Nail Shop Tea Recap: Insider on Business Registration & Tax Implications for Creative Entrepreneurs
(authorship credit: Panel hosted & moderated by Gracie J, article written by Gracie J)
As part of OPI and The Editorial Nail’s initiative to help artists succeed and become business-savvy entrepreneurs, the latest Nail Shop Tea discussion included some key educational points on business registrations and their tax implications. We’re all familiar with personal filing, but business taxes are a whole beast in itself. And while some may think taxes only come once a season, being well prepared year-round will make filing smooth sailing. . . Or at least as smooth as possible.
Whether you’re newly stepping into the entrepreneurial journey or a well-seasoned self-employed/independent contractor nail technician, there’s something in this write-up for you. We got to chat with tax expert Sheneya Wilson of The People’s CPA on the different types of business entities and how they affect filing business taxes. Here’s what we learned:
Types of entities:
Operating as an entrepreneur without a partner or a legal entity structure. You can run your unincorporated business solely using an EIN number and operate as a DBA (Doing Business As - a fictitious name or moniker) under yourself.
- The business is not a taxable entity, and all business assets, income, and liabilities belong directly to its owner.
Limited Liability Company (LLC)
An LLC provides limited liability protection. This legal entity protects you from any type of legal proceedings as long as you maintain the limited liability status.
- An LLC is a *passthrough entity, which means taxes are paid on the personal return
A partnership is a relationship existing between two or more persons who join a business. Partnership incomes and losses are filed on a US tax form 1065 and the individual income tax form through a Schedule K1.
- Also, a *passthrough entity, all profits, and losses are paid through the partners.
Consisting of prospective shareholders, a C-corp is recognized as a separate taxpaying entity, which can also elect to be taxed as S-Corp. C-Corp profits are reported on a Corporation Income Tax Return (Form 1120), where the tax reform act caps the tax rates at 21%.
- Any portion of the profits passed on to shareholders as dividends must be reported on each individual tax form 1040, Schedule B, Interest and Ordinary Dividends.
S-Corp is a tax election selected by a taxpayer in opposition to a C-Corp, which requires notification to the IRS. Selecting an S-Corp status results in the avoidance of “double taxation” that is expected for a C-corp where both corporation profits and shareholder dividends are taxed.
- An S-Corp can have an LLC or C-Corp structure and is also taxed as a *passthrough entity.
Not For Profit
An NFP operates the same as for-profit businesses, the difference is what the corporation does with its retained earnings. In an NFP you cannot take the owner's draw which other entities can. An owner’s draw is taking funds out of the business for personal use. You can still pay yourself a salary and live comfortably, but all earnings should always be reinvested into the company.
*Passthrough entities: Single-member LLC, Partnership, or S Corp; the business income is considered as the personal income of the owner(s).
Most of the entities above may appear to be the best fit, but it’s always a great idea to consult with a CPA or attorney to figure out which business structure works best for you. Sheneya recommends, if you’re working as a beauty professional (nail salon owner, nail spa, nail studio, etc.), it’s always a great idea to register with an entity that’s going to protect you from liabilities.
Register your business with an individual who’s going to give you the support you need, but also a professional who is well versed in your industry and aware of the compliance requirements for your business depending on which state or location of your business.
Do bloopers happen IRL? All the time! And guess what? You can always rectify a registration that just isn’t a right fit. Whenever you decide an entity isn’t right for you, you can either keep the entity and repurpose it or dissolve and start another one.
So what is the best type of registration for a beauty professional like you?
- Although an LLC is not the only classification required to incorporate a business, it does offer more of that limited liability protection than if you file as a Sole Proprietor. Both tax implications would file as a Schedule C in conjunction with your personal tax return.
- The most common taxing filing is an LLC for that reason. It will be sufficient for your goals, but if you are looking for even more liability and protection, a C-Corp may be the better option. Investors are also more likely to invest in a C-corp rather than an LLC.
- You do not need to be licensed to file for an LLC. The filing costs, cost of obtaining that license, advertising costs, and any other expenses made before filing can be consolidated to a “start-up” cost, that can later be deducted after you begin operating.
- As a service-based company, keep in mind in what state you decide to incorporate your LLC. It can be tempting to incorporate in a state with fewer income taxes outside of where you reside or work, but keep in mind that the IRS taxes where we live and where we work.
Sheneya reminds us that these elections are not the final determining factor for the success of your business. Upon growth and capping out on some financial benefits, you can always change your tax election!
You know we always have to leave you with a few important sidenotes. If you’ve read the below once, read it a second time, because it’ll come in handy.
Do not file an entity in a state you do not operate your business or live in.
You never want to claim a loss for more than 3 years when you are in business. After that time period, the IRS will consider your business as a hobby and may deny certain claims on your tax filing.
Don’t file your personal return before filing your business tax return if you are a pass-through entity, because the passthrough entity taxes are paid on the personal return.
As a community that values its artists and their personal/professional growth, we want to make sure as industry leaders, we’re setting you up from the ground up. Being an entrepreneur doesn’t only require the little things, like purchasing supplies and showcasing your work on social media. The meat and potatoes are where it's at! Especially post COVID, operating as an effective and efficient business owner BTS is just as important as what’s on the surface.
We hope you’ve taken away some very valuable information you can apply to you and share with your friends. Remember, you’re not on your own because we’ve got your back. See you next time, on Nail Shop Tea.
Gracie J is a celebrity nail stylist, traditionally trained nail tech, and self-taught artist who is most noted for her work as former Lead Nail Stylist for TNT’s critically-acclaimed television series “CLAWS”. She boasts celebrity clientele like Issa Rae, PoseFX’ Angelica Ross, Young MA, Dascha Polanco, and Phylicia Rashaad.
Her work has been featured in Glamour, NYLON, Paper, Coveteur, ESSENCE, and more, and she has attracted the attention of leading beauty brands like SavageXFenty and for brand partnerships. She was recently featured in Zerina Akers’ Black-Owned Everything, one of PureWow’s #PureWow100 change-makers and influencers as well as #iOneCreativeClass of 2019 creative entrepreneurs.
Gracie J is an NYC native with an audience that spans across the globe. Her work has inspired millions of fans worldwide and has been replicated by some of the top nail art communities on social media. With her annual and viral Nails At First Sight series last featured on Good Morning America, she uses her medium to educate her audience about icons and pivotal moments within Black History. She was a featured talent during Beautycon and guest speaker for Essence Beauty Carnival and has creatively directed shoots for Dascha Polanco x Blink beauty as well as Madamenoire.
As a Creative Director, Gracie has collaborated with brands like Nickelodeon, FentySkin, MCM x Puma, KISS Products, and GstarRaw. Gracie bridges the gap between creativity and talent, curating conversation-worthy nail designs for her clients and audience.
How are you protecting your business when it comes to taxes and filing? Send us a DM @OPI_Professionals on Instagram to let us know what advice you loved most! Be sure to subscribe to our OPI Professionals YouTube Channel for more insider info and nail tips from more OPI Pros.