How to Run a Face Painting Business - Legal/Tax Status of your Business
HOW TO RUN A FACE PAINTING BUSINESS - LEGAL & TAX STATUS OF YOUR BUSINESS
Face Painting businesses (and any other business) can have many different legal and tax forms. For many this is confusing so I will try to explain in simple words.
TAX STATUS OF YOUR FACE PAINTING BUSINESS
For taxes purposes your face painting business can be classified as a:
The amount of taxes you will pay and how you will be taxed depend on how you choose to classify your face painting business as.
A sole-proprietor kind of business gets taxed the same way you do. Your business and you are the same thing as far as taxes are concerned. That means that your face painting business income is your income, and you will pay full taxes (including self-employment taxes) on the income you make from it.
An S Corporation is a different entity from you, but, the profit from your business gets rolled-over to your personal tax income. With an S Corporation, you can choose to pay a salary to you, which can be less than your actual profit. Your salary will get taxed as any other salaries do. The leftover profit won’t pay as much taxes as your salary income does (since it won’t pay self-employment taxes: social security and Medicare). The left over profit will only pay the corporate taxes, and not the personal taxes. Although that will reduce your tax bill, you will be reporting less personal income than you would as a self-proprietor (because part of it would be your company’s income), but your retirement contributions will also be lower. More money today but less in the future.
As a C corporation you are a separate entity from your company, and your company will be taxed a bit differently from an S Corporation. As a C Corporation the business income doesn’t automatically go into your personal tax return. A "C Corporation" can choose not to distribute dividends, in which case that income won’t go to you, it will stay with the business and increase the value of it. If the C Corporation distributes dividends, you will be paying the corporate tax for those profits and then personal income taxes on the dividends distributed to you.
Most Face Painting business ran by only one person will be in either the first or second category. A C Corporation is usually an option geared to much bigger companies.
If you have a few painters working for you on a regular basis, and you pay them a salary (they are not just random sub contract labor), an S Corporation might be a better fit for your business. Keep in mind that an S Corporation is required to file a Corporate tax return, which is extra paperwork that is not needed when filing as a Sole Proprietor.
LEGAL STATUS OF YOUR FACE PAINTING BUSINESS
In regards to legal status, your face painting business can assume different forms. We will look into the 2 most common ones for a small business: LLC and Sole Proprietor.
A Sole-proprietor kind of business is not a different entity from its owner. You are the business, and you are legally responsible for whatever your business does. As an example, this means that if you get sued and loose, your personal possessions (car, house, furniture, etc) could be used to pay the person that sued you.
As an LLC you and your business are consider different legal entities. This is a great way of protecting your personal possessions (and your family) from whatever could happen with your business. Keep in mind though, that just filing to become an LLC doesn’t give you the protection you are looking for. You must behave as an LLC if you want to be protected.
That means that you need to distinguish between your computer and the business’s computer, your credit card and the business card, etc. If you constantly buy personal things (eg: groceries) with your business card, or have no separate accounting for your business, you are likely to lose that LLC protection in a court setting.
Keep in mind that your legal status differs from your tax status. You can be an LLC and still file taxes as Sole-proprietor if your LLC has only one member. Choosing to file as an S Corporation might have some tax advantages but it requires more paperwork.
Make sure to contact a CPA and a lawyer to see what the best option for your business is. They can also give you guidance on how to file for these legal and tax status.
Once you have this under control, you might want to look into our Book Keeping Essential blog for your Face Painting Business. We have a ton of useful tips on how to keep track of your income and expenses and we include a FREE Spread Sheet!
Disclaimer: these are opinions based on our personal experience, we are not lawyers or CPA’s, so we recommend for you to contact a lawyer and or CPA before making any decisions. We are not in any ways giving legal or tax advice and we are not liable for any decisions you make or stop making based on the opinions provided above.
Image courtesy of Pixomar / FreeDigitalPhotos.net