Should I Start an LLC for My Escape Room Business?

Starting a limited liability company (LLC) for your escape room 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 an escape room business, lawsuits can arise from things like copyright and trademark disputes, as well as from customers getting injured or lost within your escape rooms.

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

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

A prison cell with a whole burst through it

Do I Need an LLC for an Escape Room Business?

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

You should start 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 an Escape Room Business

By starting an LLC for your escape room 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.

Escape room businesses will benefit from liability protection because of the risk of personal injuries, property damage, trademark infringement, and more.

Example 1: An injured customer sues your business for failing to release her party in a timely manner despite multiple calls for assistance. You must pay for your legal defense as well as any potential settlement reached in the lawsuit. Limited liability from being an LLC protects your personal assets as the owner from being taken in the settlement.

Example 2: The exit door jams and traps a group of customers in a section of the escape room. One customer suffers an asthma attack and collapses while trapped. They are asking your business to pay for the medical bills. Your personal assets as the owner could not be used to pay since they are protected with limited liability as an LLC.

Example 3: A fire breaks out in your escape room after hours and spreads to the thrift store next door. The owner is demanding you pay to replace the fire damage to the store and product. As an LLC, limited liability protects your personal assets as the owner from being used to pay for this, only the business' assets.

Example 4: An injured customer sues your business for failing to release her party in a timely manner despite multiple calls for assistance. You must pay for your legal defense as well as any potential settlement reached in the lawsuit.

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 an Escape Room 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 an escape room 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

Escape room 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 dependable 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?

Yes, all businesses — even those with limited liability protection like LLCs — need insurance because their assets are unprotected without it. LLCs only protect the owner’s assets, not the business’s assets.

Escape room businesses need insurance because of the liabilities that can arise while working with customers. If there is any property damage or someone is injured, insurance can help cover the cost.

Common Situations Business Insurance May Cover for an Escape Room Business

Example 1: In your escape room, a customer is exposed to a container full of non-venomous snakes. The customer becomes erratic and eventually decides to sue your business. His attorney writes that you are at fault for failing to provide foreknowledge that snakes, “reasonably predictable sources of psychologically valid phobias,” were present in the escape room. General liability insurance could probably cover your business’s losses in the event of a court order or settlement for the plaintiff’s resulting psychiatric sessions.

Example 2: A new employee forgets to administer bodily harm waivers to a pair of customers. The theme of their escape room is pitch-black darkness, and one of the customers walks into a wall, breaking his nose. The customer’s nasal surgery will be expensive, and while a waiver cannot always protect your business, you are far more vulnerable without one. The customer decides to sue your business. General liability insurance would likely provide coverage for damages owed or settlements reached regarding the accident.

Example 3: Your business is being sued for failing to release a customer from her escape room in a timely manner. She claims that she shouted to be released from the room many times and that your staff did not respond, forcing her through the 40-minute duration of the escape experience. Neither you nor your employees heard anything through the door, but there is no footage of the incident to corroborate your testimony. If the court found your business liable, you could expect general liability insurance to help cover any damages owed.

Other Types of Coverage Escape Room 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 escape room businesses should obtain.

Business Interruption Insurance

While somewhat similar to commercial property insurance, business interruption policies offer equally important coverage for escape room companies. Covering disasters like those mentioned above, this insurance will assist in recovering estimated losses and cover temporary relocations during downtime that occurs due to weather or other disasters. This policy can ease the process of recovery after a business’ assets have been compromised.

Commercial Property Insurance

Escape room businesses require real estate and a substantial collection of physical assets, including tools, props, costumes, and more. A policy of this kind is essential for the protection of equipment used in your carefully organized escape room scenarios, as well as any business-owned real estate. Fires, in particular, can be devastating to an escape room business, but violent storms and similar weather disasters may also lead to the damage or destruction of your expensive business assets. Commercial property insurance can protect a business against these and similar threats.

Workers' Compensation Insurance

You might begin an escape room business alone, but if your business is successful, you will probably want to grow and include more escape rooms or even new locations. Workers’ compensation insurance is necessary for companies that employ part-time or full-time workers. Most work-related accidents that cause injuries to employees will be covered in this policy.

Commercial Umbrella Insurance

This is a special kind of policy that functions atop existing policies. Essentially, it covers an even broader range of possible claims than individual policy limits will allow. As you operate your escape room business, you may be surprised to see how different customers behave in your rooms. Any unexpected claims that arise from these unpredictable encounters could be covered by the extended safety net of umbrella insurance.

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 Escape Room Business Insurance article for more info.

Depending on the location, the cost of rent, and the complexity of the room design, opening an escape room business can cost anywhere between $7,000 and $30,000.

A business license and insurance are among the opening costs. Some escape game rooms provide elaborate costumes and set designs that include laser lights, while others keep their sets relatively simple.

Visit our How to Start an Escape Room Business guide to learn more about the costs of starting and maintaining this business.

The main ongoing expenses for an escape room are employee salaries, rent, and utilities. You also will have to replace equipment and props as needed.

Learn more about running an escape room business.

An escape room business makes money by charging customers to participate in escape room games. Escape room businesses can provide one or multiple types of rooms for events.

Learn more about starting an escape room business.

An escape room is like a life-size puzzle where customers have to find clues within the room to unlock a door and “escape.” Escape rooms vary in difficulty, and most last for about an hour. Groups such as families, friends, work colleagues, and other parties are key target audiences for this kind of business.

An escape room can make significant profits, depending on its clientele and local demand.

Learn more about starting an escape room business.