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So I have a family member that is a hairdresser.  Up until now she has always worked for others.  She's now about to rent a chair and needs to set up her own business and has asked me for advice.  I have experience setting up an LLC, Sole Proprietorship, Solo-401k, and some other things that are pertinent.  But I'm not an expert in the ins-and-outs of the best approach a hairdresser should take.

Some initial advice she got:
1) Buy liability insurance.
2) Get an EIN.
3) Get a Sales & Use Tax something-or-other (so that she can sell products).
4) Set up an LLC
5) Get a separate business checking account.

Advice items 1-3 made sense to me.

I think that #2 is primarily to facilitate #3, and on that point...

Someone else told her #3 was overkill at her early stage in the game and she could just buy the products at regular price and resell without needing to charge tax again (since she'd be paying tax herself, she wouldn't need to double-charge tax to resell - or something like that - to be honest, I didn't completely follow what this other person advised her on this particular topic).

#4 seems unnecessary to me, because: a) I previously found setting up an LLC to be more complex, more costly, and state-specific (if you move, you have to shut it down and set up a new one in your new state), and from some things I've read, if someone really wants to sue you and can spend the money on it, they can "pierce the veil", and b) Buying liability insurance (even as a Sole Proprietor) gets you all of the advantages that an LLC promises without any of the added hassle/expense.

Also, #5 (getting a separate business bank account) seems unnecessary to me if she's going to be a Sole Proprietorship, since all of the money (personal and business) is essentially comingled anyway, so it's really on her to keep track of the money that she needs to report to the IRS regardless.  So I advised her to start out with just her one bank account and to track her finances closely with a spreadsheet (my method) or some finance software (which might be the better approach, but I don't have any personal experience using any of these apps).

Am I missing anything important?  Have I given bad advice on anything?

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Why would she rent instead of buy?

Renting a chair in the salon business usually means they're renting the spot/chair in the salon for a flat monthly fee so the hairdresser can just pocket everything past the rental fee.

#4 seems unnecessary to me, because: a) I previously found setting up an LLC to be more complex, more costly, and state-specific (if you move, you have to shut it down and set up a new one in your new state), and from some things I've read, if someone really wants to sue you and can spend the money on it, they can "pierce the veil"
Piercing the veil is really overblown. It's very difficult to both establish and to prove. If the formalities are followed and the business transactions kept separate from personal transactions, it's a lot more protective than you are implying.
, and b) Buying liability insurance (even as a Sole Proprietor) gets you all of the advantages that an LLC promises without any of the added hassle/expense.
You have a point, unless the judgment goes over the limit of insurance, or if the insurance is disclaimed for some reason (an exclusion of some kind). Also, LLC protects from contracts and business debts, in addition to tort liability.

Hairdressers are licensed in most places. I doubt any llc will shield you from liability from mistakes. It would help with disputes with venders, etc. But for a one chair operation I doubt it's worth it.

I concur that forming an LLC is overkill. She's cutting hair.

Do the odd numbered ones. Deposit all revenues and pay all business expenses from the business bank account, and take a monthly draw from the bank.
The bank statements, minus the owner's draws, pretty much equals the Schedule C.

BigTR said:   I concur that forming an LLC is overkill. She's cutting hair.
  But what if she's a real barber and uses scissors and shaves with a straight edge blade?  In that case, she could have a seizure while doing so and slice someone's throat.  Seems like then there could be potential for major liability.  Or would several $M umbrella policy probably just cover that as well?

Bend3r said:   BigTR said:   I concur that forming an LLC is overkill. She's cutting hair.
  But what if she's a real barber and uses scissors and shaves with a straight edge blade?  In that case, she could have a seizure while doing so and slice someone's throat.  Seems like then there could be potential for major liability.  Or would several $M umbrella policy probably just cover that as well?

Why do people think an LLC is some magical shield? If you slit someone's throat they will sue you and the business.

scrouds said:   
Bend3r said:   
BigTR said:   I concur that forming an LLC is overkill. She's cutting hair.
  But what if she's a real barber and uses scissors and shaves with a straight edge blade?  In that case, she could have a seizure while doing so and slice someone's throat.  Seems like then there could be potential for major liability.  Or would several $M umbrella policy probably just cover that as well?

Why do people think an LLC is some magical shield? If you slit someone's throat they will sue you and the business.

  Do personal umbrellas cover small biz ? I do not know about stylist, only that they do cover rentals.

scrouds said:   
Bend3r said:   
BigTR said:   I concur that forming an LLC is overkill. She's cutting hair.
  But what if she's a real barber and uses scissors and shaves with a straight edge blade?  In that case, she could have a seizure while doing so and slice someone's throat.  Seems like then there could be potential for major liability.  Or would several $M umbrella policy probably just cover that as well?

Why do people think an LLC is some magical shield? If you slit someone's throat they will sue you and the business.

  I don't, that's why it was an open-ended question.  In the example I was assuming they died and thus it would be relatives suing.

Bend3r said:   
scrouds said:   
Bend3r said:   
BigTR said:   I concur that forming an LLC is overkill. She's cutting hair.
  But what if she's a real barber and uses scissors and shaves with a straight edge blade?  In that case, she could have a seizure while doing so and slice someone's throat.  Seems like then there could be potential for major liability.  Or would several $M umbrella policy probably just cover that as well?

Why do people think an LLC is some magical shield? If you slit someone's throat they will sue you and the business.

  I don't, that's why it was an open-ended question.  In the example I was assuming they died and thus it would be relatives suing.

  
I would say you could have LLCs layered in Corporations and then some. End of the day, if a situation like that happens both the "employer" and employee are being sued. No veil is going to help that. Umbrella will as long as it's a business umbrella (or business liability insurance).
 

Bend3r said:   
scrouds said:   
Bend3r said:   
BigTR said:   I concur that forming an LLC is overkill. She's cutting hair.
  But what if she's a real barber and uses scissors and shaves with a straight edge blade?  In that case, she could have a seizure while doing so and slice someone's throat.  Seems like then there could be potential for major liability.  Or would several $M umbrella policy probably just cover that as well?

Why do people think an LLC is some magical shield? If you slit someone's throat they will sue you and the business.

  I don't, that's why it was an open-ended question.  In the example I was assuming they died and thus it would be relatives suing.

LLC's provide limited liability for the business. It does not provide such protection for the personal actions of an owner-employee. Since an owner-employee providing services needs liability insurance anyway, liability is not a good reason in such cases to get an LLC. If there are legitimate business reasons to have an LLC. do so. However, the majority of owner-employee service businesses are perfectly fine operating as a sole proprietorship with liability insurance protecting both the business and the actions of the owner-employee.

However, I am going to most definitely disagree with the OP. Get a separate business checking account and a separate credit card and diligently separate business and personal expenses. If you can't manage this simple task, you can't manage a business.. 

btuttle said:   Get a separate business checking account and a separate credit card and diligently separate business and personal expenses. If you can't manage this simple task, you can't manage a business..
 

I'm going to disagree with that last sentence, because it was a bit harsh and oversimplistic.  If your finances are co-mingled, this allows you to be much more creative come tax-time.  Perhaps a given purchase wasn't made expressly for the business.  But as the business owner gains experience in such matters, by the end of the year she realizes that it was an ordinary and necessary expense for similar businesses, and the deduction would likely survive an audit.

irate_retro said:   
  If your finances are co-mingled, this allows you to be much more creative come tax-time.  Perhaps a given purchase wasn't made expressly for the business. 



irate_retro said:   
btuttle said:   Get a separate business checking account and a separate credit card and diligently separate business and personal expenses. If you can't manage this simple task, you can't manage a business..
I'm going to disagree with that last sentence, because it was a bit harsh and oversimplistic.  If your finances are co-mingled, this allows you to be much more creative come tax-time.  Perhaps a given purchase wasn't made expressly for the business.  But as the business owner gains experience in such matters, by the end of the year she realizes that it was an ordinary and necessary expense for similar businesses, and the deduction would likely survive an audit.

  
As a practical matter, hairdressers are horrible bookkeepers. (more likely, they keep no records at all, and find themselves guessing at tax time...well, my rent is $400 a month, and my revenue is about xxxx...)
If they co-mingle business money, it's likely they cannot track their business expenses. Not to mention their accountant will charge them a lot less for a check register and a stack of bank statements than he will for a shoebox full of junk. In the example you cite, if the business owner realizes after the fact that something should be included as a business expense, how does having separate business finances prevent her from adding that one receipt to the expenses?

taxmantoo said:   In the example you cite, if the business owner realizes after the fact that something should be included as a business expense, how does having separate business finances prevent her from adding that one receipt to the expenses?
 

Certainly it doesn't prevent moving a receipt from here to there.  (In fact that's exactly what I'm advocating.)  But now you no longer have everything in a separate bank account and on a separate credit card.  Which was the topic of the comment I was replying to.  You could reimburse yourself with a check, but then you may run into problems with the dates that are there for all to see.

Also consider if you had a "mostly separate" bank account.  But all of the borderline expenses just "happened" to come out of your personal account that year.  That would make me very uncomfortable when called before the Man.  Best to have things all mixed up in the first place so they can't try to use things against you... why provide them with a road map.  One must be meticulous with their own internal accounting of course.

Bend3r said:   
BigTR said:   I concur that forming an LLC is overkill. She's cutting hair.
  But what if she's a real barber and uses scissors and shaves with a straight edge blade?  In that case, she could have a seizure while doing so and slice someone's throat.  Seems like then there could be potential for major liability.  Or would several $M umbrella policy probably just cover that as well?

  Edward Scissorhands didn't form an LLC during the movie.  If that guy didn't form one, I'm not sure who would need to.  

irate_retro said:   One must be meticulous with their own internal accounting of course.Yeah, your thinking is in line with my original thinking. But this last sentence of yours is key. And in the case of my niece, I don't have a lot of faith that she'll be meticulous with her internal financial tracking. As such, I've since revised my recommendations to her and recommended that she maintain a separate bank account for her business expenses.

Another question: She's probably going to get set up with Square to be able to take credit cards. I know that there are probably much better deals out there in terms of the finance charges/fees, but for her situation, the ease and low cost of setup for Square probably makes sense. But I know that there are a couple of other competitors to Square. Anyone have any particular recommendations, pros/cons of the various options, etc. (or can point me to a good website that does this)?

So I did a little research on Square and some of the competition (PayPal Here is pretty similar), and one thing I'm confused by is the whole chip reader thing. The free Square thingy just does magstripe, but they have a couple of pricier options which can handle chip cards. What I'm unclear about is what, exactly, a small business is required to support right now. All of my chip cards also have a magstripe and I still come across several large chains whose card swipers don't support the chip readers. So can my niece just use the free Square magstripe version for now? I'm thinking that there's probably some drop-dead date where everyone is required by law to use the chip readers, but I had trouble finding that info by Googling.


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scrouds said:   
Bend3r said:   
BigTR said:   I concur that forming an LLC is overkill. She's cutting hair.
  But what if she's a real barber and uses scissors and shaves with a straight edge blade?  In that case, she could have a seizure while doing so and slice someone's throat.  Seems like then there could be potential for major liability.  Or would several $M umbrella policy probably just cover that as well?

Why do people think an LLC is some magical shield? If you slit someone's throat they will sue you and the business.

You only need a chip reader to protect yourself against fraud. I mean we all know that the first thing a crook does when he steals/clones a credit card is to go get his hair done.



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