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LLC For Pawn Shops
Pawn shops have a long-standing market worldwide and contribute significantly to the economy, with the US alone having a thriving $3 billion industry. Considering its historical success and market size, creating your own pawn shop can present a promising opportunity for financial success.
However, before you start any business, you need to register it first. For pawn shops, one of the best business structures to look into is Limited Liability Company (LLC). Below, we will discuss the basics of forming an LLC and the key steps to successfully launch your pawn shop business.
Definition
What Is An LLC?
An LLC is a popular legal structure for business owners who want protection from the company’s debts and liabilities. It is a hybrid between partnerships and corporations, combining the benefits of both. For example, LLCs can open business bank accounts like corporations but dodge double taxation like partnerships.
Advantages
What Are The Advantages Of A Pawn Shop LLC?
LLCs offer a ton of advantages for every type of business, including pawn shops. Below are the most prominent ones.
Limited liability
The primary advantage of forming a pawn shop LLC is limited liability protection. This means that if the company is liable for any debts or legal issues, you are not personally responsible beyond the amount you have invested in the company. This allows you to safeguard your personal assets in case of any legal or financial issues incurred by your pawn shops.
Pass-through taxation
Another benefit of forming an LLC for a pawn shop is pass-through taxation. With this type of taxation, profits are “passed through” to the individual owners instead of being taxed at the corporate level. You will only have to pay taxes once—on your personal income.
Flexible management
Unlike corporations, an LLC also offers a flexible management structure, allowing its owners to delegate tasks and responsibilities as needed. You can choose how much control you want over various aspects, such as operations or finance, and create roles accordingly to ensure everything runs smoothly within your business. This is advantageous for small business owners.
Disadvantages
What Are The Disadvantages Of A Pawn Shop LLC?
Naturally, every business type has its disadvantages—no matter how small they are. For pawn shop LLCs, there are only a couple:
Cost
Depending on your allocated budget, one major disadvantage of forming an LLC is cost. Setting up and managing an LLC involves paying fees such as filing fees, annual renewal fees, and attorney fees, to name a few. Sole proprietorships are much cheaper to set up, though it does not offer many benefits as LLCs do.
Transferable ownership
Another potential downside concerns change of business ownership. In most states, it is nearly impossible to transfer ownership rights without dissolving the company due to legal restrictions surrounding limited liability companies. You still can, of course, but it is going to cost a lot of money and time. Corporations have an advantage in this regard.
LLC Formation
How To Create A Pawn Shop LLC
Although there may be slight variations in the procedures depending on your state, the process of forming an LLC consists of the same fundamental steps. Here is a brief outline of those steps.
- Choose a unique name
- Hire a Registered Agent
- File an Article of Organization
- Create an Operating Agreement
- Get an EIN
Choose a unique name
The first step in forming a pawn shop LLC is choosing a name for your company. This name should be unique and not already taken by another business. It must also comply with state and federal guidelines and not include words that are restricted by law, such as “bank” or “insurance.” In some states, the name of an LLC must also contain words like “limited liability company” or “limited company,” so check if yours does.
Hire a Registered Agent
You must hire an individual or business entity in your state who will act as your pawn shop’s registered agent. Registered agents are tasked to accept and send legal documents on behalf of your LLC. The only requirement to consider is that your registered agent has to operate within the same state as your LLC. However, also take into consideration the range of services they provide and their reputation for reliability.
File your Article(s) of Organization
Once you have chosen a unique name and hired a registered agent, you need to file your Article(s) of Organization with the Secretary of State office where you plan to set up your LLC. The articles will generally include information about the nature of your business, its purpose, ownership structure (such as members), address information, and other relevant details. This document is necessary for registering your LLC with the government so it can legally operate in that jurisdiction. Filing an article of organization may cost between $50 to $300.
Create an Operating Agreement
It is never required, but an operating agreement is important for any business to operate as seamlessly as possible. It outlines how things like profits and losses will be handled among owners/members and sets forth expectations for how decisions will be made within your business. An operating agreement should cover topics such as voting rights, membership interests, dispute resolution procedures, and distribution rules, among others. You can draft your own, but we encourage you to look for an experienced attorney.
Get an EIN
Lastly, once everything else has been taken care of, you will need to obtain an Employer Identification Number (EIN). An EIN is used by businesses when filing taxes with the IRS and allows them to open bank accounts under their name. You can apply online through IRS websites or contact them directly if needed via telephone or email assistance centers throughout the country.
LLC Taxes
How Are Pawn Shop LLCs Taxed?
As a registered business, you will now be expected to pay taxes. But what taxes do pawn shops need to be aware of?
Franchise tax
Many states also require businesses operating within their borders to pay franchise taxes as part of their annual filing requirements. Franchise taxes are generally calculated using either a flat rate or based on the company’s gross receipts.
Sales tax
In addition to self-employment tax, many states require pawn shops to collect sales tax on all customer purchases. The sales tax amount varies from state to state, so make sure you research what applies in your area.
Self-employment tax
Self-employment tax is the common tax type needed to be paid for by LLCs. It consists of your personal income minus certain expenses you can offset taxes for, like utilities. Seek guidance from a professional accountant before filing any forms, as this will help avoid overpayment or non-compliance with IRS requirements.
Corporate tax
If you want to tax your pawn shop as a corporation, you can. It has a ton of advantages for higher-profiting businesses, like spread-out taxes and stock options. The only catch is that you will have to pay corporate tax on top of your personal income tax.
Costs
What Are The Costs Of Starting A Pawn Shop LLC?
Forming an LLC can be a great way for aspiring pawn shop owners, but it comes with costs. For example, filing fees can vary from state to state depending on each state’s regulations. Register agent fees may also need to be accounted for depending on the structure of each LLC, should you decide to hire one.
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+
Other costs that may arise include taxes and possible capital contributions towards the formation of the LLC itself. Taking the steps mentioned above may involve some initial financial investment, but they are crucial for establishing credibility and ensuring legal protection in any business endeavor you undertake.
Forming a Limited Liability Company is an ideal business structure for pawn shop owners, as it helps to protect their assets while providing many tax advantages. However, remember that there are certain steps required to form an LLC. Now that you know the basics, you are ready to begin the LLC formation process. Let us at StartGlobal assist you in the process of establishing your business as a legitimate entity and safeguard yourself from potential legal issues.
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.