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Dear Michelle,
I’m a multihyphenate salon owner and recently opened a coffee shop inside my salon. I’m so confused about how to handle the setup and taxes correctly. Do I need to file a separate tax return for the salon and coffee shop? Sometimes my receptionist at the salon will jump in and help if the coffee bar is getting backed up. Do I need to give her a separate paycheck from the coffee shop? How do I keep track of what money is coming in from the salon versus the coffee shop?
Sincerely,
Multifaceted Salon Owner
Dear Multifaceted Salon Owner,
First off, congratulations on your new venture. Expanding your business is exciting, and it’s common for entrepreneurs to expand into multiple revenue streams as they grow. I’m seeing a lot of salons expanding their business models by opening up cafes and bars inside as a way to increase revenue and create a more memorable customer experience. Along with that expansion can come additional complexities, especially when it comes to finances and taxes. It’s important to know that there is not “one right answer,” but multiple options to consider depending on your final goals.
Understanding the difference between revenue streams and separate businesses
The first step is deciding if your salon and coffee shop are two separate legal entities or two revenue streams under one legal entity.
- A revenue stream is a means by which a business brings in money. In this case, the haircuts and coloring services at the salon are a revenue stream and the coffees and croissants sold at the coffee shop are a separate revenue stream.
- A legal entity is a business that is formally registered with the state. Examples would be a limited liability company (LLC) or corporation. A legal entity can have as many revenue streams as the owner decides so it is possible to have the coffee shop and salon operate under the same legal entity.
Is having both revenue streams under one legal entity best?
Keeping the revenue streams under the same legal business entity can have advantages and disadvantages.
Advantages of one legal entity:
- Simplicity: You only have to file one tax return, which saves time and administrative costs.
- Shared resources: Employees can serve both revenue streams without issuing separate paychecks. You can leverage cost savings by sharing certain overhead expenses, like rent, utilities, or insurance.
Disadvantages of one legal entity:
- Legal risk: If something goes wrong with one part of the business, both revenue streams are at risk. For example, if a client sues the salon, all the assets of the coffee bar would also be up for grabs in the lawsuit. This is because lawsuits are against legal entities, not revenue streams.
- Future flexibility: One possible complication of staying under one legal entity is selling the business down the road. Do you have plans to sell the coffee bar and keep the salon? Selling off a revenue stream instead of the entire business can be more difficult if it’s not a separate entity.
It’s best to talk these options over with a trusted consultant, like an attorney or certified public accountant, so you can weigh the pros and cons of each against your long-term goals.
How do I know where my profit is coming from with two revenue streams?
Even if you choose to keep both the salon and the coffee shop under one legal entity, it’s recommended that you track income and expenses separately for each.
- Separate bank accounts: Set up separate bank accounts for the salon and coffee shop. This plays an important role in tracking how much profit each venture is providing. Imagine if the salon had a loss each month, but the coffee shop always had a profit greater than the salon’s loss. If the numbers were all together, you would have no idea the salon was losing money. An unseen problem does not get fixed.
- Bookkeeping: Set up your bookkeeping reports to show the revenue and expenses for each revenue stream in separate columns so you never have to wonder how much profit is coming from either.
If you choose to have two separate legal entities, then you’ll need to have separate bank accounts, bookkeeping, and tax returns for each business.
Managing your expanding business
As you grow your businesses, having the advice of a professional who understands your long-term vision is key. Setting up clean financial systems now will save you headaches later. This will allow you to quickly see how your business is performing, know how much you can pay yourself, and be ready to file your taxes when the new year rolls around.
Getting your financial systems set up right from the beginning will help you focus on what you love most — growing your business.
I hope this helps clarify some of your questions as you continue expanding your business empire.
Best of luck,
Michelle Cook, CPA
