structuring your business:

CHOOSING THE ENTITY

THAT’S RIGHT FOR YOU
By Robin Abrett

O
ne of the most frequently asked questions I hear from my and confusing crossover between your personal and professional
tax clients is how best to structure their businesses. As a lives. Although it isn’t required for a sole proprietorship, it is still
self-employed Yoga teacher or therapist, you have several a good idea to apply for a federal ID number. If you ever have any
choices: a sole proprietor, a partnership, or a corporation. But how employees or sell products (and need to file a sales tax return), you
do you decide which direction to take? This article takes a look at will need a federal tax ID.
some of the benefits of each option. Keeping good records is a must. I suggest using accounting
To do so, let’s consider software and maintaining a
the options of Heather, a Yoga written diary of your jobs,
teacher with her 200-hour your travel mileage, and other
certificate. She’s ready to start business-related expenses. At
teaching and knows she wants year’s end, file the diary with
to call her business Every your other tax papers, including
Bodies Yoga. She has heard your copy of the tax return. I
it’s a good idea to create this like to staple my receipts into
business as something called the diary. The better your record
a limited liability company, keeping, the less likely you are
or LLC. LLCs offer a layer of to miss a deduction. And if you
liability protection formerly are audited, your records are all
available only to corporations, in one place.
and the owner does not need As a sole proprietor, all
a business partner. However, business income is reported
this type of business entity can in your individual tax return.
be structured in several ways, Your taxable business income
so Heather needs to figure out is based on your gross revenues
which will be best for her. minus any deductible business
expenses. (A form called a
SOLE PROPRIETORSHIP Schedule C contains all this
Being a sole proprietor is an easy information and is attached to
“in and out” form of business your individual tax return.)
and a great place to start. A sole One business expense that
proprietorship is a good choice I am always asked about is
if you teach a few classes a teacher training and continuing
week for other facilities, such education. Whether you are a
as gyms or community centers, sole proprietor, a partnership,
as an independent contractor or a corporation, the rules are
(as opposed to an employee). the same: any continuing edu-
After consulting with her cation program is a deductible
accountant, Heather decides to business expense. The cost of
form her LLC as a sole proprietorship. There are few forms to file, the class, the travel to get to the program, and meals and lodg-
it is relatively easy to register, and you are not required to have a ing directly related to the training time are all business expenses
federal tax ID—your social security number serves that purpose. if these classes are continuing education rather than a change in
What are you required to file to set up a sole proprietorship? profession. Keep good records, save all receipts. and clock your
Every state is different, so be sure to check with your state and mileage and associated travel costs. If you have your basic train-
county departments of revenue for their filing requirements. For ing (200 hours) and you are taking the courses for your 500-hour
instance, in my state of New Jersey, sole proprietors must register certificate, you are not changing professions but furthering your
trade name papers with the state as well as local county clerks. existing career, and therefore all of those courses are a business
The state issues you a form called a “certificate of authority” under expense. A three-hour chanting workshop is an expense, as is the
your business name, and once you are properly registered with your week-long pranayama class. However, if you are just starting your
county clerk, you can open a separate business bank account. A teacher education by taking your 200-hour training, you are in a
business bank account is strongly recommended to help you keep sense changing professions (to become a Yoga instructor), and that
good records, track deductible expenses, and avoid any unnecessary class expense is not deductible.
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International Association of Yoga Therapists
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As a self-employed business owner, you will pay estimated
quarterly income taxes. Be sure to sit down and discuss all this
with your accountant to plan correctly and to avoid any unexpected
surprises when you go to file your tax return. Quarterly taxes are
due April 15th, June 15th, October 15th, and January 15th. In most
cases, you are paying four quarterly payments that in total equal
last year’s tax to avoid underpayment penalties. If your income
varies greatly year to year, you will need to sit down with your
accountant and review all of this information.
If you primarily work for other studios and facilities as an
independent contactor, statements of your self-employed taxable
income will be provided to you and to the IRS on 1099 forms at the
end of the year. You are responsible for paying a self-employment
social security tax for this income in addition to ordinary income
tax. The social security tax rate on Schedule C net income for
2007 is 15.3% on the first $97,500 of income (over that, the social
security tax rate is 2.9%). Make sure you and the facility are clear
about your arrangement. If you are paid as an employee (and taxes
are withheld from your check), this is not business income, and
you shouldn’t deposit this money into your business bank account
or report the income as self-employed business income.
As a sole proprietor, you do not have to do payroll for
yourself. To pay yourself, you simply write a check from your
business account to yourself. If you have independent contractors
who make over $600 a year, or if you pay rent to anyone (e.g., for
studio space) for more than $600, you will have to issue a Form
1099 Miscellaneous. If you hire regular employees, you must
handle payroll deductions for them.
One advantage of sole proprietorship is being able to put your
children on the payroll without having to pay the social security
taxes on their wages—and still being able to write this pay off as
a business expense. So, if you have a 15-year-old computer wiz,
you can hire your son or daughter to handle your website, email
communication, and all things relating to your business computer.
Pay him or her a wage instead of an allowance. Make sure that
the wage is in line with their skill level and the amount of time
they work (keep good records of how much they work for you).
You might want to set an hourly rate. You must file all quarterly
and year-end payroll reports and issue each child a W-2, but you
do not have to withhold social security tax on their wages or pay
the employer’s share. Their wages are a business expense to you,
thus reducing your own social security tax liability. This benefit is
unique to a sole proprietorship—if your business is a partnership or
corporation, you have to withhold social security tax on any child’s
wages, unless the partnership is between husband and wife.
What if you have been in business for a few years as a sole
proprietor, and you have not elected LLC status? Should you do
that now? The LLC gives the individual limited liability protection
against your employees’ or independent contractors’ actions,
providing you one additional layer of legal and financial protection.
March 2008 Yoga Therapy in Practice
KEY POINTS
1. You have three choices for structuring your
business: sole proprietorship, partnership, and
corporation.
2. All three provide additional legal and financial
protection to a self-employed Yoga teacher or
therapist. Consult with your accountant before
you choose the entity that is right for you.
3. Obtain a federal tax ID for your business.
4. Understand the tax liabilities and deductions
that go along with being a business owner.
5. Keep meticulous records, and at the end of every
tax year, store all of your receipts, bank statements,
and business diary with your tax return.
Maybe you own a studio and have other teachers working for you.
In that case, you might want to consider an LLC. Or perhaps you
just rent studio space, or you hire subs on occasion. Now is the
time to consult with an attorney—and your insurance company—
about some of the legal issues that can arise with studio ownership.
Another scenario in which to consider the LLC option is if you
are recording DVDs, CDs, or videos for sale to the public, or are
selling products to your students or on your website.
PARTNERSHIPS
Yoga instructors who want to join forces may form a business
partnership. Let’s say Heather decides to open a Yoga studio with
her colleague Judy, called Every Bodies Yoga LLC. The first
thing to do is apply for a federal tax ID number for the company.
This identifies the business to the government and, just as with a
person’s social security number, should be carefully guarded.
Now that Heather and Judy have filed their limited liability
corporation papers, and opened a business bank account for the
studio, what are the next steps to take as legal business partners?
The partners’ attorney should draw up legal documents that
address how the parties will handle a critical disagreement or what
will happen if one of the partners wants to leave the business. This
is called a buy-sell agreement, and spells out a mutually agreed-
upon contract of how to handle the dissolution of the business
relationship. A business attorney can review all the parameters of
this important agreement with you.
As a partnership, the business will file its own tax return
(separate from the partners’ individual returns) with a Form 1065.
In addition, each partner will be issued a Form K-1, created by
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the accountant, which shows the breakdown of each one’s net
income from the business, as well as other line items that may
affect that net income (such as charitable contributions, interest
income, and medical insurance expenses). Remember that each
partner’s net income is subject to both social security and federal
income taxes.
CORPORATIONS
Every Bodies Yoga Studio, LLC has been growing steadily for
several years as a small business. Heather and Judy have several
employees and are ready to open a second location. They’ve even
created a line of practice and chanting DVDs. The question they
have now is whether or not they need to change the structure of
their business entity by making their company a corporation and
changing the name to Every Bodies Yoga Studio, Inc.
From accounting and legal perspectives, a corporation has
a life of its own. In fact, unlike in a partnership, if one of the
corporation’s owners dies, the corporation lives on. The owners
are issued stock in the company, which can be inherited, given
away, or even sold (which means the potential for someone entirely
different to become a shareholder, or partner, in the business). Each
owner must take a paycheck with taxes withheld, and monthly and
quarterly payroll forms are filed. In addition, annual corporate tax
returns must be filed with a Form 1120.
Since an LLC now offers business owners the liability
protection that used to only be available to corporations, why
bother incorporating at all? From an accounting standpoint, the
main reason is the ability to offer medical insurance, pension plans,
and medical reimbursement plans, and the ability to allow those
benefit expenses to flow through the corporation and decrease
the company’s tax burden. For example, in a sole proprietorship
or partnership, medical insurance is nondeductible in computing
social security tax. In a corporation, however, it is considered a
deductible business expense for the company and is not subject to
social security tax.
Another related benefit a corporation may offer is a medical
reimbursement plan, which must be written and available to
all full-time employees. Under this plan, the company pays for
employees’ medical bills not covered by insurance (such as dental
exams or eyeglasses). This plan can lessen the company’s tax
burden because those reimbursed medical expenses reduce the
corporation’s net taxable income and they are not subject to social
security or income taxes. In addition, offering this reimbursement
plan enhances your employee benefits package, since many
individuals might not be able to deduct those expenses from their
own federal returns for a variety of reasons.
As you can see, choosing the business entity that’s right for
you is made based on many criteria. Everyone’s situation and goals
are different, and they might change over time or as your business
grows. Remember to consult with your attorney and accountant
to make sure your business practices are in line with your specific
needs as a Yoga instructor. Just as your physical and spiritual
practices are well-tuned, so should be your business of Yoga. ˆ
ROBIN ABRETT has been a practicing small business accountant
in NY and NJ for over 25 years, specializing in taxation and helping
individuals and small business owners. She is a senior partner in
the firm of Baron and Abrett, Inc. She is also a certified Kripalu
Yoga teacher (RYT-500), with additional certifications in Cardiac
Yoga and Children’s Yoga.

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