Last Updated: June 6, 2024, 2:59 pm by TRUiC Team


How to Start an S Corp as a Fashion Designer

An S corporation (S corp) is an Internal Revenue Service (IRS) tax classification that may help your fashion design business save money on taxes. Fashion designers use their artistic vision to bring wearable works of art into reality for their clients. 

Whether you’ve been designing clothes for years or weeks, your business could be saving thousands each year by being taxed as an S corp.

Recommended: Save yourself the hassle and use a professional service like ZenBusiness to help you handle the initial S corp election paperwork.

Fashion designer measuring dress mannequin.

What Is an S Corporation?

An S corporation (S corp), also known as Subchapter S, is a tax status with strict IRS requirements and restrictions. If your business meets the requirements to be taxed as an S corporation, you will be eligible for certain tax benefits such as pass-through taxation and self-employment tax savings, which can be significant. 

Essentially, an S corporation provides the perfect opportunity for business owners to have both the benefits of a default LLC with pass-through taxation and some of the perks of a C corporation without the dreaded double taxation. 

S Corp Requirements

In order to be taxed as an S corporation, your fashion design business must meet the following requirements:

  • Has 100 shareholders or less
  • Is a domestic LLC or corporation
  • Issues only one class of stock
  • Shareholders are US citizens or permanent resident aliens
  • Is owned by private individuals

What Type of Business Structures Can Start an S Corp?

An S corp designation can be elected by a formal business structure, specifically an LLC or a corporation. Informal business structures such as sole proprietorships and partnerships are not eligible for the S corporation classification. 

How to Start an LLC Tip Icon

Don’t have a formal business structure? If your fashion design business isn’t currently an LLC or C corporation, our friends at ZenBusiness can form your legal business entity for you and elect S corp tax status in no time.

S Corp Tax Benefits Fashion Designers Should Know About

S corporations enjoy certain tax benefits, such as pass-through taxation (all losses and profit — credits, distributions, deductions — pass directly to the owner). This is similar to how default LLCs are taxed. With pass-through taxation, all profits bypass the company and go directly to the owners, and owners pay on their personal tax return at their regular income tax rate.

Default LLC Taxes Explained

Business owners of default LLCs pay self-employment taxes and income tax on the distributions passed down to them. In other words, both types of taxes are imposed on all the money they receive after paying business expenses. Self-employment taxes include social security and medicare, and these two taxes 

S Corp Taxes Simplified

With an S corporation, owners are classified as employees and are paid in two ways: a salary and distributions.

Reasonable Salary

Since owners are employees, they must receive a salary, and therefore they must run payroll. Business owners pay self-employment taxes and income tax on their salaries. Your salary must be “reasonable” or equivalent to what someone else doing the same work would be paid. For help finding estimates or references for what would be reasonable, resources like Glassdoor and the US Bureau of Labor Statistics can show you average salaries and pay ranges for various professions.

As of March 2023, the average salary of a fashion designer in the US is $54,208. Factors like experience and location are bound to affect how much your reasonable salary should be. Be certain to account for these when doing your research and ultimately making your decision. 

Distributions

Unlike with a reasonable salary, the owner only pays income tax on the distributions. This means the business owner does not pay the self-employment tax of 15.3% on money taken as a distribution.

When Should a Fashion Designer Elect S Corp Status for a Business?

This is a subjective question and will depend on your business and your goals. You need to be sure to take enough money in distributions to benefit from the advantages offered by an S corporation and offset the additional paperwork and fee associated with running payroll. In general, you will likely benefit from S corp status once your business makes at least $60,000 in earnings and $20,000 in annual distributions. These numbers are after paying business expenses. The IRS requires S corp owners to pay themselves a reasonable salary to ensure they aren’t lowering their compensation to avoid paying more on taxes — which would lead to loss of S corp status, fines, and even business dissolution.

Use our S Corp Tax Calculator to find out if an S corp is right for your business. Calculate your savings below:

S Corp Savings Calculator

Calculate how much you can save by choosing an S Corp tax classification

S Corp Savings Calculator

Recommended:

Are you a solopreneur looking to start your S corp or convert your existing LLC and start saving on taxes? Get your S corp started today with ZenBusiness.

Six Basic Steps to Start an LLC and Elect S Corp Status:

Step 1: Select a State

Step 2: Name Your LLC

Step 3: Choose a Registered Agent

Step 4: File the Articles of Organization

Step 5: Create an Operating Agreement

Step 6: Get an EIN and File Form 2553 to Elect S Corp Tax Status

Step 1: Select Your State

Step 2: Name Your LLC

If you don’t already have a business, you will first need to form one. You will need to provide your state with a unique name that is distinguishable from all registered names when you file your LLCs formation documents.

Our Business Name Generator and our How to Name a Business guide are free tools available to entrepreneurs that need help naming their business.

Step 3: Choose an LLC Registered Agent

Your S corp registered agent will accept legal documents and tax notices on your business's behalf. You will list your registered agent when you file your LLC's Articles of Organization.

Step 4: File Your LLC's Articles of Organization

The Articles of Organization, also known as a Certificate of Formation or a Certificate of Organization in some states, is the document you will file to officially register an LLC with the state.

Step 5: Create an LLC Operating Agreement

An LLC operating agreement is a legal document that outlines the ownership and member duties of your LLC.

Our operating agreement tool is a free resource for business owners.

Step 6: Get an EIN and Complete Form 2553 on the IRS Website

An EIN is a number that is used by the US Internal Revenue Service (IRS) to identify and tax businesses. It is essentially a Social Security number for a business. 

EINs are free when you apply directly with the IRS.

Elect S Corp Tax Status

During the online EIN application, the IRS will provide a link to Form 2553, the Election By a Small Business form.

Steps to Take After Starting an S Corp

Once you formalize your S corp, be sure to get your financials in line so you are ready to begin operating.

For business banking, check out our guide on the best banks for small businesses.

If you need to build your S corp credit, read our guide on how to build business credit and get a business credit card through Divvy.

Recommended: You’ve worked hard and deserve a break! If you make at least $20,000 in distributions, let ZenBusiness start your S corp, so you can focus on your business.

Fashion Design Business Information

Fashion designers create designs for original clothing and accessories. Often they will select fabrics and patterns as well as oversee the creation of the garment or accessories if they do not make it themselves. 

There are over 30,000 fashion designers employed in the US as of July 2022. This type of work is most popular in large cities and environments with active artistic and cultural scenes. Still, there is nothing that says a fashion designer cannot work in more rural areas.

Why Most Fashion Design Businesses Should Have a Legal Business Entity

Liability is the main reason fashion design businesses should have a legal business entity. Having a legal business entity will protect your employees from lawsuits should your business ever be sued by a third party. 

For example, say you are a fashion designer and recently put out a dress you are quite proud of. Another designer is suing you for copyright infringement, stating that your design copies their bestselling garment. You, as an employee, could not be sued, and your personal assets would be protected so long as you have a legal business entity. Only the business itself could be sued, so business assets would be taken should you be found in the wrong.

Is an S Corp Right for My Fashion Design Business?

As the owner, you are the only person that can decide whether an S corp would be a good choice for your business. Compare the following S corp requirements with your business’s long-term goals to help you make your decision.

First of all, S corps are required to run payroll for all of their employees, including yourself as the owner. This may not be an issue for businesses with many employees or businesses that already run payroll, but the additional costs may be a challenge for some businesses. Remember, you will have to run payroll even if you are the only employee which can make this a tough choice for solo solopreneurs or those that enjoy being the only worker.

Next, all S corps are limited to a maximum of 100 shareholders. For businesses that are actively seeking out more investors this may be an issue. If you feel like 100 is too limiting you may want to pursue making your business into a C corporation. However, if you feel that number is acceptable and don’t already exceed it your business won’t need to take any further action for this requirement.

Last but not least, S corps are required to pay their owners a distribution from their net profits. In addition to the reasonable salary, S corp owners are suggested to take at least $10,000 as a distribution. $10,000 is the minimum number you can take and still get all of the tax advantages of an S corp. While taking that much is not necessary, you would be losing out if you couldn’t. Some business owners would rather reinvest their additional money back into their business which is always acceptable. However, if you can’t afford to take a distribution and reinvest, your business would be better off being taxed as an LLC.

Fashion Designer S Corporation Examples

Not all fashion design businesses will benefit from an S corporation. Here are two examples to help illustrate which types of fashion designers should elect S corporation status.

Scenario 1:

Imagine you run a fashion boutique in the downtown area of your city. This boutique has two designers, including yourself, and three seamstresses that help bring your unique garments to life. The boutique sells the clothing, and everyone works the front end as well. All of your employees are shareholders, as well as a few others, which adds up to 11 total. Ever since you hired your first employee, you have been running payroll. Lately, business has increased due to viral marketing, which has attracted more customers as well as online orders, which you are now fulfilling.

As long as you and your shareholders agree, this would be a suitable business to become an S corp. You already run payroll and have below the maximum shareholders, so those factors are already accounted for. If there is enough money for you to take a distribution and pay the rest of the business expenses, you should have no issue turning your fashion design business into an S corp.

Scenario 2:

Now, imagine you run an online fashion design business from your home. Clients submit their measurements and what they want, and you sketch their designs with material recommendations and potential patterns that they can show to a seamstress or other resource to have it created. As of now, you average ten clients a month but have seen an increase in requests. You work alone on the weekends and have kept your regular job for now. Eventually, you would like to make this a full-time job, but it is not financially viable yet. Currently, you would like to get an upgraded drawing tablet to help speed along your design work.

This business would not be as suited for an S corp. Since you are trying to save up for a new drawing tablet and are saving, in general, to make your business more professional, the costs of running payroll and taking a distribution would likely be too high to make an S corp beneficial.

Start an S Corp FAQ

An S corporation (S corp) is a tax classification that an LLC or a corporation can apply for that provides self-employment tax savings on distributions.

If you already have an LLC or C corporation, you can form an S corp by filing Form 2553 with the Internal Revenue Service (IRS).

S corps offer businesses tax advantages, and owners of S corps can save thousands of dollars on self-employment taxes.

While both LLCs and S corps benefit from pass-through taxation, they are not taxed the same way.

With an S corp, owners pay personal income tax and self-employment tax on a predetermined salary. They may then withdraw any remaining profits from the business as a “distribution,” which isn’t subject to self-employment tax. With an LLC, all company profits pass through to the owners’ personal tax returns, and then the owners must pay personal income tax and self-employment tax on the entire amount.

Both LLCs and S corps benefit from a provision in the Tax Cuts and Jobs Act of 2017 that allows qualifying owners of pass-through entities to deduct 20% of qualified business income (QBI) from their tax returns. However, for S corps, the deduction doesn’t apply to profits paid out as wages.

According to Glassdoor, the average salary of a fashion designer in the US is $54,208. Factors like where you live and where you work are going to affect what you should be making, so be sure to consider that when doing your research.

A distribution is a dividend that a shareholder/owner can take from the business profits that remain after a company pays all of its employees’ salaries. Shareholders must pay personal income tax on distributions, but distributions aren’t subject to self-employment tax.

There’s no corporate tax rate for S corps. Instead, owners of S corps pay personal income tax on the company’s profits. This rate depends on each owner’s personal income tax bracket. 

In some states like California and New York, S corps may pay some form of tax at the corporate level.

No, if you have more than 100 shareholders, you cannot apply to become an S corp. If you are in the process of cutting down on your numbers, do so before applying.

The price will vary depending on what state you live in. The cost can range from $20-$800 per year.