Last Updated: May 14, 2024, 11:43 am by TRUiC Team

Do I Need an LLC for My Formal Wear Rental Business?

Starting a limited liability company (LLC) for your formal wear 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 formal wear rental business, lawsuits can arise from things like large refund requests or contract law disputes, or even false advertising allegations (e.g., relating to the quality of your garments, etc.).

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

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

A man adjusting his suit sleeve

Should I Start an LLC for My Formal Wear Rental 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 a Formal Wear Rental Business

By starting an LLC for your formal wear 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.

Formal wear rental businesses will benefit from liability protection because of the risk of being sued for personal injuries, property damage, trademark infringement, and libel. 

Example 1: Your formal wear rental company gets a large order from a college but is unable to deliver on time. The college ultimately sues your business. If judgment goes against you, compensation must be paid from LLC assets; your personal assets are protected. 

Example 2: You send 100 suits to be cleaned. They are returned in a damaged condition. You sue the cleaning company and are sued in return for the cleaning bill. If you lose your case, your personal assets will not be affected; they are protected by limited liability.

Example 3: You wind up your formal rental wear business to pursue more lucrative opportunities. However, your LLC does not have enough assets to pay off all creditors. Unpaid creditors will be unable to go after your personal assets, which are protected by the limited liability status of your company. 

Example 4: A customer fails to return several items on time, leading you to charge them extra. They decide to sue you, claiming that your late fees were not disclosed to them during the rental process.

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 Formal Wear 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 formal wear 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

Formal wear 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 loansgrants, and credit.

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

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?

All businesses need insurance to protect their business assets — even LLCs. This is because the limited liability protection from an LLC protects your personal assets, not your business assets.

Formal wear rental companies are no exception; they need liability insurance which will cover damage to their stock of formal wear, as well as instances where a customer or member of the public is injured on their premises.

Common Situations Business Insurance May Cover for a Formal Wear Rental Business

Example 1: While several groomsmen visit your shop, one of them slips on a wet floor in your restroom, injures his tailbone, and asks your business to pay for his medical expenses. General liability insurance would cover his medical treatment and any awarded damages in the event of a lawsuit.

Example 2: A competitor sues your business, claiming you stole your logo design from her company. While you don’t believe the logos are similar enough to make a valid claim, you know you need a lawyer. General liability insurance would pay for your legal defense and any required settlement.

Example 3: As an employee accepts delivery at your loading dock, the overhead door malfunctions and crashes down onto the delivery vehicle. The impact damages both the truck and some of your inventory. A general liability policy would pay to repair the delivery truck and replace the damaged goods.

Other Types of Coverage Formal Wear 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 formal wear rental companies should obtain.

Commercial Property Insurance

You made a major investment to design a beautiful, welcoming formal wear rental business stocked with the latest fashions. In the event of a fire, theft, or natural disaster, commercial property insurance would cover the cost of repairing or replacing your business-related property. This includes structural damage to your building as well as your inventory and other business supplies.

Workers’ Compensation Insurance

If you have any employees, most states will require you to carry workers’ compensation insurance for both part-time and full-time workers. 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 or death benefits stemming from a workplace accident.

Data Breach Insurance

If you offer a loyalty program for your returning customers, data breach insurance can help safeguard your business in the event a cyberattack compromises their sensitive personal information. This essential coverage provides an extra layer of protection not usually included in a general liability insurance policy.

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.

Startup costs for a franchise operation can run from $95,000 to $243,000. They will be less if you strike out on your own. Ongoing costs are rent, salaries, cleaning, and commercial insurance.

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

Ongoing expenses include rent, licensing, inventory, payroll, office supplies, advertising, and website maintenance.

Learn more about running a formal wear rental business.

A formal wear rental business primarily makes money by renting formal wear at a profit.

Learn more about starting a formal wear rental business.

A formal wear rental business rents special, high-end clothing on an as-needed basis to customers. Profit margins for formal wear rental businesses can be significant and depend on the volume and price of rentals. 

Learn more about starting a formal wear rental business.

Related Articles

Article Sources

IRS: Limited Liability Company

IRS: S Corporations


SBA: Small Business Guide

SBA: Choose a Business Structure Guide

US Census Bureau: Small Business Statistics

SBA Office of Advocacy: Data on Small Business

FRED: SBA Data for Small Business