When planning to start a new shop, there are several decisions that need to be made. One of the important ones is business structure. We often get asked the question, “How should I set up my shop?” Any time a person starts a business of any kind, they need to work with professionals who understand not only what to do, but also the specific industry. Choosing not to work with a professional could leave the shop open to legal issues down the road. The legal aspects of setting up and, more importantly, protecting a business, are complex. By putting the business in a corporation or an LLC, you are protecting yourself from any potential lawsuits. If the shop is not incorporated or in an LLC, all of your personal assets, including the house you live in, are at risk.

So, should you be a C corp, an S corp, LLC, etc? For most people, we recommend setting up an LLC (limited liability company) for legal protection. This is set up on the state level. It is cost-effective and fairly straightforward to do.

If it’s just you, you will be taxed as a sole proprietor. If you have one or more partners, by default you will create and be taxed as a partnership. Either offers a strong starting point for your new shop.

Eventually, once revenues substantially increase, you may consider switching to an S corporation. An S corp gives you the same legal protection with a little more flexibility. This will not alter the operating structure of the business; it still operates as an LLC. Switching to an S corp will tell the state and the IRS to tax you as an S corp. When operating as a sole proprietor or a partnership in an LLC, you pay a self-employment tax of 15%. Switching to an S corp serves as compensation for the LLC owner not paying payroll taxes. A salary must be created for the owner. However, any money taken out of the business beyond that salary is not subject to the 15% self-employment tax or regular payroll taxes, thus creating substantial tax savings. Typically, your shop should generate at least $60,000 of profit per year for the switch to make sense.

Additionally, if you own the land your shop sits on, that should be a separate LLC, and you will rent back to yourself. This way you’ll save some FICA and Medicare costs. Plus you’ll also separate the legal burden between the two businesses. Owning the property in a separate entity means no one can make claims on it during a liability claim.

If you think you are not set up correctly, or would like more information about setting up a new shop, please feel free to contact us. info@paarmelis.com