The great majority of coin or card operated laundry businesses in the western states are operated in the form of a sole proprietorship. That basically means that title and ownership is held by an individual who takes all the financial risks and earns all of the rewards of that particular business.
Some laundromats are partnerships of one form or another, which means there is more than one owner sharing the benefits or risks. However, even a fifty percent owner is individually responsible for 100% risk of the business. That means creditors can go after any and all persons that are partners.
Why is all of this important? The type of business structure they will use is one of the most important decisions a person can make in beginning their enterprise. One of the most important changes you can make as a laundry entrepreneur is to select a new legal format for your business.
By providing the best type business structure that is suitable to your needs, you will be able to save on time, money and possibly even be able to avoid -future heart aches.
What are the choices?
There are six normal business types that you can consider. Sole proprietorship, general partnership, limited partnership, limited liability company (“LLC”), C corporations, and S corporations.
Sole Proprietorship.
If you are the sole owner and you do not care to share ownership, you are by default considered being in business as a sole proprietorship. Most small businesses begin as sole proprietorships.
Partnership
If there are two or more owners, that is the chief requirement for being defined as a partnership. It helps if there is a written partnership agreement; however, no written document is actually required. All of the partners are jointly liable for the debts of the partnership. Most laundries with more than one owner are operated as just normal partnerships.
General Partnerships
Both types of partnerships can be legally formed without paperwork. Many are just a handshake agreement between the partners. However, a general partnership agreement may almost be required to govern the running of the business. The agreement can help head off arguments between the owners.
The remaining types all require some very serious paperwork.
Limited Partnerships.
A limited partnership must first have a general partner named with one or more limited partners. General partners manage things while the limited partners are passive investors and have no rights or say in running the business. While limited partnerships are common in large real estate projects, oil wells and so forth, there are very few laundry businesses organized in that way.
Limited Liability Companies.
A limited liability company, commonly referred to as LLC, may have one or more owners. These are relatively new and are often recommended by lawyers, and therefore have become more common as small businesses. The purpose is mostly to limit an investors liability to what their investment was, and no more.
C Corporations.
These are corporations subject to the corporate income tax law of Sub Chapter C of the Internal Revenue Code. All public corporations and many corporations operated by the wealthy are operated as C corps. Few laundry operations are ever organized as C corps.
S Corporation.
The S corporation has elected out of corporate income tax. This election is made under Sub Chapter S of the Internal Revenue Code. Many small businesses operate as S corporations. This type of entity permits dividends to be taxed at the owners individual tax rate rather than the double tax paid by other types of corporations.
What is the right entity for you?
The right choice is not always easy. Here are some of the most important considerations.
The LLC, the S corporation and the C corporation generally protect your home, and other valuable personal assets from the risk taking of a personally owned business. Things you and your family own could be at risk if someone sues when something goes wrong.
A sole proprietorship and a general partnership do not protect personal assets from the business’ creditors. In addition, in a general partnership, your personal assets are exposed to actions of partners made on behalf of the business. Thus, if you own a home or other valuable personal assets, and you wish to limit risks, you should not use a sole proprietorship or a general partnership.
This leaves LLCs, C corporations, and S corporations. Most lawyers recommend that you form an LLC or an S corporation because they can operate free of the corporate income tax. The income, expenses and any tax credits of the business are “passed through” to you to be included in your individual tax return.
This “pass through” feature is important for many reasons. First, losses from the business can be used to reduce personal tax liability.
Second, after tax profit from the sale of your LLC or S corporation business assets may be substantially greater than from a similar sale of the business assets of a C corporation.
Losses from C corps can’t be used to reduce individual income taxes. The loss can only be used to reduce your C corporation’s corporate income tax liability.
Finally, income earned by an LLC or S corporation service business is generally subject to employment tax, which is roughly 15%.
Conclusions
As a business person, don’t run your business as a sole proprietorship or general partnership without first considering a LLC or S corporation format. Have a tax accountant compare the projected overall tax cost of operating as an LLC, S corporation or C corporation for the next several years. Have them compare the estimated total tax cost of selling your business as an LLC or S corporation, taking into account reasonable tax planning alternatives. Of course, there could also be minor differences between states so that is another reason to get the advice of a knowledgeable tax accountant. Once you know all the facts, you’ll be able to select the right legal style for your laundry business.
Most small business owners don’t really trust lawyers in general, but must learn to trust their own attorney to give them the correct legal moves to make. Note, we say legal, not business advice. That’s an area of expertise you as a business person may be better able to give them.
Don’t try to save money by avoiding the hiring of an attorney to do a legal review of your business organization moves. Spending a little up front could save you lots of future worry about taxes, inheritance and legal problems. Spend a little up front now, and save yourself a lot of future concern and frustration.
