by Ashley Mott, Demand Media for Small Business Chon.com
A beauty salon can be classified as several different business types depending upon the reasons why a characterization of the business type was requested. A beauty salon’s business ownership type allows for six possible answers, while the type of industry a beauty salon belongs to requires a set answer that can be expanded upon to further describe the type of services a particular salon offers.
Business Ownership Types With Pass-through Taxation
The sole proprietorship, partnership, limited liability company (LLC), limited liability partnership (LLP) and limited partnership (LP) business-structure types allow salon owners to calculate the salon’s profit or loss from business and then pass on the net profit or loss to personal tax returns as income. An independently owned salon may choose a sole-proprietorship structure when the limited personal liability provided by an LLC is not necessary. Likewise, partners in a salon business must choose between a regular partnership or an LLP. Because so many aspects of business structure are left to choice, the business ownership type a salon uses may not be evident, particularly if it operates as a sole proprietorship or partnership. However, many states feature a searchable database of LLC, LLP and LP registrations on the Secretary of State’s website that can help rule out these business types or determine an individual salon’s ownership structure.
A salon organized as an S-corporation benefits from pass-through taxation. Shareholders in S-corporations report the losses and earnings of the salon on individual income tax returns, and pay taxes at a personal tax rate based on individual income versus the corporation’s net earnings. The S-corporation structure is open to a salon with between one and 100 shareholders, and also provides limited liability as well as potential payroll tax savings. The IRS considers salons with a C-corporation ownership type as separate, taxable entities. It also taxes the dividends the C-corporation distributes to shareholders. Both corporation types are searchable in Secretary of State databases. However, many incorporated salons voluntarily identify themselves as corporations on brand websites, in trade publications and in official correspondence.
Some beauty salons operate as part of a larger salon franchise. Opening a salon under a franchise agreement carries a fee but allows the owner to start a business with immediate brand recognition. When a beauty salon belongs to a franchise, the salon is known as a franchisee of the larger brand. The distinction that exists between operating as part of a franchise and operating as an independent beauty salon with a unique trade name creates two different types of salon businesses. It is important to note that the type of business a salon owner chooses does not obviate the need for choosing a business ownership type.