Do I Need an LLC for My Costume Rental Business?

Starting a limited liability company (LLC) for your costume rental business can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For a costume rental business, lawsuits can arise from things like medical damages (e.g., a customer claiming they’ve contracted dermatitis after wearing a used costume from your store), as well as from general employment and contract law disputes.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your costume rental business seem more credible.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Should I Start an LLC for a Costume Rental Business?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should form an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for a Costume Rental Business

By starting an LLC for your costume rental business, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Costume rental businesses will benefit from liability protection because of the risk of being sued for personal injuries, property damage, and the libel of other businesses.

Example 1: A customer rents a costume but returns it in an unusable state due to their own negligence. The customer then blames this on the rental business and seeks compensation for the damages. With an LLC structure, your personal assets will remain safe as long as you are not directly responsible for the incident.

Example 2: A customer sues your business for breach of contract after you failed to deliver their rental costumes on time. Even though the lawsuit holds your business legally liable, the LLC structure prevents any personal assets from being used to pay for it.

Example 3: An employee of your costume rental business is negligent in checking the quality of a costume before it is rented out, leading to an injury. The customer then sues your business. The LLC structure protects you from being held personally liable for any resulting damages or costs.

Example 4: A customer is injured while wearing one of your costumes. They claim the costume was poorly designed and resulted in the injury.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for a Costume Rental Business

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if a costume rental business owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Costume rental businesses rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a trusted LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

LLCs need insurance to protect their commercial assets. Costume rental businesses have expensive costumes and equipment that need to be insured against theft, damage, or accidents in the workplace. Business insurance helps protects these assets to ensure their longevity.

Common Situations Business Insurance May Cover for a Costume Rental Business

Example 1: On a rainy day, a customer slips on your store’s wet entryway and breaks an arm. General liability insurance would cover the cost of the customer’s medical treatment.

Example 2: While delivering costumes, a vendor accidentally knocks a heavy shelving unit onto themself. General liability insurance would pay for the vendor’s accident-related medical expenses.

Example 3: When trying on a costume, a customer stumbles and hits their head against a dressing room mirror. In the fall, the customer sustains a concussion and several lacerations. General liability insurance would cover the customer’s medical bills.

Other Types of Coverage Costume Rental Businesses Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all costume rental stores should obtain:

Commercial Property Insurance

If you own the building in which you operate, you’re responsible for all business-related property housed there in the event of a fire, burglary, or natural disaster. Commercial property insurance would cover the cost of replacing your damaged inventory after an accident so you can recover quickly. Just be sure to select a policy with a claims limit that at least equals the cost of your expanded inventory during the busy Halloween and holiday shopping seasons.

Product Liability Insurance

When you sell products to the public, there’s always a chance a customer may file a lawsuit if they believe one of your products injured them—such as if a child chokes on part of a costume. Product liability insurance would protect your business by covering your legal fees and any damages awarded in a product-related lawsuit.

Workers’ Compensation Insurance

Most states require businesses to carry workers’ compensation insurance for their part-time and full-time employees. This coverage protects your employees if they become injured at work or fall ill after a work-related accident. It not only covers an employee’s medical bills and lost wages if they need time to recover but also any disability benefits stemming from a work-related accident.

Crime Insurance

While business property insurance normally covers robberies by third parties, crime insurance provides protection against employee theft and other similar risks. You can purchase this coverage as a standalone policy or as part of a business owner policy or BOP.

Commercial Umbrella Insurance

While your general liability insurance policy covers most claims, some accidents or lawsuits may be so catastrophic that they threaten to exhaust the limits of your primary coverage. Commercial umbrella insurance protects you from paying out-of-pocket for any legal fees and awarded damages that exceed your primary policy.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance, workers’ compensation insurance, and commercial property insurance.

Read our Business Insurance article for more info.

For a costume rental business, you will need to set aside capital for a business space, business cards and logos, a website, insurance, and inventory. All these can cost between $5,000–$27,000, provided you don't do any major renovations.

Visit our How to Start a Costume Rental Business guide to learn more about the costs of starting and maintaining this business.

Payroll and inventory are the biggest ongoing expenses for costume rental businesses, along with rent and other standard operational costs.

Learn more about running a costume rental business.

Costume rental businesses primarily make money by selling and renting costume items.

Learn more about starting a costume rental business.

Costume rental businesses offer costumes, wigs, makeup, and related items. A successful shop will offer items for both rent and purchase year-round for holidays, masquerade parties, theater performances, or events.

A costume rental business’s profits will depend on sales volume and overhead.

Learn more about starting a costume rental business.