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LLC For a Cleaning Services Business
Companies often employ professionals who provide cleaning services for various types of spaces, including commercial, office, and residential properties. These services can be scheduled on a weekly, monthly, or bi-weekly basis and are in heavy demand during move-ins or move-outs when deep cleaning is required.
If you are planning to operate a cleaning service, establishing a limited liability corporation (LLC) is a strategic choice to consider. Let us take a look at what that is, its advantages, and why your cleaning service needs to be one.
Definition
What Is An LLC?
LLC is a business type that possesses a tax structure that shares similarities with partnerships and sole proprietorships. For example, LLCs are not subject to income taxes, like partnerships. Any company losses are reported on the individual tax returns of the owners, allowing LLC owners to dodge double taxation.
Moreover, LLCs share some similarities with corporations, especially when it comes to financial responsibility. One significant advantage is that LLC owners are not personally liable for any debts or legal consequences faced by the company. This means that in the unfortunate event of a lawsuit, your personal assets, such as properties and bank accounts, are protected and cannot be seized by the court.
Advantages
What Are The Advantages of A Cleaning LLC?
LLCs offer a lot of advantages for cleaning services. Below are a few:
Asset protection
Regardless of whether you plan to operate a small-scale house cleaning service or a larger company, it is crucial to have liability protection in place to safeguard against unforeseen accidents. Consider a scenario where a client files a lawsuit against your business for damages caused by your cleaning crew. If your cleaning service operates as a partnership or sole proprietorship, all your personal assets, including bank accounts, can be seized by the court for compensation.
However, if you choose to structure your cleaning service as an LLC, you get limited liability protection. This means that your personal assets are shielded from such lawsuits, ensuring greater security for your business and finances.
Credibility
By adopting the formalized structure of an LLC, you not only bolster the professionalism of your cleaning business but also establish a higher level of trust among potential clients. Informal businesses often lack registered, reputable names and tend to operate under the names of their owners. However, by establishing an LLC, you gain the privilege of adopting an exclusive business name or appending “Limited Liability Company” at the end of your company name, lending it a credible identity.
Moreover, homeowners generally feel more comfortable and secure when making payments to established business entities rather than individuals.
Tax advantages
By capitalizing on the tax flexibility offered by an LLC, you can potentially reduce your business’s tax burden. For example, forming an LLC grants you the advantage of selecting your preferred tax treatment with the IRS (whether it is a sole proprietor, partnership, or corporation). This enables you to choose the most suitable tax option that aligns with your specific business objectives, all while maintaining the same legal structure.
Furthermore, opting for individual tax rates for LLC income can potentially lead to lower overall tax obligations for your business, as individual tax rates tend to be lower than corporate ones.
Disadvantages
What Are The Disadvantages of A Cleaning LLC?
Although the benefits of creating an LLC outweigh the disadvantages, here are some you should be aware of:
Difficulty in transferring ownership
Transferring ownership in an LLC can be more complex compared to other business structures like sole proprietorships or corporations. LLCs are designed to accommodate multiple owners or members, and transferring ownership requires a formal (and documented) process and the agreement of existing members. This is because LLCs prioritize the control and decision-making authority of their members, making changes in ownership more involved and potentially impacting the company’s dynamics and governance.
Not ideal for big businesses
LLCs are typically structured as pass-through entities, meaning that the profits and losses of the business “pass through” to the individual owners and are reported on their personal tax returns. This can result in higher tax liabilities for larger businesses, as the individual rates might be higher than the corporate ones.
Additionally, LLCs are subject to self-employment taxes, which can further increase the overall tax burden. Still, if you think your car wash business is earning enough for a corporation tax-type to be worth it, you can switch to it anytime.
LLC Formation
How To Create A Cleaning LLC
Creating a cleaning LLC is a straightforward process. However, remember that each state may have its own specific requirements and regulations when it comes to forming an LLC. Do your research before proceeding with outlined steps.
- Select a name
- Hire a Registered Agent
- Prepare an Operating Agreement
- File your Certificate of Organization
- Obtain An EIN
Select a name
The first step to establishing an LLC is the selection of an appropriate business name that represents your company and its services. For example, you can include words synonymous with “clean” in it so it is easier for clients to recognize the type of service you offer. You must also make sure that your name has no duplicate within your state, as your local Secretary will not approve of its formation otherwise.
Hire a Registered Agent
Next, get a registered agent for your LLC. A registered agent is a service or a person that is responsible for receiving legal documents on your LLC’s behalf, such as tax notices, regulatory documents, and subpoenas. It is best if they have some experience forming a cleaning LLC before, but any agent who knows their way around your local business laws is more than qualified for the job.
Prepare an Operating Agreement
An Operating Agreement serves as a set of rules and guidelines for everyone that is involved in the formation of your LLC—and we recommend you draft one even if you are the sole owner. This document lets you establish clear expectations and responsibilities as to how your company will be operated, how profits will be distributed, and more.
It also helps you prepare for future events that may require legal intervention, such as ownership transfers or management changes. By having an Operating Agreement in place, you can prevent a lot of misunderstandings and conflicts from occurring.
File your Certificate of Organization
A Certificate of Organization (also known as the Article of Organization) is the sole document you need to establish the legal existence of your cleaning LLC at the state level. Your state will have all the standardized forms you must complete, sign, and submit, along with the necessary state fees.
Once the form is filed and approved, your state will issue a confirmation document or a certificate for your cleaning service that will serve as legal proof of the existence of your LLC. This certificate will also allow you to create a bank account for your business and receive an EIN.
Obtain an EIN
After registering your cleaning LLC, you must apply for an EIN to the Internal Revenue Service (IRS). You will use this number to file taxes and open bank accounts. The latter is not legally required but will help you get loan approvals faster. Plus, separating your business and personal finances is generally good money practice.
LLC Taxes
How Are Cleaning LLCs Taxed?
The inherent structure of an LLC empowers its members to have control over the taxation approach employed for the company. This flexibility will enable you to select the most favorable tax treatment in accordance with their unique business circumstances. Below are your best options:
General partnership or sole proprietorship
You can choose to be taxed as a sole proprietor (if you are a solo owner) or a partnership (for multiple owners). With these structures, your company does not have to pay separate taxes to your jurisdiction. Instead, the owners file their taxes based on “personal” income or the income of your business. This is only filed annually.
S-corporation
You can also choose to tax your cleaning LLC as a corporation. The S-Corp tax structure can help save costs by decreasing the amount of personal income tax you have to file—though your company will have to pay a second, different set of taxes.
Choosing this type of business entity also has its limitations. Some of the requirements include the following:
- The business can contain up to 100 members or owners.
- All the members and owners must be US citizens or residents.
It is recommended if you are profiting a lot. S-Corps can also attract investors by providing stock options for the business.
Costs
What Are The Costs Of Starting A Cleaning LLC?
Starting an LLC for a cleaning business may cost you a lot, depending on your business type and the state you choose. Generally, for startups, it may cost anywhere from $500 to $2,500. This amount can be broken down in the following ways:
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+
Equipment and supplies
$1,500+
Marketing and advertising
$500+
Cleaning services encompass a wide range of services, from residential house cleaning to the maintenance of expansive office complexes. Unfortunately, plenty of unwanted incidents can occur on the job, like property damage or if a customer slips and falls due to a wet floor. Establishing an LLC for your cleaning business can help you mitigate potential liabilities and instill confidence in your potential clients.
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.