One of the ways massage therapy business owners can see increases in profitability and lower tax liabilities is to choose the correct business structure, depending on their needs. Each structure retains key characteristics when it comes to taxation, growth opportunities, capital-raising potential and continuity, making it vital to choose the correct structure for your business.
Massage therapy is in demand—and right now, there is a gap between that demand for massage sessions and the number of therapists available to provide them. Further, the Bureau of Labor Statistics predicts a 20% growth in the massage therapy industry between now and 2031.
This means right now is the perfect time to open a new massage therapy business or take your current business to the next level.
The Sole Proprietorship Business Structure
A sole proprietorship is one of the most common structures small-business owners select. The top advantage of a sole proprietorship is the ease of setting up this structure, as there is no need to apply for a federal Employer Identification Number (EIN).
In addition, there is no need to register a sole proprietorship business with your state unless you are trying to secure exclusive rights to your business name.
In a sole proprietorship, all income or loss is reported on the individual tax return on Schedule C. This is because there is no separate legal entity and you are the business. This can be favorable since you won’t need to file a separate business return and you can operate based on the same tax year. You are the sole owner of a sole proprietorship business, meaning you will report 100% of the income or loss generated, but you can take business deductions and credits to reduce your taxable income.
However, there are disadvantages of sole proprietorship status. First, there is expanded personal liability in the business: Because there is no distinction between you and the business, your personal assets may be on the line if your business is sued. For this reason, it is essential that you maintain a comprehensive liability insurance policy. In addition, there is no ability for capital-raising activities outside of personal loans, as sole proprietorships are not able to bring on partners. Being taxed as a sole proprietorship can also represent a disadvantage depending on the other items present on your tax return. Sole proprietors are considered self-employed, subjecting them to self-employment taxes.
The Limited Liability Company Business Structure
There are two main types of limited liability companies: single-member and multi-member.
Single-member LLCs are taxed in the same manner as sole proprietorships, with all income or loss being picked up on the individual tax return; however, you are generally required to open a legal business in the state you operate in.
This creates a legally separate entity from your personal assets and increases liability protection. You are able to claim business expenses, but you will pay self-employment taxes on your net income, just like a sole proprietorship.
Moving up the complexity scale is a multi-member LLC. This business entity type retains similar characteristics to a single-member LLC, but there are two or more members in the business. This means each member will split income or loss according to a predetermined agreement. This structure can be beneficial if each member is contributing assets or expertise to the business, providing greater opportunities for expansion.
Due to multiple individuals being involved in a multi-member LLC, there is a need to file a separate business return, which requires applying for an EIN and registering with state legislators. The business tax items will flow through to the individual tax return on Schedule K-1. Members in this entity type are considered general partners, unless they elect to change their taxation method, subjecting most income to self-employment taxes.
The Partnership Business Structure
Massage therapy business owners who are looking to add another specialist to their business can benefit from a partnership. Sometimes having others to bounce ideas off of is a great way to promote business growth.
The partnership business entity structure is a legally separate business from the owners, requiring a partnership tax return to be filed each year. Like the multi-member LLC, the income will flow through to your individual tax return.
Partnerships provide added safeguards when it comes to liability risk and give access to capital-raising activities through additional partner contributions. Setup costs still remain low while your borrowing capacity increases with more partners entering the business.
Partnerships do come with greater filing requirements, from estimated tax payments to filing annual returns. Nevertheless, this structure does come with expanded tax planning strategies with the ability to minimize personal tax liability by electing to pay state taxes at the business level.
Moreover, partnerships can have general and limited partners. Limited partners are only liable for business debts up to their investment threshold, while general partners may be required to contribute personal funds to take care of the business’s debt. One of the top disadvantages of partnerships is everything must follow the outlined agreement. This includes all distributions from the business. Partners can’t simply go withdraw $1,000 from the business checking account without approval from all other partners, for example. This can create issues if disagreements arise. Leaving the partnership can also be tricky, especially if you are a general partner.
The S-Corporation Business Structure
S-corporations are a step beyond a partnership. Like a partnership, s-corporations provide significant asset protection and allow for pass-through taxation. This can result in a reduced tax bill, depending on the other tax-return items. The entity-level tax election is only in place for state returns, meaning any federal income or loss will be picked up on your individual return.
One of the top reasons for choosing an s-corporation is flexibility when it comes time to exit the business. This business type works based on shares, meaning you can easily sell or transfer your ownership to a different individual. This is especially important in estate planning and passing the business down to the next generation.
S-corporations are still corporations, making the business subject to additional rules and regulations designed specifically for corporations. Additionally, there are strict distribution rules, leading to potential capital gains taxes when you exceed a certain amount. The IRS also closely monitors s-corporations to promote compliance, giving you a higher chance of receiving an audit request or letter in the mail.
Furthermore, depending on the different benefits you take in the company, you may need to report taxable fringe benefits. This includes the company paying for your health insurance or personal use of a company vehicle. This has the potential to increase your tax bill at year-end.
The C-Corporation Business Structure
Another type of business entity to consider for your massage therapy business is a c-corporation. This is the most complex business structure, with numerous rules and regulations you must precisely follow to avoid fines and penalties. C-corporations report and pay all taxes at the corporate level, passing nothing down to your individual return. This may result in a more favorable outcome depending on current corporate tax rates.
Corporations also have complete separation of business and personal liability, significantly reducing the risk of personal liability. In addition, selling shares is simple and can often be done immediately, depending on where shares are traded. There is a greater ability for tax credits and deductions at the business level. The major drawback of a c-corporation is the high level of ongoing care for the business, which can be costly. From submitting an annual tax return to filing monthly reports, the IRS closely watches your business for compliance. Moreover, many recent legislative changes are aimed at corporations, making this structure very susceptible to new rules and regulations.
Choosing the Right Business Structure for Your Massage Practice
What is the right choice of structure for your massage business? Choosing the right business structure is vital to enjoying various tax advantages, but you aren’t locked into the structure forever. Although you may need to close the first business and start a new one to change structures, it’s not an unmanageable task.
First, decide if you want to bring on partners or if you want to handle the business solo. Keep in mind that bringing on partners is not the same as hiring employees. Employees work for you while a partner works with you. If you are looking to have a partner, you won’t be able to choose a sole proprietorship or single-member LLC.
Next, consider the goals for your business. Are you looking to run a small massage therapy business or expand nationwide or even globally? Small businesses benefit most from a sole proprietorship or single-member LLC, while growing businesses should consider another type of structure.
Finally, consider how you want to be taxed. Most business structures pass taxes to the individual return, but you may also be subject to self-employment taxes. Corporations are one of the only structures that does not come with self-employment taxes; however, you may be required to take a W-2 to receive funds out of the business.
You Aren’t Locked Into a Business Structure
Understanding the various business structures and choosing the right one for your massage therapy business can be tricky. This is why it’s important to work with a qualified financial professional from the start.
And remember—you aren’t locked into any one structure forever. Although you may need to close the first business and start a new one to change structures, that is not an unmanageable task.
About the Author
Lozelle Mathai, MBA, CFEI, is a financial accountant with over 18 years of experience in the field of financial management and accounting. She is the owner of The Body of Accounting, a division of Closing Your Books LLC. The Body of Accounting is an accounting consultancy firm that educates massage and bodywork business owners on how to manage, maintain and understand their business finances, including how to determine the best structure for their business.
