In this article, we take a look at the different business structures available to tutors starting their own tutoring business to help you find out which is most suitable for you.
In order to ensure the long-term success of your tutoring business, it’s crucial to select the right business structure. The business structure you choose can have a huge impact on how you pay taxes, the amount of personal risk you take on, and more.
An important first step for tutoring entrepreneurs is to review some of the different business structures that are available, from the Sole Proprietorship through to the Corporation. Each business structure comes with its own unique pros and cons, along with different requirements for set-up.
Spoiler alert: For most tutoring entrepreneurs, the best option is going to be the Limited Liability Company, or LLC. Even so, it’s smart to compare and contrast each business structure, and to understand the potential implications for your tutoring company.
The Basic Options: Sole Proprietorships and Partnerships
When you first start generating revenues as a self-employed tutoring business, the government will automatically categorize you as a Sole Proprietorship. This business structure does not create a new legal entity; in other words, you and your business are essentially interchangeable. There is no demarcation between business assets/liabilities and personal assets/liabilities. Additionally, you don’t file a tax return on behalf of your business. You simply declare profits or losses on your personal income tax return, and pay at your normal tax rate.
Partnerships work in pretty much the same way, with one notable exception: In a Partnership, you invite one or more collaborators to manage the company with you, and you split profits between each partner. In other words, when tax time rolls around, each partner will declare their allocation of the profits or losses, and then pay at their individual tax rate.
What About LLCs?
Sole Proprietorships and Partnerships can both be perfectly fine options for tutoring businesses, especially those that are just starting out. However, there are some notable limitations:
- These business structures make it challenging to bring employees on board.
- There is nothing in the way of personal wealth protection, which exposes the tutoring entrepreneur to risk.
- Sole Proprietorships and Partnerships may be perceived as lacking in credibility or professional legitimacy.
For these reasons, many entrepreneurs choose the LLC model. When you register your company as an LLC, you do create a new legal entity. Your LLC is its own distinct thing, with unique assets and liabilities. The upshot of this is that you can keep your personal assets protected, and off the table for litigation or creditors. This is what makes an LLC one of the best business structures.
Why LLCs are the Best Option for Tutoring Entrepreneurs
For a majority of tutoring entrepreneurs, the LLC is the best legal structure. There are a number of built-in benefits, even beyond personal wealth protection.
Administrative Flexibility
One benefit of the LLC is that it allows you a lot of wiggle room regarding how you actually run the company. When you create your Operating Agreement, you can choose to handle day-to-day management yourself, to bring in partners, to hire a team, and even to outsource to a third-party management company. And, as your tutoring business grows or evolves, you can go back and revise your management structure.
Tax Flexibility
LLCs also offer wiggle room with respect to taxation. The default option is to declare profits or losses on your personal tax return, paying anything you owe at your normal tax rate. There is no need to file a separate return for the business itself. However, if this option becomes financially disadvantageous, you can opt into corporate taxation at any time.
How LLCs Can Be Set Up for Taxation
The default treatment for a Single-Member LLC is for the LLC to be taxed just like a Sole Proprietorship. The default treatment for a Multi-Member LLC (2 or more owners) is to be taxed just like a Partnership.
There is also the option for “corporate election”, meaning, an LLC (after filing a form with the IRS) can elect to be taxed like an S-Corporation or C-Corporation.
Having an LLC taxed as a C-Corporation is rare and likely not a good idea. Having an LLC taxed as an S-Corporation can save money on self-employment taxes (a portion of the total taxes paid). However, they are not as simple as some people make them out to be.
First, they are complicated and detailed to set up and maintain (needs accurate bookkeeping, payroll, payroll taxes, and additional accounting). And secondly, they only make sense once there is a consistent $70,000 in net income (per LLC Member). For that reason, it’s best to speak to a tax professional to weigh the pros and cons of an LLC being taxed as an S-Corporation.
As your tutoring business grows, keeping track of financial details becomes increasingly important particularly as you navigate the complexities of LLC management and taxation. In addition to speaking to a tax professional, opting for small business payroll software can help you streamline employee payments, manage tax obligations efficiently, and maintain overall financial health. This will assist you in remaining tax compliant while focusing on your teaching.
Enhanced Credibility
Registering your business as an LLC isn’t necessarily difficult, but it does require you to file some legal paperwork and pay some nominal fees. Doing so is an exceptional way to solidify your tutoring business as a “real” company, not just a side hustle or a hobby. This increased credibility can help you win the trust of clients, future employees, partners, or even investors.
What About Incorporation?
The LLC clearly offers some distinct advantages, yet there is still another business structure that tutoring entrepreneurs might consider. That’s incorporation. Through the incorporation process, you can formalize your company as a Corporation.
Generally speaking, this option makes sense for only the largest tutoring businesses. When you incorporate, you are legally required to issue shares, hold annual shareholder meetings, and provide comprehensive financial reporting each year. In short, it’s a fairly strict regulatory environment, and the compliance demands are likely too much for smaller or mid-sized companies.
How to Register Your Tutoring Company as an LLC
The steps for registering your company as an LLC can vary from state to state. Generally, the process is very doable on a DIY basis, though if you need help you can always seek the best LLC service for your company.
- Choose a name. The first step is to select a name for your LLC, ensuring it isn’t already in use by another LLC in your state.
- Name a Registered Agent. Your Registered Agent is in charge of receiving tax and legal documentation on the company’s behalf. Your Agent must have a physical mailing address in your state. Generally, LLCs hire third parties to serve as their Agents, though some states do allow you to serve as your own Registered Agent.
- Create an Operating Agreement. This is the charter for your tutoring business, denoting how you will allocate managerial duties and profits between you and your partners.
- File your Articles of Organization. This is the legal document that officially creates the LLC. When you file you’ll also need to pay your state’s filing fee, which can be anywhere from $15 to $300.
- Claim an EIN. You can claim an Employer Identification Number from the IRS website. You’ll need one to file taxes or administer payroll.
- Set up a bank account. Make sure you’re using a dedicated business account, not your personal account.
Business Structure is a Key Decision
When you establish your tutoring business, you’ll face many important decision points. Few matter more than the business structure you choose. So, choose wisely and pick the right business formation for you. As you grow, an LLC could likely be the best option to pave the way to long-term tutoring success.
James has been helping people teach English abroad for over twelve years. He’s traveled to over 30 countries, lived in 3, and taught English in Chile and online.
- 123 Popular Christmas Sayings & Phrases in English - September 18, 2024
- 231+ Christmas Words & Phrases With Their Meanings - September 17, 2024
- Why Learn English? 11 Great Reasons to Learn English - September 15, 2024
