July 15, 2021

How to Structure Your Barber Business to Keep Money

Published in BarberEVO magazine.

You don’t have a problem making money… you have a problem KEEPING money

Tyrik Jackson talks about how to structure your business to protect yourself and how to elevate your business to being bankable, no matter your skillset and area of expertise.

Make Your Barber Business Bankable

For some reason, we all look at our bank accounts at some time and we find it doesn’t reflect what we earn. Many of us aren’t structured properly in business and it is all about choosing the right accountant that understands your business and having the correct corporate structure for what we do as practitioners.

Ask yourself this question.

If you were a banker and someone came to you asking for money to expand their business, who would you offer money to?

Would you lend $30k to John who owns Johnny’s Barber Shop who makes $100k a year or to “Barbershop Incorporated Enterprises” which makes $100k a year. This is a company that generates money, and they have money available in their account – it’s a no brainer. Do you want to be Johnny who makes all the money, with fancy clothes, a nice car and no banking leverage… or do you want to be bankable?

How Most Barber Business Are Set-Up

Most of us who have businesses don’t have a proper business structure. They see themselves as a business owner, but they don’t operate as a business owner. They are all talent and skill, and they open up a business. But it isn’t being run like a business.

Is there a system in this “said business”? Yes. Clients come in, they sign in, they get a haircut, so it feels like a business, but it’s not. When you go to a bank and you try to get a business loan, the bank wants to know what your business looks like. Not your daily function, aesthetic or how busy you are. On paper, what does your business look like? Many of our business structures are tied to the person of the business. Not tied to a business entity itself.

As an example, John’s Barber Shop. John does the haircutting and hires five guys. They pay John so John is making all the money. He puts it in the bank – John sees all this money coming in and when he goes to the bank, everything is in John’s name. So, John is paying higher tax with the money he is making, also has all the liability and his business isn’t showing any real value to a bank of lenders.

LLCs Vs. S. Corporations

John has to restructure his business so that it is an entity. He is the owner, and he decides to open up and be a Limited Liability Company (LLC), which sounds really good. John thinks he is limited in the liability he is responsible for.

If John is the only person in the LCC company, he is still responsible for ALL liability. The way John protects himself is to go a bit further and open as an S Corporation. Then he is fully protected, and no one can go after his personal assets in a lawsuit claim.

Let’s say Sarah brings her son into the barbershop and his ear gets cut by the shears. It’s no big deal, they put a Band-Aid on it. But it gets an infection, she gets treatment and now she wants to sue, and she is going after the company.

When she goes after John LLC, he is going to be responsible for the claim. If John is set up under the S Corporation Company, he is protected under the business entity, they can’t go after his house, car, or personal assets, so he is protected.

So why doesn’t every one set up their business as an S Corporation rather than an LLC?

The reason people don’t go to the S Corp brand is because LLC terminology sounds better. It sounds good until you break down what it actually means.

Finding the Right Accountant for Your Barber Business

The other thing is that most accountants are lazy. They don’t see you as a company, they see you as an employee. Most people go to their accountants at the end of the year with their W2 forms and they say, OK, you made X amount, the government has to have X amount. Sign here. That’s it.

As business owners, we all function differently. We are all making money in different ways, so accountants can’t make a cookie-cutter system that works for every single person. What you need is not what everyone needs. An accountant has to tailor your finances and your tax liability appropriately for your business as an individual entity.

Hire an accountant that is focused on your actual business, rather than you being viewed as a person that is just paying them for a service. They have to be prepared to tailor a system to benefit your business. Hire an accountant who is tried, tested and true and who finds out how you run your business and how best to save you money, that is what you need.

How Can I Get More Lending Power with Banks?

If you are a sole proprietor or an LLC, you are viewed by banks, financial institutions and government agencies as an individual. When you are an individual doing business as an S Corporation, then banks, financial institutions, and government agencies view you as a company. You get more respect as a company, and you now have lending power. You have the ability to control your tax liability and your income.

What does that mean?

Here’s an example: same money same person different structure.

One person, LLC sole proprietor Same person, S Corp Company
Earnings: $75,000 Earnings: $75,000
Expenses: Expenses:
Advertising, $1,450 Advertising, $1,450
Rent, $7,200 Rent, $7,200
Supplies, $7,500 Supplies, $7,500
Cellular, $1,800 Cellular, $1,800
Payroll, $0 Payroll, $30,000
Total expenses are $17,950 Total expenses are $47,950
Net income is $57,050 Net income is $27,050
Income tax is $17,450 Income tax is $4,139

Looking at the S Corporation Company income, because you have considered your business structure, your net income is zero. You made the same $75K, you paid the same expenses, but because you now have a payroll, your net income is zero, you are now in a position to get a possible refund on any possible overpayment of anything you have paid into. The payroll is the difference-maker.

You are still the owner of the company; you control all the money coming into it but everything you do is a business function. You have a company car, a company cell phone which is all written off to the S Corporation and you are now on the payroll. You only pay taxes on the amount of money you pay yourself.

If you make $3 million in an S Corp and you pay yourself $30K, you don’t pay any taxes on the $3m.

Back to the guy who is an LLC, if he makes $3 million, he is paying tax for all of that $3 million.

If I use myself as an example… Tyrik owns several companies, but they all come under the Tyrik Jackson International brand. When Tyrik gets paid for any work he does, it goes to the corporation, it doesn’t go into his pocket. Tyrik drives a company car; he uses the company card to put gas into the company car and he uses company money to do company things. Everything he does is through the company, so I have the ability to use company money without it being taxed. Not what Tyrik the individual needs. That is then just based on what he needs to live in his house, pay his mortgage, groceries, and money to take his kids on vacation etc.

I am only being taxed on the money that the corporation pays Tyrik, not all the money coming into the company.

What’s the take-away from this?

Spend time finding a good accountant, one that works for your business, one that invests time in finding out how you run your business and how it should be structured to suit you. For full liability protection, look into registering your business as an S Corporation Company and make sure you are running a business that is not only recognized but more importantly a bankable business.

 

Pursue Your Barbering Education!

Are you considering a future in barbering? Premier Barber Institute can help get you started! Our school offers three barber programs to teach you the skills you need. Not only can you learn technical barber skills in our programs, but you can also learn business skills. If you’re ready to follow your entrepreneurial spirit into barbering, contact us today!

573 East Main Street
Norristown, Pennsylvania 19401

Phone: (844) 467-7364

school hours:
mon – fri: 9:00 am – 9:00 pm
sat & sun: closed