Photo Booth Rental Businesses: Which Entity Classification is Best?
Starting your own photo booth rental business leads to a wide variety of benefits, but it also comes with a meticulous setup process that includes deciding on the right business structure.
Different business structures have alternative financial and tax reporting regulations, making it important to select the most advantageous one for you.
Sole proprietorships, partnerships, and corporations remain the three business types that you will have to choose from, with full comprehension of the different characteristics being key.
Sole Proprietorships and Single-Member LLCs
The first and most common entity classification is a sole proprietorship, frequently referred to as a single-member LLC. Sole proprietorships have one owner who reports all the income or loss on the individual return on Schedule C.
The simple setup and cost-friendliness of a sole proprietorship attracts many small photo booth rental businesses that are just starting out. Very few legal formation documents need to be filed, allowing for a quick setup. Similar to other business entities, photo booth rental businesses set up as sole proprietorships can deduct qualifying business expenses and claim business credits.
However, there can be no other members or partners brought on in a sole proprietorship. This leads to limited capital raising activities, which can be detrimental if you are trying to grow your business. In addition, there is little to no separation of business and personal assets, meaning your personal assets may be subject to lawsuit payments.
Moreover, there is no guaranteed business continuity with a sole proprietorship since you are the sole owner of the business. If you need business succession, you will have to form a new entity or convert your sole proprietorship to one of the other business types.
Partnerships and Multi-Member LLCs
Moving up on the complexity scale is a partnership, also known as a multi-member LLC. Partnerships are composed of two or more individuals and require a separate business return to be filed, referred to as the 1065.
Since partnerships have the ability to bring on multiple partners, raising capital through partner contributions is easier. However, partnerships cannot hold initial public offerings to raise capital through stocks. Another benefit of forming a partnership for your photo booth rental business is that there is business continuity and a greater separation of business and personal assets.
Finally, partnerships can decide between taking a salary versus a distribution, offering expanded tax planning abilities.
Despite the advantages, there are disadvantages to consider as well. Partnerships are required to file a business tax return each year by March 15th, generating a K-1 that will be reported on the partner’s individual return.
In addition, because partnerships are a separate legal entity, there is a higher level of due care needed in the accounting function to stay in compliance with Generally Accepted Accounting Principles and regulatory agencies.
Finally, there is unlimited debt liability for the partners. This means if the business goes under, you will still be liable for paying off creditors and lenders.
S-Corporations
Another business entity classification to consider is an s-corporation. An S-corporation is similar to a partnership in the partner setup and taxation; however, this entity type will file a business return called the 1120-S each year.
There can be up to 100 partners in an s-corporation, allowing for added flexibility. In addition, s-corporations allow shareholders to easily transfer ownership over to new individuals. This can be increasingly beneficial when it comes to succession planning or selling your business.
Moreover, like a partnership, an s-corporation passes the income down to shareholders through a K-1. Shareholders also receive complete separation of personal and business assets, adding increased legal protection.
One of the top disadvantages of setting your photo booth rental business up as an s-corporation is less flexibility when allocating income and loss. Any income or loss needs to be allocated based on ownership percentages.
These percentages are based on the number of shares owned. In order to adjust the percentages, a formal agreement needs to be in place, which can take time and cost money.
Additionally, the IRS monitors s-corporations more closely to be sure all rules and regulations are being properly followed, increasing your chance of receiving a letter. However, with accurate financial and tax reporting, you can minimize the risk of receiving correspondence.
C-Corporations
The final major business type is a c-corporation. A c-corporation retains less flexibility in the setup and procedures. Unlike the other business entity types, taxes are paid at the corporate level with no income being passed down to shareholders.
This may be more favorable depending on your tax situation. Most c-corporations are public entities, meaning they have the ability to raise capital through the stock market. This can be very beneficial if you are trying to grow your photo booth rental business into a large enterprise. Moreover, when public shares are offered, shareholders have the ability to easily buy and sell shares, adding flexibility.
On the contrary, c-corporations are expensive to set up and maintain because of the rules they are subject to. Companies with publicly traded shares must follow subchapter C of the IRC which outlines various different regulations. Moreover, c-corporations frequently experience double taxation at the corporate and shareholder level, resulting in more taxes being paid in.
Finally, corporate losses are not deductible since no income is passed down to the shareholders. Any gains or losses will be recognized when you sell your shares of stock.
Next Steps
Deciding on the right entity type for your photo booth rental business can seem overwhelming, especially with each type having advantages and disadvantages.
Luckily, RevoSpin has teamed up with Legalinc to minimize this burden. The team at Legalinc is knowledgeable about each entity type, guiding you through choosing the right one based on your needs. In addition to assisting you choose the most favorable entity type, Legalinc can help you keep your business in good standing with the IRS through annual reports and filings.
For more information on the next steps to start your photo booth rental business, reach out to the team at Legalinc today.