JAIME: Welcome to Outgrowth: A Slice of Pro Beauty with your hosts Jaime Schrabeck.
ASHLEY: And Ashley Gregory Hackett. As we continue our Business Basics series, we tackle the subject of choosing a business structure.
JAIME: The structure you choose impacts your taxes and liability, with some significantly more complicated in terms of cost, paperwork, and other requirements. Let’s grow together.
ASHLEY: Well, Jaime, this is a pretty complicated topic, and so I’m really looking forward to getting into it, and digging in with you on it. But I think we also need to preface this episode by saying we are not attorneys and we always recommend seeking the advice of a professional when it comes to these big business questions.
JAIME: And attorneys are not the only ones who would have something to say about this. Your accountant would, too.
ASHLEY: Definitely. Well, this is a question we see asked all the time, thus, we decided to make it part of our Business Basics series. So if you’re following along at home, you know that this is our third episode in the series and today, the next logical step after naming and branding is figuring out just how you’re going to structure this business within the rest of the world.
JAIME: Declaring your structure sets up so many different things and it’s not a decision to be taken lightly.
ASHLEY: No, and part of what we touched on in previous episodes alludes to the fact that this is the most exciting time in your business, which is getting it started, getting it off the ground, seeing it come together with a name, and a logo, and a brand, and a vision. But this is really one of the steps that absolutely must not be rushed because it has so many implications for your business down the road.
JAIME: It’s a precarious time because up to this point unless you’ve went ahead and filed for a fictitious business name statement, or your trademark, neither of those applications has anything to do with your tax status. So this is really making a declaration to the federal government and your state government as to how you’re going to account for the money that’s taken in by your business.
ASHLEY: Right. These are your declaration of existence. In essence, this is telling your state, and in some cases your city, as well as the federal government, that you are a business entity that is either looked upon as an extension of yourself or as its own thing. And we’ve touched on this as well in previous episodes when Amy Toepper from Legal In A Box joined us and gave us a overview of how some of these business structures work. But beyond being licensed, and insured, and declaring that you exist, this also has some tax implications that you alluded to as well.
JAIME: Serious tax implications. It’ll dictate which form you fill out. It’ll also dictate what other requirements, and we’re not going to be able to get into much detail about that because, again, we’re not experts on these different structures, but once you declare that, then whatever structure you’ve declared, that becomes the type of entity that your business is. And let’s start with the most basic one, Ashley, which is you as an individual starting a business. The default is that you’re a sole proprietorship. So it’s sort of like a long phrase to me that you’re in business for yourself and you are, in fact, the entity.
ASHLEY: Yeah. Yes. And so all business will be done under your social security number, meaning that any income tax liability, even general liability of damages your business may cause, or if anyone were to come after your business legally, it’s all linked to you. So it’s all considered part of your personal income. There is no separation between you and your business as a sole proprietor.
JAIME: That’s regardless of whether or not you have a fictitious business name. It doesn’t matter. It’s really just an extension of yourself. And for those of you who have multiple projects, multiple businesses, those different entities can be numerous. You could have multiple businesses going simultaneously and they don’t all have to have the same structure.
ASHLEY: Correct, and I am an example of that. I have several businesses that are a sole proprietorship. My session manicuring is me as a sole proprietor being contracted out to different clients. And so most of the time, I will need to turn into either my agency, which they have it on file, or to clients that they require a W-9 from me which has all of that tax information so that they can also report contractor payments to me to the IRS as well. So if you are worried about your social security number being out there, which some of us are, this is definitely one of those things where you want to make sure you’re doing business with legit other entities, but this is how this works. It is very much part of me and my personal tax return. And then I have other things like The Nailscape and like Outgrowth which are a different structure.
JAIME: Sole proprietorship is the entity type that I have the most experience with. And for as many years as I’ve been in nails, I’ve never done anything differently. I’ve not ever pursued an LLC or a corporation. I’ve kept it really simple.
ASHLEY: And that’s, I think, what most of our listeners will relate to is the fact that a sole proprietorship doesn’t mean that you’re the one in charge or that you are. There’s a lot of confusion around the word “proprietor,” meaning like the boss or the owner or the person who opens up the shop in the morning or whatever. This just really means that you and the business are one. If we want to get really, really simple with it. Sole proprietorship is something that a lot of booth renters can identify with as well because they are the contractor. They are the one who is performing the services and paying rent to a salon. And then we can get into all of the fun things around misclassification and all of those conversations. But for today, let’s just focus on what it means to be a sole proprietor and what you can expect when setting up your business.
JAIME: You know what I find interesting about these, Ashley, is that it doesn’t really matter how large your business is or how much money you expect to generate. You could have a sole proprietorship that generates a dollar. You could have a sole proprietorship that generates a hundred million dollars. It’s not any indication of the size of your business or whether or not you have employees.
ASHLEY: That’s right. There is a little bit of some tax finagling that you may need to do around a schedule C form being self-employed, and whether you give yourself a salary, and all of those sorts of things. That’s definitely a question for an accountant. A lot of the conversation I see in beauty groups revolves around what a sole proprietorship means and how we can navigate this landscape as a business owner when there really is not much differentiation at least in the eyes of the government, between us and our business.
JAIME: One of the advantages is that as a sole proprietor, you are 100% of your business. And when you go to make any changes or to start anything, and you have to represent the business, yours is the only signature that matters.
ASHLEY: That’s right. So it kind of brings that word “sole” into focus. You are the one. You are the one who makes the decisions and you are also the one that holds all of the liabilities when it comes to, oh, God forbid, hurting a client, or an accident, or whatever. And so that’s why it’s so important to have the protection of liability insurance. But I think that’s something that a lot of us miss just because it is the easiest option. It also comes with really the most risk.
JAIME: As we go down the list of the different structures, the next one makes me smile because it’s one of the things that I tend to caution beauty pros against, and that is to get involved in a partnership without having the additional protection of an LLC, but we’ll get to that later. But just a straight up partnership where two individuals join together and form this new entity that’s called a partnership. For that, they would actually be applying for a tax ID number from the federal government.
ASHLEY: Yes, which is free to obtain. It can seem a little bit complicated, but of course we’ll link to so many great resources for figuring out which one is right for you in the show notes. But a partnership doesn’t just mean a handshake. It doesn’t just mean, okay, 50/50. You do this. I do this. It’s an actual legal structure.
JAIME: For individuals who have a significant other, this is something to consider. Do you really want to have your significant other as a partner in your business or do you want to be in a relationship, a personal relationship, but not necessarily in a business relationship with your partner, if that makes sense?
ASHLEY: Right. Well, and what happens when the partnership ends, which is something that we don’t want to think about in the beginning, but there definitely needs to be more on the table than just a handshake. This is something that requires some paperwork, whether you do take the extra step to go towards an LLC or not. A partnership is something that requires all of the terms to be put down on paper and signed by both or all parties if it’s more than two people.
JAIME: And don’t assume just because you’re married to your partner that that doesn’t require a contract because if you really want to focus on the health of your business, you’d have to worry about the health of your marriage as well as the health of your business.
ASHLEY: Right and this is why it’s different than a sole proprietorship, right? It’s a separate entity from you as a person. It’s a separate entity from you and your partner, meaning your marriage partner. So this is why it requires a little bit more due diligence, but it also offers a little bit more protection as well in case things, unfortunately, as they often do, go south.
JAIME: We hear that story a lot in our industry, you know, two individuals coming together, particularly ones who have different skill sets or perhaps one has the resources, the financial resources, and the other has the industry knowledge. And they need each other in order to launch a business, but oftentimes that doesn’t work out. So that’s something where you’d need an exit strategy as well. And you’d need to have clear guidelines as to who’s responsible for what because the federal government is not going to wait for you to file your taxes and pay what’s owed as you work out these personal issues.
ASHLEY: It’s a business conscious uncoupling that you need to be prepared for and this is just great protection for all parties without, it’s awkward, right? It can be awkward to begin with the end in mind, but it’s really the smartest option when it comes to ensuring that the partnership is set up to thrive and set up for success from the beginning.
JAIME: That’s another thing you don’t have to worry about with a sole proprietorship. If you cease doing business, you just report the last of that income on your next tax return and that’s the end of it.
ASHLEY: Yeah. Again, I can see the appeal and why most of the beauty industry is part of that sole proprietorship squad. Shall we get into LLCs?
JAIME: We should and again, a word of caution. This is where things get complicated because registering your limited liability corporation would depend on what state you’re in.
ASHLEY: That’s right. Some states, unfortunately, don’t allow for limited liability corporations when it comes to the beauty industry, am I right?
JAIME: California is was one of those states where you need to do your research because it’s not as clear cut as you might think. And we often see individuals who would normally be sole proprietorships getting the LLC designation attached to their business because they think it legitimizes them when in fact, you know, it does more to indicate what kind of structure you are. It really doesn’t say anything about the quality of the services you have or the size of your business. It’s an interesting dynamic that I see when I see a business name with the word LLC after it. I’s sort of strange to me.
ASHLEY: Well, and as we’ve learned in some states, it requires if you are an LLC that you advertise yourself as such. And the great thing about it is that it’s in the name and it’s a limited liability, meaning that because it is a separate business entity, and there’s the protection afforded to the members of the LLC that if anything were to happen with the business, if it were to create liability, the business itself is accountable to that as opposed to, in general, the members themselves and their personal assets. However, that is not always the case and so it’s so important to do your research. Also, you may find that your home state is not the best place for you to file for your LLC. It may be advantageous in other states. But again, this is all to say it is really important that you have a thorough understanding of the differences between these entities and speak to a professional who can guide you through this process because it is complicated. It is fraught, but once you get settled into the correct entity type, it’ll fit in a way that will make all of your eventual business decisions easier and more supported in the long run.
JAIME: LLCs are attractive for a reason, the fact that it does offer the protections, but then you don’t have to go as far as you would if you had a full blown corporation in terms of those requirements. And I would caution here that just because you can fill out a form, just because you can go online, and use a service like Legal Zoom, and fill out and pay a fee doesn’t mean it’s necessarily legal because it’s not Legal Zoom’s obligation to make sure that you’re not wasting your money on a structure that doesn’t fit your business.
ASHLEY: Right, and there are some additional requirements when it comes to an LLC depending on the state where you file. There are some annual reporting requirements. There are annual fees and taxes that need to be paid to the state in order to keep your LLC in good standing. And these are definitely things you want to research ahead of time, because if you don’t want to be paying the state of Delaware $300 a year just to continue to be an LLC, that’s something that you need to think about and know that there are definitely pros and cons with each.
JAIME: Here’s a question for you, Ashley. Does your LLC have to have the same name as your business?
ASHLEY: That is a question that actually depends on the state as well.
JAIME: And this is, again, the type of question that you might have because you need to know if in fact you are going to have multiple businesses, is it possible to fit these businesses underneath the umbrella of one LLC or do you need to file each one separately?
ASHLEY: And we’ve all been there where we see something on your credit card statement and go, what in the world is that because the business is doing business as, or DBA, something else. And then the financials all go through the name of the LLC. So you can see that at the bottom of websites; so, like I mentioned, on your credit card statement. For the fictitious business name in California, you would have a DBA or doing business as in other states. So there are potential obstacles, but once it’s figured out and you get everything squared away, it is freeing and exciting to have this whole separate business from you that has an employer ID number, and exists within the eyes of the federal government, and now, you know, it’s up to us to stay compliant.
JAIME: With those federal ID numbers. That’s the information that would get passed to, for example, your agency, if you were getting paid through your LLC as opposed to having to give them your personal social security number.
ASHLEY: Correct, and with that come other obligations and requirements for paying yourself, and how that gets reported, and all of those sorts of things. So that’s where we get into the commingling of funds. That’s where we get into piercing the corporate veil. There’s all those other things that we’ve referred to in previous episodes as well, but with the great protections of an LLC, there are also some limitations in how the business can be run and what it can afford you with regard to compensation.
JAIME: We’re learning those things ourselves, Ashley, because we have formed our own LLC as we’ve partnered on this particular project.
ASHLEY: That’s right and this is the first time I’ve been a part of an LLC that is filed in the state that it is. So we’re both learning together, even though I do have an LLC that is based in a different state, which is The Nailscape. So we’re figuring it out as we go and realize that because it is such a complicated process, we should speak about it here.
JAIME: Well, let’s move on to corporations because we, we see the title CEO all over the place when people describe their role in their own company. And many of these we know are sole proprietors, but I guess the label CEO is just too appealing to avoid.
ASHLEY: Yes, especially when you’re the CEO of your sole proprietorship, which is often what we see. Look, I’m all for small business success. I just think that when you start using terms that don’t necessarily apply, it can look a little bit gauche and it can look a little bit like you don’t really know what you’re talking about. But, yes, with a corporation, you now move into the C-suite level of positions, that you can have a CEO and a COO and actually have it mean something.
JAIME: Which this whole topic just, it makes me queasy when I think about what would be required under this. No wonder my mind just sort of stops at LLC.
ASHLEY: Well, my parents have a corporation. They’ve had it for many, many years and it is very complicated. It was a general contracting business which has now turned into an education business, but incorporating is something that absolutely should involve a lawyer, or several. And it absolutely should involve an accountant or a CPA that can assist you with creating this correctly.
JAIME: Well, and here’s my concern, that I’m in California, I know it would be expensive.
ASHLEY: 100%. And that’s why you can look at creating nexus with a registered agent in a different state. But, again, more research is required and that’s why it is so important to have a professional who specializes in this practice to help you, as opposed to just reading a blog post and thinking, oh, I’ll go for an LLC.
JAIME: Sounds good. I see other people doing it.
ASHLEY: Yeah, right. Or let me go to a Facebook group and ask, what do you do? Everybody’s situation is different. Everybody’s financial situation is different. And so we can’t rely on the “what abouts” as opposed to good advice from a licensed, experienced professional.
JAIME: Ashley, you mentioned the term registered agent and I’m not sure everyone knows what that is.
ASHLEY: Sure. So a registered agent is basically the person that acts as your representative in a state where you don’t live. So there are certain states like Delaware being one, that I can speak to because I have an LLC that’s registered in Delaware. It’s a very business-friendly state, which thus the reason that I elected to do that, but Delaware requires you to have a registered agent, meaning someone who kind of holds the paperwork, so to speak. And basically gives you an address in that state to allow you to have nexus there, or to allow your entity to exist in that state, as opposed to just an idea out in the world. I’m sure there’s a better way to explain that, but registered agents are people who specialize in doing that. That’s really their only job. There are companies that are just registered agencies and they are just kind of an address.
JAIME: It’s no coincidence that many banks are incorporated in Delaware.
ASHLEY: That is right. I was given some advice a long time ago that Delaware is the place to be if you have an LLC, for my own personal reasons. But it again requires more research and advice, but this was someone who was a C-suite executive for a financial planning agency that handles retirement accounts and things for like entire city worker funds and things like that. So I was like, I think he knows what he’s talking about.
JAIME: And is that a service that you pay for, Ashley?
ASHLEY: It is.
JAIME: Which makes sense because if they’re taking on that responsibility of being available for being served and that sort of thing, then that should have a cost.
ASHLEY: Yeah, and it’s nominal, but it is definitely something that you have to think about upfront. Is this something that you want to deal with every year? And sometimes the benefits outweigh the costs, but that is something that you do have to do for yourself.
JAIME: At the top, we mentioned seeking professional advice from lawyers and accountants, but there’s a lot of research you could do for yourself initially that’s absolutely free and it’s direct from the federal government.
ASHLEY: There is the small business association, which is everywhere and has so many great resources, including free classes that can help explain this to you. as well as, I’m sure, millions of online videos and Zoom calls and things that you can be a part of. I have dealt with the SBA here in Chicago to learn about the process by which you start a business in the city of Chicago and what the requirements are, what the licensing requirements are, what permits I would need, what designation I would need to be able to file sales tax and all of those sorts of things in the city and the state of Illinois. So there’s a lot of decisions to be made and it is very complicated, but there’s great resources out there that will literally hold your hand and walk you through it.
JAIME: In our show notes, we’ll include those resources and beyond the SBA, we’ll include those from the IRS.
ASHLEY: Right. Because while it is a lot of just black and white print, the IRS does want you to do things correctly and we’ll help you figure out that information as well.
JAIME: And I know that we’re going to cover this in our next episode that’s dealing with our Business Basics, but any form that you fill out, it’s not only going to ask you for the name of your business, but it’s going to ask you for the designation of the structure.
ASHLEY: That’s why it’s so important to get that figured out in the beginning, have a solid foundation, and know why the decision that you’re making is the one that you’re making, and how it benefits you in the short-term in the long-term, but also protects you from potential obstacles down the road.
JAIME: And if you happen to be in a relationship, make sure that you speak to your partner about this before you make a decision because if you’re filing jointly, it’s going to impact you, too.
ASHLEY: That is true as well as anything created in some states while married, or common law, or whatever, they actually belong to that partner as well. So there’s a lot of things to navigate here. So that’s why, again, we always recommend going to a professional to get the best possible advice.
JAIME: And when you have the right information, Ashley, you can still make mistakes. You can still decide later to perhaps change the structure, but that’s a lot of work. It’s so much easier if you can choose the structure that fits not only what you intend when you launch your business, but what it’s really going to look like for the next five to 10 years.
ASHLEY: And that’s why it’s so great to have done your due diligence when it comes to your name, your brand, and potentially any trademarks that you want to file so that you know when you do pay the money and create this business entity on paper in the eyes of the government, that it is a name that you can legally have, and it is something that is protected for you and available to you for the long-term.
JAIME: And to emphasize again, the form that you would fill out to obtain your employer identification number, even if you don’t ever intend to employ anybody, from the IRS that is something that you can fill out for free. That is really simple to do and be wary of anyone who’s wanting to charge you for information that you can access yourself directly from the federal government. When you want to engage a professional, it’s when you’re giving them specifics about your particular situation.
ASHLEY: Yes. Getting an EIN number and filling out that form is something you can do online. You can do it for free. It takes about five minutes. You do have to do it during business hours I found out, but it is available to you. It is available for free and we’ll, of course, link to that as well In the show notes.
JAIME: Ashley, this structure conversation, you know, has me thinking about what I’ve chosen for myself and every year, there’s that opportunity to change it if I wanted to. But every year that goes by, it gets less and less appealing to do anything differently because if I were to change the structure, I would have to go back through just like if you were changing your last name and reconnect with all of the organizations and agencies that I do business with that require me to have my social security number and change it.
ASHLEY: So that’s why it’s so important to get it right in the beginning. There is a little bit of wiggle room as you mentioned. You can make a different designation down the road, but depending on your state and the structure you’ve chosen in the beginning, but I think we’ve emphasized a lot here that it is important to bring in a professional, and pay for a professional to explain, and walk you through this whole process, just so that you’re set up for success right away. But this is a conversation that’s ongoing, and of course we will refer back to other great episodes where we discuss business entities and how they work. Our next step in Business Basics will help put a bow around everything we’ve talked about so far and help you, again, continue down this road of starting your beauty business and making it successful for years and years to come.
JAIME: That’s what we all hope for, but in this case, we want to plan.
ASHLEY: Yes. Plan for success. Don’t just hope. Hope is not a plan.
JAIME: No, it’s not.
ASHLEY: All right. Well, if you’re enjoying Outgrowth, please leave us a review on Apple podcasts. You can do that now with just one click. Visit bit.ly/outgrowthpodcast.
JAIME: As always, you can follow us and comment on recent episodes on Instagram at @outgrowthpodcast.
ASHLEY: Perfect. Well, until next week everyone, be smart.
JAIME: Be safe.