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How To Start LLC For Barber Businesses
There is no doubt that the fashion industry is evolving day by day. And with the emergence of new trends and styles, the demand for skilled barbers has become increasingly important.
Are you looking to establish an LLC for your barber business? There are a number of things you need to consider before getting yours started. Here is a comprehensive guide to what an LLC is and what you need to know about forming one for your barber shop.
Definition
What Is An LLC?
A Limited Liability Corporation, or LLC, is a type of business structure that protects its owners from being held personally responsible for any company obligations and liabilities. Think about it: your customers can sue your barber business for personal injury. But with a barber LLC, it is only the company that will get in legal trouble and not you, its owner.
Advantages
What Are The Advantages Of A Barber Business LLC?
While each business structure, such as sole proprietorships and corporations, offers its own advantages, an LLC stands out for its ability to combine the best features of both.
Limited liability protection
LLCs offer limited liability protection, as previously stated. Like corporations, if your business is sued or fails on a loan, your personal assets (such as your car, home, and bank account) are safeguarded.
For example, one of your staff cuts a customer’s hair, severely damaging their scalp because they were not paying enough attention to what they were doing. The client consequently sues your company for the physical injury they sustained. In situations like this, limited liability will shield your personal assets from any compensation your company is required to pay.
Tax benefits
By default, LLCs are taxed as pass-through entities, just like sole proprietorships or partnerships. This means that the owner includes the company’s net income on their personal tax return. The company itself does not have to pay taxes as a separate entity.
Increased credibility
Through an LLC, not only do you get the right to use a company name, but you can also issue official receipts and sign up for a Google Business Profile. If you register for the latter, your barber shop will appear on Google Search and have more customers. You can also ask them to leave reviews to improve the ratings of your business.
Easy to start
Lastly, one of the biggest advantages of starting a barber LLC is that it’s easy to set up and maintain. Most documents are only filed once or annually, and the costs are lower compared to setting up a corporation.
Disadvantages
What Are The Disadvantages Of A Barber LLC?
Of course, there are also important considerations to keep in mind when setting up your LLC. Below are some of them
It is hard to get investors
Big investors would rather invest in corporations over an LLC. This is because an LLC is associated with new business owners, which they think are “risky” ventures. Once your barber shop is more established, that is when you should be thinking about investors.
LLCs are not permitted to keep profits
A barber LLC must annually distribute its earnings to its owners or return them to the company. As a result, many LLCs wait years before their growth justifies forming a corporation.
Extra taxes
Some LLCs must also pay additional taxes (like franchise tax) or fees to conduct business in some states.
Still, The benefits of establishing a barber LLC far outweigh the drawbacks. Forming an LLC is often the best option, especially for new business owners.
LLC Formation
How To Create A Barber LLC
The steps to form an LLC may differ slightly depending on the state, but there are standard requirements regardless of your location.
- Name your business
- Appoint a Registered Agent
- File the Article of Organization
- Obtain An EIN
- Draft an Operating Agreement
- Acquire necessary permits and licenses
Name your business
The first step is to choose a name for your new LLC. Your name should clearly represent your company and its services, and it should not be already taken by another business. You can verify the latter by checking your local business database. This is usually available on the website of your Secretary of State.
Appoint a Registered Agent
Your LLC’s registered agent handles all important documents sent by the state, such as legal notices and annual report reminders. They can be you, another member, or a professional service.
File the Article of Organization
An Article of Organization (called the Certificate of Formation in some states) is a document that provides essential details about the LLC, its purpose and goals, its members, and its administrators. Filing it to your Secretary of State will establish your LLC as a legal entity.
Obtain An EIN
Your barber LLC’s Employer Identification Number (EIN) is equivalent to a Social Security number for tax purposes. You will do this to hire staff, file taxes, apply for bank loans, and more. You can obtain an EIN, cost-free, from the Internal Revenue Service (IRS).
Draft an Operating Agreement
Although most states do not mandate operating agreements, we strongly advise every LLC to have one. This legal document describes several important LLC operational issues, like how the company will be managed and the division of profits, which can help prevent ownership problems in the future.
Acquire necessary permits and licenses
To legally run a barber LLC in your state, you could need other permits like a general business license. Check your local authority office for a complete list of requirements and comply. Also, see if your LLC is subject to any franchise or privilege taxes imposed by your local municipal and county agencies.
LLC Taxes
How Are Barber LLCs Taxed?
LLCs have the advantage of having flexibility in how they are taxed. This means that depending on your preference and the number of owners in your business, you can choose from different tax options. Below are the common ways:
Single owner
You can choose to be taxed like a sole proprietor. This means filing your LLC’s earnings as your income. Sole proprietor LLCs will only need to submit a 1040 tax return form.
Multiple members
The business is taxed like a partnership, so all company owners split taxes equally. The filing process is then the same for Single Members.
You also have the option to tax your LLC like a corporation. This allows you to enjoy the benefits and tax structures of one. For example, your barber LLC can save money by lowering its self-employment tax burden if it pays corporate taxes. You can pay yourself and your co-owners a fair salary for your roles and only pay self-employment tax on that part of your income, while you can reinvest the remaining funds into your business without paying this tax.
Of course, this will still depend on your profits, so it is best to consult a tax professional about the best option for your business. You might also have to spend extra on payroll, bookkeeping, and accounting services. Allot around $2,000 a year in taxes to cover these expenses.
Costs
What Are The Costs Of Starting A Barber LLC?
The cost of opening a barber LLC can vary depending on different factors, such as where your business is located, the type of barbershop you want to establish, and the amount of money you have for startup expenses. You will also need to purchase equipment, hire staff or independent contractors, obtain the necessary licenses and permits, and invest in marketing and promotion.
On average, the initial costs for starting a barber LLC range from $30,000 to $50,000. So, before deciding to create one, conduct a thorough analysis of what you will need and how much it will cost.
LLC Costs
State filing fee
$50+
Registered agent service
$100+
LLC formation service
$50+
Operating agreement
$200+
Business license and permits
$50+
Employer Identification Number (EIN)
Varies
Initial legal and accounting fees
$200+
Insurance (annual)
$500+
Equipment and supplies
$500+
Marketing and advertising
$500+
Forming a barber LLC can bring you stability and dependability. Whether you’re offering haircuts, beard shaves, trims, or color highlights, following the steps mentioned above will help you legitimize your business where you operate and attract customers to your shop.
For a more detailed overview of forming LLCs in various states, check one of our guides below:
Comparisons
Is LLC The Best Entity For Me?
Maybe, LLC isn’t the right entity for you. Maybe it is a C-Corp. Only way to find out is to directly compare them all.
LLC vs Corporation (C-Corp)
Sole proprietorships and Limited Liability Companies (LLCs) are two of the most common business entities for individuals and small businesses. Learn what differentiates the two today.
LLC vs S-Corp
Not sure what business structure to choose? Learn about the key differences between LLC and S-Corp today.