So, you have decided that you want to take your fashion business seriously. The first step in doing that is to transform your side hustle into a legitimate business recognized by US law. You have a lot of options when deciding the business formation for your fashion outfit.
It could be a sole proprietorship, Limited Liability Company, corporation, or partnership.
A sole proprietorship is the simplest business form you can use for your fashion outfit. When establishing a sole proprietorship, you don’t need to file a lot of documents, compared to the other business types.
However, the drawbacks for a sole proprietorship is that you will be personally liable for any debt or other liability your fashion business incurs.
Despite the fact that you have a fashion business, it doesn’t mean that you can’t have a separate registered business name and trademark for your fashion business.
Limited Liability Company LLC
If you want to get more personal protection while operating your fashion business, I suggest that you establish a Limited Liability Company (LLC). In a limited liability company, you won’t be liable personally for any debt or expenses your fashion business incurs.
The only time this won’t apply is in the case of fraud or other criminal activities.
To incorporate an LLC, you need to establish a business name. In addition, you need to create some documents called articles of association. These documents determine things like each owner’s share in the profits of the fashion business, responsibilities, and voting power.
If you want to take your fashion business a step further, you can establish a corporation. Corporations are just like a more complex version of LLCs. The additional complexity comes into play when you consider things like taxation, accounting, and other documents.
You shouldn’t start your fashion business as a corporation unless you want shareholders or your business partners will only work with a corporation. You can start as an LLC and then transform into a corporation when you become large enough.
You can establish your fashion corporation as C Corp or S Corp.
For a C Corp, all the earnings the business make will be kept with the company till it is paid out to workers and officers as wages and salary. The money kept by the corporation has a lower tax rate compared to the wages and salary. This means that a major drawback of a C Corp is double taxation.
On the other hand, an S Corp is a pass-through corporation. This means that the Income, losses, credits, and deductions pass from the corporation to the shareholders. Shareholders report them in their personal income tax filings. Meaning that there is no double taxation for an S Corp.
A partnership is a business formation with multiple people involved as partners in the fashion business. It can either be a general partnership or limited partnership.
A general partnership is one where all the partners have equal control over the business and are liable for the losses and debts of the company.
A limited partnership is one where there is a managing partner who is responsible for the day to day running of the business. The other partners in this type of formation are only liable to the extent of their investment in the partnership.