Incorporating your salon can protect your personal assets and establish it as a professionals run business.
Why would a salon owner want to incorporate? Salon owners who have substantial personal property, who own large salons with many employees, or who teach in their salon are usually advised to incorporate their business to simplify paperwork and to protect their assets.
In spite of the drawbacks to incorporation (cost and complex operational rules, for example) many salon owners incorporate in order to obtain the benefits, winch include protected personal assets, more possibilities for tax write-offs, and being recognized by the public as a professionally ran business. Being incorporated also means the name of your business is reserved for your use exclusively. It also means you can’t choose a business name that’s already being used by someone else.
To become a corporation, your business can be as small as a single rental chair in a salon or as large as a chain of salons. Even one person can form a corporation. That person becomes the officer, director, stockholder, and employee of the corporation.
Becoming incorporated is not that difficult. All you have to do is file papers of incorporation with the secretary of state in your state, deposit some cash in a static account, and follow a few rules, such as holding annual meetings and using the proper corporation name in all business dealings. Some states even have simple printed forms for incorporation in which you fill in the blanks.
But incorporating properly involves some education on your part, a good lawyer to advise you, and a good accountant to make sure you file all documents properly and continue your salon operations in accordance with your corporation. You have to play the corporate game.
Filing the papers and getting the legal and accounting help costs from a low of $100 to tens of thousands of dollars. And you should know as much as possible about corporation taxation and legal responsibilities of corporations to avoid getting on the wrong side of the IRS in the case of an audit, or a judge in the case of a lawsuit.
A sole proprietorship is the easiest type of business to open and ran. Nail salon owners, booth renters, and independent contractors are particularly good candidates for a sole proprietorship in which all business profits are counted as income and taxed at regular income tax rates, while costs are counted as business expenses and maybe deducted.
A drawback of this type of business is the liability exposure. The business owner and the business itself are one and the same in the eyes of the state and creditors. If a sole proprietor becomes unable to pay its debts, the creditors can pursue the personal assets of the owner. If you (or your spouse in community property states) own a lot of property, you may be understandably concerned about that prospect.
As a sole proprietor, you may write off only a small portion of your health insurance cost, which is considered a personal, not a business, expense. The health insurance of your employees may be 100% written off as an employee benefit, provided all employees are offered insurance.)
Partnerships also face the risk of personal liability, but it may be worse than the risk faced by a sole proprietorship. Any time one of the partners signs a contract (a lease, for example, or an employment contract), all partners are bound by the contract. If one of the partners is negligent in his duties of the business, all partners are legally liable. As a member in a partnership, you could be liable for debts you hadn’t bargained for.
You’re Protected, But Not Completely
A corporation is a separate and distinct entity. If anyone goes after the assets of the business, only what was put into the business is available to them, not the personal assets of the owner or owners. The protection is termed “corporate veil.”
But, just because you become incorporated doesn’t mean you are completely protected. Several factors can occur that will take away that protection (called “piercing the corporate veil”).
Being incorporated doesn’t mean you don’t need liability insurance for your salon. If you enter into incorporation for the sole purpose of avoiding insurance costs and liability, you will be held personally liable by the courts. You can’t avoid responsibility for events that are bound to arise during the normal course of business.
The protection from liability also does not cover wrongful acts, errors, or omissions made by you or another director of the corporation. It also does not cover personal guarantees made by officers of the corporation (you personally guarantee to pay back a loan).
When you have a “risky business,” banks and other lenders may be reluctant to enter into business relations with you unless you offer a personal guarantee that you will repay any debts. If you default on those debts, your personal assets can be seized.
Finally, incorporating does not protect you for things you are normally responsible for, such as having car insurance or withholding employee taxes.
There are other advantages to incorporation besides personal liability protection. As a separate entity, the business exists regardless of the owners. The owners may change, but the business stays. Clients like businesses that stick around.
Banks and vendors look more favorably on a successful corporation. And benefits specific to corporations exist, such as 100% tax write-offs for health insurance for members and their spouses and dependents.
In addition, some expenses such as health insurance, individual retirement plans, or computer equipment often considered personal expenses by the IRS, are easier to deduct in a corporation as a corporate expense or an employee benefit.
The Double Specter Of Theirs
The initial cost of incorporating will set you back, but a potentially higher cost is the double taxation corporations are subject to. First, the profit of the business is taxed as corporate income (usually at a higher rate than personal income tax), and then the salary of the employees, yourself included, is subject to personal income tax. You can get around double taxation in some instances.
One of the ways to avoid the double taxation is to retain business profits and reinvest them in the business. The corporation still pays income tax on these profits, but the owners of the corporation do not have to pay income tax on them, since they did not receive them. Or you could retain the profits for a time and withdraw them later when you might be in a lower tax bracket.
Another way is to pay yourself a high enough wage in the form of salary and bonuses that it eats up all of the corporate profits. Then you bring corporate income taxes to zero and only pay tax on your own income.
A third way to avoid double taxation is to have an S corporation. An S corporation is a hybrid of a regular C corporation and a sole proprietorship. It has the; same basic structure and has the liability protection of a C corporation, but the corporate income is not subject to federal income taxes. All of the corporate profits are passed to the owners who pay only regular personal income tax on it. However, S corporations cannot take advantage of the health insurance write-off (its limited to 25%).
Some salon businesses will benefit by incorporating, but many will not. There’s no hurry to do so. A business can incorporate when it first opens its doors or any time afterwards. You can start your business as a sole proprietorship, which costs much less and involves a lot less paperwork, and then incorporate later.
Once you incorporate, from then on you have to act like a corporation. All business dealings have to be on a corporate basis (you sign letters, “Jane Smith, president, Nail Salon, Inc.”). Everyone involved with your business must be made aware that they are dealing with a corporation. Otherwise, your corporate veil can be pierced.
Nail Salons Give Their Reasons for Inc’ing
Although incorporating involves extra work and cost, quite a few nail salons have taken that step. NAILS spoke with some salon owners who have incorporated and asked them why they took that step and how it’s affected their business operations.
Georgette Garber-Torell owns The Hottest Touch Nail Salon, Inc., in Satellite Beach, Fla. She says, “I’ve always been naturally business-inclined. I listen to business advisors and read a lot about running a business. I think when you’re a corporation, you’re taken more seriously. If you run your business legitimately, a corporation is the only way to go.
“You can write off more legitimate expenses, legally. Life, health insurance, and retirement plans can all be written off as business expenses. I have an S corporation. Salons should have this type because then you avoid the double taxation. “It’s not hard to incorporate. It’s mostly paperwork, and I’m good at that. In Florida, it costs between $500 and $700 to incorporate with the help of a lawyer. I went to a legal services firm and a paralegal did it for only $250.”
Chiera Dinser’s company, Chiera & Company, Inc., in Southfield, Mich., has been incorporated since she owned her first salon, Platinum Blonde Nail Studio in Southfield, Mich., in 1987. Now the owner of Chiera & Company salon in South-field, Dinser says, “I didn’t want to be just ‘a girl who owns a nail salon.’ My father is a banker, and he advised me to keep my business as professional as possible. I own my own home. If someone attacks your business, they have to go through your corporation before they can get to your personal assets. My sister is the vice-president of the company. All accounts and anything legal to do with the business have to be done on a corporate basis. I have both an accountant and an attorney who helped me with the incorporation and taxes.”
Ira Bloom, who owns a franchised chain of nail salons in Dallas, Texas, says, “There are two reasons I incorporated: taxes and the corporate veil. I have an S corporation. In a regular C corporation, the business profits are taxed at a higher rate than my salary is. In an S corporation, the business profits are passed to me as simple income and taxed as income tax, which is less.”
My Kieu Hunyh owns four nail salons in Maryland and four nail salons and a nail school in Virginia. The first salon she bought was already named “Mimi’s Perfect Nails,” so when she incorporated and had the chance to change the name, she chose “Mimi Inc. Nails and Skincare” because she didn’t want to alienate the regular clients. The name isn’t so different from her own name, which is pronounced “me.”
“It was not that difficult or expensive to incorporate. I saw an ad in Entrepreneur magazine that quoted $100 to incorporate a business, and they would do it over tin phone. My lawyer was skeptical and I thought it was a hoax. But called and got a written estimate and my lawyer concluded it was legitimate. So it was much cheaper than if I did it with an accountant.”
Shari Finger owns two Finger’s Nail Studios, Inc. salons, one in West Dundee and one in Algonquin, III. Says Finger, “The main reason I incorporated was to separate myself from my business, sole proprietorship is open to more lawsuits. That’s not to say I’ve been sued; I never have been. But there’s more red tape someone has to go through to get your personal assets.
“I wanted to convey a more professional image. Putting ‘Inc.’ behind your name shows you are more professional.
“I decided to incorporate after I had opened my second salon and began to teach (this was before licensing was mandated in this state). My attorney and accountant advised it. The total cost to incorporate, including the filing fee and the accountant’s fee, was around $300. I found an accountant who specializes in corporations. You can do it yourself with accounting computer software, but you can’t ask a computer questions.”
Incorporating may be a way to create a little more ‘red tape’ in your business, but it might be an important step to take for your salon’s professionalism — and protection.