-employment tax and income tax and make quarterly estimated tax payments to the IRS, or you could be subject to fines and penalties.

Ever hear of an S Corp? Well, to be fair I hadn’t. But a lot of small business LLCs choose to be taxed as S corporations. An S corporation does not pay corporate income tax. Instead, its shareholders report the company’s income on their personal tax returns. I am the sole shareholder in my situation. If you are a LLC taxed as an S corporation, you will pay Social Security and Medicare taxes only on the salary you pay yourself, not on the rest of your business profits.

To understand how an S corporation can save you money, let’s suppose your salon has $200,000 in profits. Without an S Corp, your self-employment tax burden would be on that entire amount, which would be a bit over $20,000.

But now let’s suppose your salon in has an LLC, plus you have designated it an S Corp (like I have). With $200,000 in profits, you pay yourself a reasonable salary of $80,000, and now your tax burden is around $12,000 (because it’s only based on your salary), and you will not have to pay any taxes on remaining business profit. That’s a tax savings of more than $8,000.

Two advantages of a S Corp Designation:

Pass-through taxation. I report my salon’s profit and loss on my individual tax returns.
Once-a-year tax filing requirement. I don’t have to file my taxes quarterly.

Taking advantage of S corporation taxation has saved me money each year and I enjoy not having to file quarterly. I could file quarterly if I wanted to, but it’s not mandatory.

- If you have an LLC but want it to be taxed as an S corporation, you’ll need to file additional forms with the IRS, I filed form 8832. It won’t cost you anything. But have a great accountant on your team, for what it’s worth, S Corps are more heavily scrutinized by the IRS… So if you have once been a fan of “Liberal Accounting” on your taxes you have to knock that off with an S Corp because you will totally get busted.

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Get a Registered Agent

Depending on the State you live in, it may be mandatory for you to declare a Registered Agent. In Virginia, this is the case, you must have one. A registered agent is a responsible third-party who is registered in the same state in which your business entity was established and who is designated to receive official correspondence on your behalf, ie: service of process notices, correspondence from the Secretary of State, and other official government notifications. If you have an LLC, this person cannot be you.

I started out by using a Registered Agent that LegalZoom offered because it was simple. It was $159 per year, and it gave me the peace of mind of being compliant. But then… I got annoyed. LegalZoom raised their fee for my Registered Agent to $299 per year. And I kid you not, I get one letter from the State Corporation Commission every year (for my filing fee) that goes to my registered agent, and that’s it. I’ll admit I was an idiot for paying them $159 each year to accept this one letter on my behalf, but I refuse to be the idiot that pays $300 for them to accept that one letter. I finally wised up and I found another Registered Agent in Virginia that will do the same thing (with better service than LegalZoom) for $49 per year.

- Registered Agents are a state by state requirement. Learn from my mistake and don’t do that one through LegalZoom, find a service for $50 bucks a year and happily pay it. I’m using Virginia Registered Agents now.

The point is: you don’t know what you don’t know. It imperative to be compliant, but sometimes getting there can cost us a little more money than it needs to. According to the Small Business Association 30% of new businesses fail during the first two years of being open, 50% during the first five years and 66% during the first ten years. You have to be tough if you want to open a small business, and you have to be smart with your money, forming an LLC with a S Corp designation protects my personal assets and gives my business some tax burden relief which leaves me more money to invest in my business year after year.