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Best Business Entity for Laundromats: LLC vs S-Corp vs C-Corp — Transcript

by Laundromat Ownership · 2,855 words · 474 segments · language en · Watch on YouTube

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0:05Hello and welcome to the Laundromat
0:06Ownership Podcast. I'm your host Ian
0:08Gallaher. Me and my business partner
0:10Brian Henderson own Liberty Laundry in
0:13Tulsa, Oklahoma, and we also own the
0:15original point of sale system for
0:17laundromats, Wash-Dry-Fold POS, which is
0:19a software company.
0:21Today, I want to talk about sole
0:24proprietorships, LLCs,
0:26LLCs filing as S corps, and
0:29incorporations or corporations filing as
0:31C corps.
0:32Uh I've actually owned all of these
0:34businesses in all of these different
0:36kind of states of my career
0:39or phases of my career, I guess.
0:41And uh none of this is legal or tax
0:44advice, but hopefully I can uh tell you
0:47a few of the things that I've learned,
0:49and some of which I've just weren't
0:50learned recently that I kind of wish I
0:52had known
0:54years ago.
0:55So, uh
0:57before we get too deep into the things
1:00that are super applicable for every
1:02laundromat owner,
1:04I do want to talk about sole
1:05proprietorships just real quick because
1:08actually the average person that listens
1:10to this podcast and just the average
1:12American
1:13is going to be by far most likely to
1:16open a sole proprietorship.
1:18And what is that really? Well, if you're
1:22doing any business that is not via an
1:25employer,
1:27and so you are technically then
1:28self-employed, so you're doing the
1:30business. Let's say you're
1:32buying something at the store and then
1:33selling it on the corner of the street,
1:35lemonade stand style, right? That is a
1:38technically a sole proprietorship. The
1:39IRS wants you to claim that income,
1:42and
1:43uh they want you to claim it as a sole
1:45proprietorship if you have not set up
1:47any other kind of business structure.
1:49And so,
1:51it is a form of business, and the IRS
1:54recognizes it as a common uh business
1:56entity,
1:58but it's kind of almost the lack of a
2:00business entity, too, because anything
2:02you do with revenue needs to be claimed
2:04and needs to be filed with the IRS. And
2:06if you don't do anything else, then it's
2:07a sole proprietorship. And so, uh
2:10whether you've claimed it or not or
2:11whether you've uh uh
2:13you know, ever started a business, you
2:14probably still started a sole
2:16proprietorship or you might one day.
2:20Filing an LLC
2:22is what you do when you have assets to
2:24protect, and it's what you do when you
2:28don't want to be sued personally for
2:29slip and fall. Sole proprietorship, most
2:33common, most underrated.
2:36I'm sure I've had four or five over my
2:38lifetime. I used to play music as
2:41you looking on YouTube might see that
2:42little record way up there. Um you know,
2:45I uh for the bird photography, I do bird
2:47photography. Um I spend money on
2:51cameras and that kind of stuff. And so,
2:54those are little sole proprietorships.
2:56Now, I've never had a bird sue me. I'm
2:58not worried about a bird suing me. And
3:01so, they're really even though I do have
3:02assets to protect,
3:04there's no reason to form an LLC around
3:06that entity, because essentially what
3:09that entity does is buy cameras, take
3:12pictures of birds, and then I could sell
3:14prints online, that kind of thing. So,
3:17that's an example of an entity that an
3:20LLC would probably be overkill for,
3:23and that a sole proprietorship would be
3:26you don't really have to do anything to
3:27start a sole proprietorship except for
3:29track your receipts and do some real
3:30basic accounting, and then basically
3:33file it in your tax return. And you're
3:35even required to do that if you have any
3:37kind of income. So, if you did sell some
3:39prints, for example, you need to be able
3:41to uh report that income. I'm just going
3:44to skip over partnerships real quick
3:45because
3:47a multi-member LLC is what you're going
3:49to do if you you another business
3:50partner in the laundromat space. There
3:52is zero reason or zero chance that you
3:56would want to do a general partnership,
3:58which is like a non-LLC partnership, for
4:01laundromat. That would be psychotic. So,
4:04and I've never ever run across and I've
4:06talked to 3,000 laundromat owners, I've
4:08run into three or four sole
4:09proprietorships. Everyone else was an
4:11LLC or corporation. I've never run into
4:14a partnership, that would be crazy. So,
4:16there's no reason to even talk about
4:18that.
4:19But, I'm going to get on to LLC, which
4:21is by far the most common um form of
4:25entity that owns a laundromat.
4:27Um
4:28and you do want to have this created
4:32before you actually close on the deal,
4:33because the LLC is the structure that is
4:35going to
4:37uh own the the lease. If you have a slip
4:39and fall, if somehow you lose your shirt
4:41on this, you've only lost what you've
4:44invested in the company. And so, an LLC
4:46at least helps you create a vehicle that
4:49is separate from yourself
4:51that is registered and has its own limit
4:53of liability as it as an operational
4:56structure
4:58that is separate from you, the person.
5:00Right? Because you, the person, may have
5:03income or assets that you want to
5:05protect
5:07and you want to keep that separate from
5:09the laundromat. That's why you spend the
5:11200 bucks and you get an LLC at the
5:14local state department. It's not hard,
5:16it's not complicated. You don't need to
5:18hire anyone to do it, you can do it in
5:20an hour.
5:21If you want to hire someone, fine. It's
5:23not hard, though.
5:25So,
5:26that is the basic idea for the LLC and I
5:30think most of the listeners probably to
5:32this podcast, if you own a laundromat,
5:34you already have an LLC.
5:36So,
5:37what about an S corp? Why would you file
5:40as an S corp? Now, people get really
5:42confused about this. You might say, "Do
5:44you have an LLC or an incorporation?"
5:47And they would say, it's an S corp."
5:49That's kind of like saying, uh
5:51"Do you want chicken or steak for
5:53dinner?" And you say,
5:55uh
5:56"I want pudding for dessert." Okay,
5:57well, fine, but that's not what I asked
5:59you because
6:01an LLC can file as an S corp and an
6:04incorporation can also file as an S
6:06corp. So, an S corp is a tax
6:10filing status.
6:12An LLC and a corporation, that is a
6:15business entity. So, the IRS says the
6:18most common ways to file a business is a
6:21sole proprietorship, a partnership,
6:25an LLC,
6:27or corporation. Um
6:30S corp is not listed in there because
6:32that's not a business entity, it's a tax
6:34filing status. So,
6:37when you are an LLC, why would you file
6:41as an S corp?
6:43This is so complicated and hard to
6:45understand, so if you've never fully
6:46grasped it,
6:48I do not, um
6:50judge you one bit. And in fact, I had to
6:53own an S corp for several years before I
6:55really got my head around it and didn't
6:57have to think about it every time I
6:59thought about it.
7:01So,
7:02let's say you do and and the cutoff
7:04point, people say 60,000. I see I see
7:07ads that say, "If you're doing 60,000 or
7:09more net profit, then
7:11get an uh file as an S corp and you can
7:13save all this money."
7:14I think that is marketing. I think you
7:16need at least $80,000 worth of profit,
7:19probably 100,000. And if it's a
7:21multi-person LLC, it may need even more.
7:24So,
7:26let's say it's a one-person LLC,
7:29one-member LLC,
7:30and you're doing $100,000 in net profit.
7:34Uh I'm not talking about gross profit.
7:36I'm not talking about,
7:38you know, before all the bills. I'm
7:39talking about you are paying yourself at
7:42the end of that year $100,000.
7:44Great. Wonderful.
7:48People that don't own laundromats or
7:49that have never owned a small business
7:50don't know the uh
7:53the terrible little secret here that
7:55you're going to pay normal income tax
7:59on
8:01that $100,000 just like you would if you
8:03got it from a company, right? So, let's
8:05let's call it 30%, 25%, something like
8:08that.
8:10And then you pay an extra 15%. Why?
8:15Because you're self-employed.
8:17If that doesn't sound fair,
8:19uh
8:20IRS doesn't care what you think sounds
8:21fair.
8:22That's just the way it is.
8:24You're paying the income tax that you
8:25would normally pay, and then you're
8:26paying what's called a self-employed
8:28tax, and that's another 15%. If that
8:31sounds crazy,
8:33you know, I don't know what to tell you.
8:34That's just Don't forget you pay sales
8:37tax every time you buy something, and
8:38and there's all kinds of other taxes
8:40that you're paying for, too, like when
8:41you go to the doctor or when you renew
8:43your tag on your car.
8:45That's just life. I can't do anything
8:47about that. However,
8:50let's say you are a single-member LLC
8:53and you're making $100,000 net income.
8:57You could
8:58argue or you could structure it.
9:02You could say, "I'm going to file as an
9:03S corp."
9:05You have to then do payroll. You have to
9:07do these quarterly payroll
9:09payments through a company. I've heard
9:11some people do it on their own, but it's
9:13a lot of work. It's easier to just hire
9:14a payroll company to do it for you.
9:17Um and basically you have to withhold
9:19from each paycheck.
9:21And you essentially have to literally
9:23hire yourself as an employee. So, now
9:25not only are you the owner, but you are
9:26also an employee of that LLC.
9:31And here's where it gets confusing.
9:32People would say, "Okay, as an employee,
9:35I've employed myself as an owner.
9:38Um so, let's say my salary is going to
9:40be
9:41um $40,000 because that would be the
9:44salary of a laundromat manager, $40,000
9:47a year.
9:49And remember, there's $100,000 net
9:51profit that you're paying yourself every
9:53year.
9:54As an LLC, single-member LLC, $100,000
9:57net profit.
9:58Now, you're saying, "I'm going to be an
9:59S corp
10:01and I'm going to pay myself
10:02I'm still going to pay myself that
10:03$100,000, but I can pay myself $40,000
10:07per year as an employee."
10:09Well, on that $40,000, you still pay
10:11your income tax and you still pay your
10:14self-employment tax. So, you got to pay
10:16that extra 15% still.
10:19But, on the $40,000 that is your salary,
10:22the $60,000
10:24that is essentially at this point a
10:26distribution is exempt from the
10:27self-employment tax.
10:30So, you could see
10:32let's say it's a large structure that
10:34does um a million dollars plus in net
10:36profit,
10:37you could see how paying yourself 40,
10:3950, 60,000 dollars, whatever it is that
10:41makes sense for the let's say you're a
10:44laundromat manager,
10:47well, then you're only paying
10:49that self-employment tax and the regular
10:53income tax, so you're getting double
10:54taxed on that salary.
10:57But, then let's say you had another
10:58900,000 that you were going to
10:59distribute to yourself,
11:01um that is now a distribution that the
11:03LLC paid you and that is exempt from the
11:07self-employment tax.
11:08And so, 15% of 900,000 is a lot of
11:11money, right? It's $100,000 plus. So,
11:15you would save an an enormous amount per
11:18year.
11:19And we figured this out a little bit
11:21later than probably we should have,
11:23but we eventually became S corps both as
11:27a
11:28um
11:28software company
11:31and as a laundromat.
11:33Um so, it is the most tax-efficient
11:36vehicle
11:39if you are going to pay yourself a lot
11:41of money over a long period of time as
11:42an owner.
11:44And that is the mission of every not
11:46every laundromat owner, but of most
11:48laundromat owners is you buy it
11:51and it just becomes a cash cow that you
11:52pay yourself net profit on every year.
11:55And the most
11:57tax-efficient vehicle for that by far is
12:00an LLC filing it as an S corp.
12:04If you were an LLC filing as a C corp, I
12:06can't think of a single advantage of
12:07that for a laundromat. If you're going
12:09to flip that laundromat in 5 years or
12:11less, you should probably consider being
12:14a corporation
12:16so that you can sell with lower tax
12:19liability at the end of it under the
12:20QSBS laws.
12:23If
12:24you don't know when you're going to sell
12:26or if you're going to hold it for a very
12:27long time, which is more common for a
12:29laundromat, especially since laundromats
12:31typically don't sell at high valuations
12:33of multiples. I've got a whole other
12:34series on that. Not going to get into
12:36that, but they're not typically very
12:38high growth or very high multiple type
12:41of businesses.
12:43So, that's why it's so uncommon to see
12:44laundromats as incorporated businesses
12:47or C corps. I have seen it over the
12:50years and it typically is from
12:52distributors who are buying a
12:54laundromat. They know they're going to
12:56hold it for 5 years as like their
12:57showroom laundry piece or whatever and
13:00then they're going to try and sell it to
13:01a public company um not as an asset
13:03sale, but as actual stock as a
13:06corporation.
13:08So, C corporations
13:12or rather corporations filing as C
13:15corps.
13:17When you're filing with that tax
13:19structure
13:22you are getting taxed on
13:26a corporate tax level, so every amount
13:28of net revenue that that corporation
13:30has, that gets taxed once.
13:33And then you have to pay taxes again
13:36on those dividends that come in just
13:38under your normal income tax. So, you
13:40get taxed
13:41at two levels.
13:44versus with an S corp, remember an LLC
13:47filing as an S corp, they get taxed more
13:49on what the salary is. Remember we we
13:51talked about that 40,000 or maybe it's
13:5360,000, depends on your area. That
13:55salary that you're paying yourself,
13:59you get taxed on that one twice. You've
14:00got that 15% self-employment.
14:03And then the rest of those
14:04distributions, you really only get taxed
14:05on once because you take them all out
14:07and you just get that standard income
14:09tax. That's That's just part of your
14:11standard income.
14:13The big takeaway from this is
14:16if you're going to own a laundromat for
14:18a very long time and you're going to
14:19take a lot of cash out of it for a very
14:21long time, and that is the main value
14:23proposition of that laundromat,
14:26is to run it in a cash-efficient way and
14:28then pay yourself with the cash,
14:30then an LLC filing as an S corp
14:33is the most tax-efficient
14:36vehicle once you pass a certain amount
14:39of profit. To I would say 100,000.
14:42If you're under that 100,000, just file
14:45as an LLC. I'll kind of review them all
14:48again. I think the sole proprietorship,
14:50probably the most common,
14:52stay there until you
14:54until you really have a good reason to
14:55go to LLC.
14:57Then once you hit LLC, stay there until
14:59you're doing $100,000 or more of profit
15:02per member of the LLC.
15:05And
15:06you you might talk to an attorney about
15:08that or look at a calculator, but that's
15:10those are rough numbers.
15:12And then
15:14once you do that, once you have that
15:15much net profit, move to an S corp.
15:17These are kind of different seasons of
15:20of a business. And some
15:23won't ever make it to LLC. They'll just
15:25stay as as as sole proprietors. Some
15:27LLCs will never have more than $100,000
15:30in net profit, and they'll never need to
15:31go to S corps.
15:33Some S corps
15:35will never be in a place where they're
15:36going to sell for some
15:38significant multiple. And so that they
15:40wouldn't need to necessarily convert to
15:42a C corp or an incorporation and then do
15:45that QSBS thing.
15:47And so that's kind of how I would look
15:49at it as a evolution of a brand or of a
15:53of a business over time.
15:56And broadly um
15:58sole proprietorship
16:01you don't have to do anything to have
16:02one of those. LLCs like $200 with your
16:05state. I mean, I think the price is very
16:06based on which state you are in, but
16:08it's very easy and simple to uh
16:11found and maintain.
16:14It protects your personal assets.
16:18S corp is the same thing. You still get
16:19all the protection, but then you
16:21actually pay reduced taxes when you
16:22self-employ yourself and then take the
16:25rest out as distributions.
16:28And then the
16:29incorporated is really
16:32only beneficial
16:34if you have outside investors, which
16:37very rare for a laundromat, but if you
16:39have a bunch of outside investors. So if
16:41you take venture capital or any kind of
16:42outside capital, that's almost always a
16:44C corp. But if you know you're going to
16:45sell at some point, it's not just going
16:47to stay in the family forever, that's
16:48when you might consider
16:50going to a C corp. And then you're
16:53actually selling the shares of the
16:54business, and it's not an asset sale in
16:57that um situation. It's actually a stock
17:00sale. The stock The assets are tied to
17:02the stock.
17:04And then the stock sale is what you get
17:05the preferential tax treatment on.
17:10Hope this was helpful to someone out
17:11there. We've got more great episodes
17:13with more great content coming soon.
17:14Thanks.
17:20>> Yes.

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