Issue link: https://www.massageandbodyworkdigital.com/i/1464088
L i s te n to T h e A B M P Po d c a s t a t a b m p.co m /p o d c a s t s o r w h e reve r yo u a cce s s yo u r favo r i te p o d c a s t s 77 While a sole proprietorship has quite a few advantages from a convenience standpoint, the legal liability leads many attorneys to recommend considering an LLC instead. The process for filing a DBA differs from state to state. In some states, you need to register at the state level. In other states, it may be at the city or county level, so consult the regulations in your own state. Sole proprietorships can operate under the owner's social security number for tax purposes. While this may seem convenient, it may still make sense to get an official business tax ID, called an employer identification number (EIN). This can help keep your social security number private and add legitimacy to your business. Getting an EIN is free and fast. You can get one online at irs.gov/ein. (Don't get scammed by an online service that tries to charge you to get an EIN. Do it directly at the irs.gov website.) Sole proprietorships offer no legal protection in your business. Your personal assets and business assets are considered one and the same from a legal standpoint, and if any legal action is taken against your business, your personal property is just as exposed as your business property. When it comes to filing taxes, all business profits from a sole proprietorship end up on a Schedule C, which gets added to your personal tax return. TAKEAWAY: Massage practices generally fall into one of three types of business entities, and each type comes with differing tax savings and liabilities. While a sole proprietorship has quite a few advantages from a convenience standpoint, the legal liability leads many attorneys to recommend considering an LLC instead, which we will discuss next. LIMITED LIABILITY COMPANY The limited liability company (LLC) is a very common business entity for massage practices. For a single-owner massage practice, an LLC operates in much the same way as a sole proprietorship. Profits end up on the Schedule C and get added to your personal tax return. However, the LLC does have a few differences. One of the most important advantages of the LLC is legal protection. The LLC structure sets up the business in a way that shields the owner from liability. LLC owners are protected from personal liability for business debts and legal claims. This means that if the business itself defaults on a debt, the creditor cannot legally come after an LLC owner's house, car, or other personal possessions, if the creditor does not have those assets listed as collateral for the debt you owe them. There are exceptions to this rule, but in general, the LLC offers greater protection to the owner. One caveat is that this protection is only enforceable if the business owner keeps business and personal finances properly separated. If the owner pays for personal expenses with business funds or vice versa, this can nullify the protections offered by an LLC if it's ever challenged. An LLC is typically easy to set up. In most places it can be done online through your state's secretary of state's website. Fees can vary depending on the state—anywhere from $100 in some states (such as Indiana) to $800 in others (such as California). An LLC should also have an EIN. While it's not technically required, it's a good idea to get one for the reasons outlined earlier (privacy and legitimacy) and because you will need to get one anyway if you ever hire employees or bring on a partner. An LLC can file taxes with a Schedule C, just like a sole proprietorship, or as an S corporation, which we'll discuss next. S CORPORATION The third term to explore is the S corporation. It's not as common among solo massage practices but it's important to know about. While LLCs and S corporations are often discussed in tandem, they actually refer to different aspects of a business. An LLC is a type of business entity, while an S corporation is a tax classification that may be chosen by an LLC. A business entity must be registered first (either a C corporation or, more commonly, an LLC) and then the S corporation "election" allows the business to be taxed as an S corporation. To put it another way, most massage businesses form an LLC as the entity and then apply with the IRS to be taxed as an S corporation. So why would a massage therapist consider filing taxes as an S corporation? While there are multiple differences between an LLC and an S corporation, most of them are not consequential to a small solo business. The primary reason to file as an S corporation is often tax efficiency.