One of the hottest industries to start a business in is the tech industry—more specifically social media marketing. We're going to walk you through the process of how to start an advertising agency so you can begin your path to success in digital marketing. We talked to Jason Yormark, founder and Chief Social Officer of Socialistics, about how he started his company and has 4x the revenue since starting it 2.5 years ago. He started off with Microsoft then started blogging during a year layoff before getting hired back. He started the Socialistics advertising agency as a side project but has grown it to managing $2-5K social media marketing campaigns for 15 clients, including Habitat for Humanity and the U.S. Air Force. We'll give you everything you need to know when starting an advertising agency, including an overview of the industry, developing the business concept, getting all the licensing/business requirements, commonly asked questions about advertising and marketing, strategies for launching, and business operations.  Throughout, we'll provide input from Jason and myself on what we have found that works and doesn't work. Keep reading to find out more.

Advertising Industry Overview

Business owners in all industries need marketing. Most small businesses don't have the time and knowledge to run their own ad campaigns, so there's a ton of opportunity for starting a new business in marketing or advertising. Let's start by discussing the state of the industry. Because of the global pandemic, marketing spending dropped to $1.28 Trillion in 2020 according to PQ media. Jason experienced a drop in revenue which he attributes to: [su_quote]Companies trying to keep employees overspend on marketing.[/su_quote] I saw similar results in my marketing and blogging business from February through September of last year and then spending started ramping up again. This year I've been getting approximately 3x the requests of previous years, which I attribute to my business maturing, combined with more business confidence. Despite a drop in overall spending, according to Beroe Inc, global digital marketing was between $330-340 billion in 2020 and grew almost 13% over 2019. Meanwhile, spending on legacy advertising formats like TV, billboards, and radio declined by 30%. According to Safe Frog Marketing Group (through Hubspot), nearly 2/3 of companies hire an advertising agency or freelancer to manage part of their digital marketing needs.  Combine this with the number of marketing companies staying the same ,and spending on advertising expected to increase by 8-15% according to Forbes, this is the perfect time for starting an advertising agency. One of the opportunities Jason told us about in digital advertising is the ability to attract potential clients with reduced retainers. Here's what he had to say, [su_quote]Look for what companies hate about the industry. Then look to disrupt it. Month-to-month contracts have been a disruptor for us that has allowed us to do 3-4X growth in such a short time.[/su_quote]

Major Advertising Agencies and Other Competitors

Globally, the 50 largest marketing/advertising agencies make over $460 million in revenue or more. The top ad agency, Accenture Interactive made over $4.4 Billion in 2018. Wow! They are killing it! If you want to see the full list check out this article by Agency Spotter. According to IBIS World, there are 5,585 digital advertising agencies in the United States, so there is a ton of competition, but plenty of revenue to start your own agency and work for your ideal client. I did a little estimation of what the average marketing agency makes based on these numbers, and it's around $20 million. Granted, some aren't going to be anywhere near this, but even if you are making $75,000+ working from home as a one-man company, that's not bad money. Currently 2 years in, I make enough working part-time to pay the bills without stressing. It's not nearly what Jason estimated: [su_quote]I was making about $60k with 80-90% profit when it was just me.[/su_quote]

Inspiration for Starting an Advertising Agency

The first step when you want to start an ad agency is to conduct research to determine what is right for you. Your marketing company should be focused on satisfying your potential client's marketing needs while utilizing your current skill base.  You may want to start a marketing company focused on a specific niche, such as Business to Business (B2B) or Business to Customer (B2C), a general marketing company, or you may want to start a digital marketing firm focused primarily on a specific social media network like Facebook. You aren’t limited to just one type, but this decision will impact how to start a media company. This decision will drive every move going forward. Some of the common types of marketing companies are:

• Social Media Marketing - Focused on marketing through social media 
• Email Marketing - Email-based marketing
• Brand Management - Building a brand through a variety of techniques
• Content Management - Managing the flow of content
• Copywriting - Writing about products, services, tutorials, or website wording
• Product Marketing - Focused on analyzing interest in a product then selling the product
• Marketing Analysis - Analyzing how to improve through meeting market demand
• Growth Marketing - Focused on increasing the market share through marketing
• PR/Communications - Communicating with external stakeholders
• Event Marketing - Marketing events like concerts or business conferences
• SEO/SEM - Improving organic search results or paid search results
• E-Commerce - Marketing products sold online

The Muse has a great article that describes what each type of marketing is like. Socialistics focuses on social media marketing for B2B primarily. Jason told us, [su_quote]It's too hard to fight for every business out there. We look for clients who believe marketing is valuable, their business is ready to be marketed, and that we are confident we can help them. If either of those aren't there, then we aren't the right company for them.[/su_quote] Marketing is focused on helping people or companies become aware of a product or service and helping them move from unaware, to aware, to researching the offering, and finally to purchase. Each business has a different model for accomplishing this. We'll show you some of the ways to achieve this. Keep reading for different types of marketing agencies.

Name Your Marketing Company

I can't stress enough the importance of the name you choose when starting a marketing company. It will communicate what the company is all about. Keep reading for ideas about how to name your startup marketing agency.

Does the name explain the business?

Socialistics' name is a bit of a challenge for me to picture what it does. The name is unique, but here's how I break it down: Social - " of or relating to human society, the interaction of the individual and the group, or the welfare of human beings as members of society" - Merriam-Webster Dictionary -istics- "of, relating to, or characteristic of" - Merriam-Webster Dictionary It took me a minute to wrap my mind around the name to realize it meant relating to social media. I wonder whether Jason was going for something that made people think more about what it does. He could be taking the exact opposite strategy of what I'd normally suggest, which could potentially offer similar results. I tend to prefer including words like Marketing, Advertising, or something to identify what your company actually does, which can make it easier for people to think of it when they are looking for help.

Is it easy to spell?

Make sure your business name is easy to remember when using a search engine. A crazy name like Onomatopoeia Tees makes searching for your business difficult because it's hard to spell. Because people tend to type fast, it can be helpful to register domain names for common misspellings of your business name and forward them to your website to make it easier for customers to find you.

Location

Including your state, county, or city identifies you as a local business. For example, Sin City Modeling Agency would obviously be focused on models in Las Vegas. I would typically discourage this for a marketing company unless you are specifically trying to narrow your business model to serve clients in the local area. There is too much remote work available to limit yourself from the start. Later it might make sense, but in the beginning, it can be hard to get that first big client.

Branding

Does your name fit your branding? Some business owners focus on visual ideas for a logo before a name. Fortunately, Socialistics logo spells out what they do for people. Take a look: As you can see, it has their name and "a social media agency." The "S" in the logo also hints at one of the advantages of social media marketing: the fact that internet marketing offers a closed-loop marketing strategy, while other forms of advertising do not. Overall, I like it. It tells what the company does, suggests differentiation to those who know about the industry, and also could have ties to their belief in community service because what we put out into the world comes back to us.

Register a .com

Find a name for which the .com domain is available. It's the most recognizable. You can conduct a search by clicking here. The longer you can purchase it for, the better. This helps communicate that you are in it for the long haul. Some great places to buy a domain include:

• Google Domains
• Go Daddy
• Your Web Builder
• Unstoppable Domains  - only use if you are familiar with blockchain technology

Test Your Name!

See how people like it. Check Google Trends. Read articles like Five Tools for Naming a Business. Make sure to check what happens if people shorten it. You wouldn't want to name a business Sensational Product Advertising & Marketing because people might shorten it to SPAM, and that goes right to junk mail. Once you're satisfied with the name, register your business name with the government so you can protect someone else from getting it.

Write a Business Plan for Your Ad Agency

You need a business plan to help define the advertising agency's objectives and strategy. A business plan for your advertising agency guides decision-making, helps financiers consider whether to provide startup costs, and gives you something to show businesses who could be potential partners or clients.  A business plan should answer the following questions:

1. What was your inspiration for starting an advertising agency?
2. What problem are you solving for clients?
3. What is the market opportunity? Who are your clients? What types of businesses need your services?
4. What is different about your advertising agency? Why should other businesses believe you will be successful?
5. What progress has your agency made so far?
6. What startup costs have you already incurred by starting an agency?
7. What do you need funding for? What are the costs associated with incremental sales?

A creative business plan goes a long way. It needs to be inspiring, informative, and factual. There are a ton of businesses in constantly changing environments, so you need to stand out to a potential client. A business plan that is constantly evolving helps you keep your business plan in line with where the business is and where you want it to go. We've compiled some resources to help you build an awesome business plan.

Templates

We've gathered templates to help you develop your business plan. Here are some of the best:

• One-page business plan
• U.S. Small Business Administration (SBA) Business Guide
• State-specific templates
• Business Plan Template for a Startup Business

Resources

It gets better! Here's some free and low-cost education on business plans:

• How to Write a Business Plan
• SCORE's free business plans and startup assistance resources
• The Complete Business Plan Course (Includes 50 Templates)

How to Start an Online Advertising Agency

Most types of businesses have similar processes that have to be performed. Whether you want to know how to start a digital marketing agency or how to start a social media marketing agency, there are related expenses that will be incurred. Every agency will need to:

• Legally establish the advertising agency
• Obtain necessary licenses and tax requirements
• Obtain funding
• Establish a location
• Create a website
• Create social media profiles
• Have a tech stack that simplifies the operations of your small business

We'll give you tips and information on how to get the most of your digital marketing company in each of these areas.

Legally Establish the Advertisement Agency

You've developed a plan and created a name for your advertising agency. It's time to create the legal structure. For best results, hire legal representation that has experience starting advertising agencies, like an attorney, accountant, or tax specialist. It will simplify the process so you can get clients, build a team, and run creative campaigns. There are five basic types of legal structures that most people will utilize: sole proprietorships, Limited Liability Corporations (LLC), Partnerships, Corporations, and Franchises. Each has its pros and cons. You'll have to decide which is best for you, but we've gathered information on each to make it easier.

Sole Proprietorship

A sole proprietorship is the easiest way to start a digital ad company, but the structure doesn't protect the owner's personal assets from legal issues. That means if something goes wrong, you could lose both your agency and your home. This structure is the least difficult to set up, but I'd recommend agencies getting professional liability insurance and cybersecurity insurance because you'll be a potential entry point to clients' systems. If your website, email, or other services get hacked, it could be detrimental to more than just your agency: it could cause client lawsuits. To start a sole proprietorship, fill out a special tax form called a Schedule C. Sole proprietors can also join the American Independent Business Alliance.

Limited Liability Corporation (LLC)

An LLC is the most common business structure used in the United States because an LLC protects the owner's personal assets. It's similar to partnerships and corporations, but can be a single-member LLC in most states. An LLC requires a document called an operating agreement. Each state has different requirements. Here’s a link to find your state's requirements. Delaware and Nevada are common states to file an LLC because they are really business-friendly. Here's a blog on the top 10 states to get an LLC.

Partnerships and Corporations

Partnerships and corporations are typically for massive organizations or legal firms. Unless there is a specific reason you need a partnership, it is better to do a multi-person LLC. Investopedia has good information about partnerships and corporations here.

Franchise

There are several opportunities to purchase successful franchises. TopFranchise.com has a list of 10 advertising companies that you can start as a franchise. This makes it where an entrepreneur can benefit from the reputation of an established clothing printer that has already worked out many of the kinks of starting from scratch. Check out our BigFrog videos to learn more about franchise benefits. They are a t-shirt printing company, but they still have great advice on the business model.

Obtain Necessary Licenses

Each location has different licenses, permits, or tax forms required. Use the SBA License and Permits page to find requirements for your locations. Some locations have very confusing regulations. If you don't work with a legal representative, make sure to talk to the employees who work in the licensing and tax offices. They can give you advice on which licenses you actually need. Make it a point to follow the laws. I once met a person who failed to follow the proper regulations, and it cost her a substantial fine and nearly 100 hours of community service per month.

Obtain Funding

Ad Agency startup costs can be achieved for under $1,000. You basically need some space in your home, a website, social media, and some time. If you are going to rent an office space or run a ton of paid ad campaigns, the cost goes dramatically up. That's not really necessary unless you are starting a franchise or have a local team that needs a space to all work together. When it's just you, an advertising agency can be started for less than a few hundred per month. If you do need to obtain external funding, other options include:

• Loan from family or friends
• Business partner(s)
• Government programs

The SBA offers free courses on financing options and funding programs. For info on using personal funds to start a business, check out this article from The Hartford. Alternative sources of funding include:

1. Crowdfunding 
2. Credit cards
3. Home equity loan
4. Rollover for business startups (ROBS)

Establish a Location

For most small business owners, an advertising agency can be a home-based business until you've reached profitability. Many will meet a client at a local coffee shop. If you feel you need a more professional location to book the job, I'd recommend looking into office-sharing services like WeWork. They let you share space with others, reducing the expenses of having an office. Some things to consider if you go other routes are:

1. How many people will be on my team?
2. How many people will come to a client meeting?
3. How can I display my campaigns?
4. Does space encourage the exchange of ideas?
5. How quickly is the company growing?
6. Will we have a sales team to answer client calls?
7. Are we 24/7 because we offer services across the world?

Contact a local commercial real estate agent to assist you in the search. You can search for them by your area here.

Create a Website

A website is critical to a marketing company. It's often the first thing people see, and if the job isn't done right, why should they trust you to do their advertising right? From a marketing perspective, your website needs to show you get results. But what does that mean? Some things I look for when I search for businesses include:

• Do they come up when I search them? With Target, Yes they do.
• Does it show Wikipedia or Google My Business information in the search? If not, make sure you fix that.
• When I click on the link, how fast does it load? I want instantaneous on desktop or less than 3 seconds if over cell phone data. Any less, and you are losing customers. Google has extensive data on what is expected to rank high in search.
• Now that I'm on the site, does it look professional? If not, I'm probably going to run unless I can tell they use it for experimentation.

Building a great website is so important. Fortunately, there's a lot of things that make it easy. Using web builders has never been easier. They have tons of plugins and drag-and-drop functionality. I'd recommend the following:

1. Easiest to use: Wix
2. Best features: Wordpress
3. Other Options: Great List

Add the list of website builders into the article. Get affiliate links from Serge. Alternatively, you can hire a web developer, but they'll probably charge you up to $25k to do the same setup you would anyways. They just accomplish it quicker because they know what they are doing.

Create Social Media Profiles

I'd recommend having all possible social media profiles because you never know where you'll find a client. For B2B, the best is LinkedIn, but I'd also make sure you are on:

• YouTube - Best for Video 
• Instagram - Best for products and other marketing that uses pictures
• Facebook - Best for B2C marketing
• Twitter - Financial markets, political, and crypto are big industries on Twitter
• TikTok - Short fun videos primarily targeted to ages 30 and under

You can start with one and focus on it or try them all and narrow them down based on the results. Hootsuite has some good information on best practices. You'll need to keep up to date on these if you are starting an advertising agency.

Have a tech stack that simplifies the operations of your advertising agency

Every advertising agency will need a tech stack to make running the business easier. I'm not going to go into great detail on each of them as they all have great educational resources available that I suggest you utilize as you'll be using them a lot. Here's the list of some I love:

1. HootSuite or other social media management tools that put all your social accounts in one place and let you manage it from their dashboard.
2. Google Workspace for email, spreadsheets, presentations, and cloud storage.
3. Integrated accounting software that connects to your bank and allows automation so you only have to set a rule once. PC Mag has a great article about various options.
4. Customer Relationship Management (CRM) software to keep all your information in one place. Agencies have a ton of content they handle for a lot of clients. Being able to keep track of it in one place is crucial for the success of the business.
5. Content Management Software (CMS) is used for storing, labeling, and sorting content. A CMS may be part of a CRM, or it may have to be integrated, but easy access to files is critical to assist clients.
6. Analytics Software will be needed and attached to all web assets so you can track how you are performing. This will be true for both the advertising agency and your clients. You can't improve results if you aren't measuring them.

These are the bare minimum I would suggest before starting an advertising agency.

Business Expansion

Now that you have everything you need to start an advertising agency, it's time to find clients and expand the business.

Marketing and Advertising Strategy for an Advertising Agency

Finding clients can be done in a variety of ways. Agencies can use their personal network, the same ad strategies you plan to use for clients, conventions, and other techniques. The biggest thing is to be sincere. Jason told us about how he managed to land the Air Force and Habitat for Humanity. He told us, [su_quote]The  Air Force was more about nurturing them than pursuing. They were frustrated with 30-page reports they didn't understand. So I sat down with them and took my time, understanding what was really important to them.[/su_quote] In other words, always be ready to listen because that might be enough to land a client. Here's what he had to say about Habitat for Humanity: [su_quote]They had somebody at an event. Heard a speech and liked what they heard. We had to pursue them though. We had to follow up because it was a strategic decision. It's feel-good work and brings us clients because it speaks about our morals.[/su_quote] [su_youtube url="https://www.youtube.com/watch?v=kb1czTEK8f8 "] In that scenario, he had to do lots of follow up and be patient. When clients say "no," they mean they aren't ready yet.

Potential Partnerships and Collaborations for an Advertising Agency

Partnerships and collaboration for an advertising agency may come from selling other tech that they find useful, being listed in blogs and reviews, or through fields like photographers, graphic designers, and developers. Another source of partnerships is non-profit institutions. As Jason pointed out: [su_quote]Habitat for Humanity wasn't so much about the money as the message it sends about our business and our values.[/su_quote] If you can get a client that people know and share their values, it makes expansion so much easier.

Contact List Building for an Advertising Agency

Every person you come in contact with is a referral. Anything you do you should be trying to get followers, likes, and people signing up for your email list. This makes a huge difference. You can then share more content with them to help them get closer to becoming a client. Even if they don't own a business one day, they might soon. Some useful tools include:

1. Hubspot - Free email marketing tools, including forms, databases, analytics, and templates
2. MailChimp - Similar to Hubspot’s marketing services but started as an email marketing company.
3. SendGrid - Most of my software development clients prefer SendGrid. It’s more tech-heavy though

Advertising Agency Daily Operations

An advertising agency makes its money from retainers and is mostly a time-intensive business. The reason digital marketers use scheduling tools for as much of their work as possible is they need someone to be available when their clients need them. People tend to use Facebook at specific times every day. If no one is available to respond to comments because they are working on something else, that is going to harm the advertising agency's clients. If you are unable to satisfy your clients' needs, they'll go somewhere else. Jason focuses on "service over revenue growth" because the revenue growth will come with time. As long as they retain the customers they have, they know they'll have around $40k/month coming in consistently while managing 15 clients.

Remote Workforce in Advertising Agencies

Jason was concerned that his team being spread across the world would hurt him. The idea that your team couldn't be all together was something he viewed as a challenge at first, but now he views it as one of the main sales points.  He told us: [su_quote]Turn weaknesses into strengths. Remote saves clients money and gives more access to talent. It also gives the client 24/7 service.[/su_quote] [su_quote]You can expect each client to be around $2,000-5,000 and require 20-40 man-hours to give them proper service.[/su_quote] There are a ton of great resources to be able to utilize the global workforce. Companies like Upwork are a great place to start. You can find reviews of other places to find marketing freelancers in this blog. Top Advertising/Marketing Influencers

• Neil Patel - He’s marketed everything and has over 2 million followers across all channels. His blog gets over 4 million views per month.
• Matt Bailey - Over 20 years in Marketing and author of Internet Marketing: An Hour a Day (2011)
• Gary Vaynerchuk - Over 30 Million followers across his platforms. 

Conclusion

Starting an ad agency can be a highly rewarding career. We used insights from Jason Yormark and myself to help you get an inside look at what life in the marketing business is like. We provided you with the knowledge and resources to learn about the industry and name your company. You have tons of resources to get the business up and running, ideas on where to find clients, and ways to operate the business. Now it's up to you. Will you be the world's next great advertising agency?

Did you know an S-Corp can create considerable savings compared to an LLC? An S-Corporation (S-Corp) and a Limited Liability Company (LLC) are both excellent choices for business structures, but once you hit $100K net income, an S-Corp might reduce your tax load. UpFlip is here to help you choose between an S-Corp vs an LLC. We’ll explain what to consider when choosing one business structure over another, what LLCs are best at, what S-Corporations do best, and what they have in common. We’ll also explore frequently asked questions between an S-Corp and an LLC. 

What is a Limited Liability Company?

According to the National Small Business Association’s (NSBA) 2017 Year-End Report, an LLC is the most common business entity. Thirty-five percent of businesses opt for this business structure. The primary reasons people choose an LLC include: 

1. Separation of business and personal assets
2. Ease of forming an LLC 
3. Separation of personal and business liabilities
4. Ability to choose your tax structure
5. Pay self-employment tax

Keep reading to learn what an S-Corporation is and why people use it.

What is an S-Corp?

An S-Corporation isn’t a business entity but a tax filing status. Despite this technicality, 33% of small businesses are S-Corps, according to the same NSBA report.  An S-Corp files taxes using Subchapter S of the Internal Revenue Code. Click the link to view the current version of the S-Corporation tax code. You must meet the following requirements to form an S-Corp:

1. Have less than 100 stockholders
2. Run an LLC or C-Corp
3. Be a U.S. resident
4. Maintain one class of stock
5. Pay the business owner a reasonable salary
6. Pay half of the 15.3% payroll taxes

S-Corporations are predecessors to LLCs, according to Law Shelf. People also call an S-Corp by the names:

• Sub S-Corporation
• Small business corporation

Difference between LLC and S-Corp

There are a handful of differences between LLCs and S-Corporations. Some of the most important differences include:

• An LLC is a business entity. At the same time, an S-Corp is a tax filing status.
• An S-Corp treats business income differently than a default single-member LLC.
• An LLC provides more tax options than an S-Corp.
• LLCs have fewer compliance requirements.
• LLC owners pay self-employment taxes, but S-Corps use payroll taxes.

LLC vs S-Corp: Entity Status

Because an S-Corp is a filing status as opposed to a type of business formation, an LLC is by far the more efficient business structure unless you want to take advantage of the S-Corp dividend abilities. That means you’d need to go through creating an LLC or a C-Corporation before you can even start an S-Corp. S-Corporations were heavily used before LLCs became a business structure because of the limited liability protection to professionals without the far more significant complication of C-Corp status.

LLC and S-Corp: Business Formation

The formation of Limited Liability Companies and S-Corps can be relatively similar. Let’s look at the requirements for each to understand the differences and similarities.

Forming an LLC

An LLC will have several main requirements to create and maintain it. You’ll need to:

• Pay the filing cost
• Pay ongoing fees
• Write an operating agreement
• Submit the articles of organization
• Get an EIN

We’ll look at the filing costs, operating agreement, and the articles of organization because they are unique to an LLC.

Filing Cost and Ongoing Fees

To form an LLC, you need to register with the Secretary of State (SOS) in the state you plan to operate. You can find your state’s SOS by using the government agency finder on USA.gov. Paying the filing cost will require a fee at the state level. None are over $500, and most are under $300, but you’ll also have to pay ongoing fees that range from $0 annually to $500 annually. The lowest fees to maintain an LLC are in Pennsylvania, which typically costs $70 every ten years.

Operating Agreement

An operating agreement states how the business will function. When you file this document with the SOS it provides the benefits of:

• Personal liability protection
• Making verbal agreements legally enforceable
• Setting rules that are different than your state's default rules for LLCs

An operating agreement is mandatory in California, New York, Delaware, Missouri, and Maine. Others may give you the option to include one, but those states require one. An operating agreement includes:

• The creation date
• Location
• Owners and percentages
• Management and voting interests
• Investment in business
• How profits, losses, and assets, are distributed
• A succession plan
• A dissolution plan
• And anything else required by your state.

You’ll need to sign and notarize the operating agreement. Create an LLC through our partner BetterLegal to save $30.  Let’s look at the Articles of Organization next.

Articles of Organization

The Articles of Organization are very similar to the operating agreement, but you must submit the document to the Secretary of State’s office. They include:

1. Company name
2. Description of the company
3. Mailing address
4. Name and address of the registered (or statutory) agent
5. Information about company owners, managers, and officers

The most common reason for rejecting an LLC application is that someone else is using the name.

Forming an S-Corporation

An S-Corporation will first require starting a business entity with your state’s SOS. You may opt to create an LLC or C-Corp as your business entity. Then you’ll need to file Form 2553 with the IRS to opt to be treated as an S-Corp. There should be less than 100 stockholders, and they can’t be foreign residents or several types of legal entities. UpCounsel explains which legal entities can and cannot hold S-Corp shares, but each one may need to be considered on a case-by-case basis. These restrictions are significant drawbacks of an S-Corp.  Unless some of the following sections impact your company, I recommend starting with an LLC and opting for an S-Corp when the benefits outweigh the costs. 

LLC or S-Corp: Treatment of business income 

How LLCs and S-Corps treat taxable income varies dramatically. Significant differences include:

1. Owner employee classification
2. Profit treatment
3. Treatment of Fica
4. Tax code(s) used

We’ll look at each in more detail.

Is the owner of an LLC required to pay self-employment tax?

By default, the government classifies an LLC owner as self-employed, which means the owner:

• Claims the profit or losses as personal income, which is called pass-through income.
• Pays the full 15.3% Federal Insurance Contributions Act (FICA) taxes.
• Follows the same tax code as a sole proprietor or partnership.
• May choose to file taxes as an S-Corp or C-Corp and file based on their tax codes.

An S-Corp owner will treat their income differently. Their income is treated two ways depending on whether they are actively involved in the company. Let’s look at each.

How is an S-Corp owner’s income treated when they run the business?

If you actively work in your S-Corp, there are three types of income.

1. A reasonable salary: Must pay comparable to the Bureau of Labor Statistics Median Income or higher for your role. Find the appropriate wage.
2. Losses: Treated as pass-through income, reducing your net income.
3. Profits: Profits are treated as dividend income and have three tax brackets: 0%, 15%, and 20%. You don’t pay FICA on dividends.

The salary will be subject to 7.65% payroll tax taken out of your paychecks and 7.65% that comes out of the S-Corp revenue and is considered an expense, which reduces dividends. You’ll be following a different tax code and filing different forms.

S-Corp Owner as a Stockholder Only

If you are not actively involved in the management of an S-Corp, you do not have to include a reasonable salary. You only have to include losses and profits based on the following:

• Losses: Treated as pass-through income, reducing your net income.
• Profits: Profits are treated as dividend income and have three tax brackets: 0%, 15%, and 20%. 

This strategy can be beneficial if you pay others to run the company and do not want to be taxed based on FICA and personal income brackets. Depending on your role in the business, net income, and other factors, an S-Corp can have considerable benefits over an LLC. The benefits become tremendous once you have reached a net income greater than the median wage for a comparable position. All profit from the S-Corp will be dividends, reducing your tax load. We’ll discuss tax benefits next.

S-Corp vs LLC: What Are the Tax Benefits?

Both an LLC and an S-Corp have benefits that create tax savings depending on your company's profits and the number of business owners. The table below shows an S-Corp’s tax savings over an LLC assuming $500,000 income before taxes.

Comparisons Using Operations Manager Median Pay of $180,000
	LLC (Default)	Working in S-Corp	S-Corp Dividends Only
Net Income/Salary	$500,000	$180,000
Minus FICA	$18,228	$9,114
Minus Income Tax	$148,753	37831.5
Dividends	0	$320,000	$500,000
Minus Dividend Taxes	0	$41,749	$70,761
After Taxes	$333,019	$411,306	$429,239
Effective Tax Rate	33.40%	17.74%	14.15%

We’ll discuss the benefits of each now.

What are the tax considerations of an LLC?

An LLC owner has several considerations for taxes if using the same tax code as a sole proprietorship or partnership, including:

• 15.3% self-employment tax is broken into 12.4% for social security and 2.9% for Medicare.
• Pay personal income tax rates of up to 37%.
• Benefits like Health care are tax-deductible in pass-through taxation.
• Pass-through LLCs can deduct 20% of net income before being taxed.

An LLC can also file as a C-Corporation or an S-Corporation by filling out the appropriate documentation. Please read up on LLCs on the IRS website to learn about their tax treatment. From a tax standpoint, the benefit of an LLC is the ability to choose whether filing like a sole proprietor or corporation is best for the business owner. Choose the one with the least tax consequences. When you own an LLC, pass-through taxation is easier because you only pay personal taxes to the Internal Revenue Service. However, business entities can see even more benefits through the S-Corp election. Let’s look at that now.

What are some tax considerations when electing S-Corp status?

S-Corporations have more tax requirements than an LLC, but less than a C-Corp. S-Corps don’t pay corporate taxes, but they do have to file a tax return. The requirements for an S-Corp include:

• 1120S: Documents income, gains, losses, deductions, and credits.
• 1120W: Estimated tax form that is required if a corporation elected S-Corp status.
• Employment taxes: The company will collect and pay payroll taxes, which are the same rate as self-employment taxes, but the company and employee split the cost. They are also responsible for federal unemployment tax.
• Excise taxes: Charged on industries like energy, gambling, and tanning booths.

Meanwhile, stockholders will have special requirements for their personal tax returns, including:

• 1040: This form is to claim income and losses from S-Corps, estates, trusts, etc. 
• 1040SR: Alternative form 1040 for those over 65 filing their personal tax returns.
• 1040ES: Quarterly estimates for business owners' personal tax returns.

I suggest reviewing Schedule E and other S-Corp requirements with a licensed tax professional. Information in this blog should not be considered income tax advice. While there are more requirements for S-Corp tax status, the S-Corp tax rate is zero. That means you get most of the benefits of a corporation without the corporate income tax.  If you have to pay taxes, an S-Corp tax treatment definitely beats an LLC once an LLC is taxed at the 25% tax bracket or higher.

LLC vs S-Corporation: Operations

The operation of an LLC or a business electing S-Corp status is similar, except 

• An S-Corp has to manage payroll taxes.
• An S-Corp has more legal requirements, which take time.
• An LLC taxed for self-employment tax is done on a personal income tax form unless the LLC has other employees. 

Which is better, LLC or S-Corp? A small business will have fewer operating requirements as an LLC vs corporation requirements. You’ll want simpler operations when starting a business because there is a long learning curve.

LLCs and S-Corporations: Compliance

LLCs have a much easier time complying than an LLC elected as S-Corp. Unfortunately, the tax classification is the main reason for selecting S-Corp status, but it is also the cause of increased compliance requirements. If you consider having your LLC taxed as S-Corp, I would recommend getting several estimates from licensed accountants of how much it will increase your costs. If the tax savings are more significant than the additional costs, you can save a lot of money on taxes. Use the formula above to determine whether the transition makes sense for you. An S-Corp is one of the types of businesses that makes the most after-tax-profit as long as you plan on staying under 100 stockholders.

Frequently Asked Questions about LLCs and S-Corps

The following sections answer some of the most commonly asked questions about S-Corp and LLC business structures.

Is an LLC a corporation?

An LLC is not a corporation. A corporation can sell stock in the company, while an LLC cannot. An LLC may opt to file taxes as either an S-Corp or a C-Corp. LLC owners can file with the IRS to opt into one of the tax structures. The forms to file are:

• LLC as S-Corp: Form 2553
• LLC as C-Corp: Form 8832

Can an LLC be an S-Corp?

An LLC can be an S-Corp by filing Form 2253 with the IRS.

What is an S-Corporation?

An S-Corporation isn’t a business entity but a tax filing status. Despite this technicality, 33% of small businesses are S-Corps, according to the same NSBA report.  An S-Corp follows Subchapter S of the IRS Tax Code. To become an S-Corp, your company must:

• Have less than 100 stockholders.
• Be a C-Corporation or LLC.
• Be wholly owned by U.S residents.
• Have one class of stock.

Can an S-Corp own an LLC?

Yes. LLC owners can be any combination of people or legal entities in most states, but some states may have restrictions. You can view the requirements on their Secretary of State (SOS) website. Use USA.gov to find the link for your state’s SOS office.

S-Corp vs LLC for real estate?

Real estate professionals may want to file as an S-corp instead of an LLC because tax benefits can reduce your tax rate. As an employee of an S-Corp, you have to assign yourself a reasonable salary, but the S-Corp pays profits as dividends, which have a lower tax rate.  You’ll want to use an S-Corp vs LLC calculator to establish whether it makes sense to create an S-Corp.

How does an LLC become an S-Corp?

An LLC becomes an S-Corp by filling out Form 2553 and filing taxes using guidance from the IRS.

How to revoke an S-Corporation election?

To revoke S-Corp status, you’ll need to send a statement of revocation to the IRS. You can find more information about revoking S-Corp status on the IRS website.

S-Corporation vs LLC: So Which Should You Choose?

You can’t go wrong choosing to form an LLC or electing S-Corp tax classification. Both are highly beneficial to small business owners because they each offer liability protection for business owners' personal assets. The main difference between the two is income taxes once company profits pass median income for a comparable position. While I am not licensed to give legal advice, I would personally start with a single-member LLC, then move to an S-Corp after reaching a level where the income taxes are reduced S-Corp status. If you still aren’t sure which structure to use, I suggest reading our other blogs about choosing a formal business structure.

• 11 Types of Business Structures: Which One’s The Best Fit?
• Sole Proprietorship vs LLC – Which Should You Choose?
• S-Corp vs C-Corp

Do you like shopping for bargains on clothing and shoes? Have you considered reselling sneakers?  Tia Hall started Sneak City five years ago, and today she and her business partner Anastasia Lemley make $350K per month between their online store and two retail locations. They started out buying valuable sneakers like the Jordan Brand at thrift stores for just $50. Now their business is one of the best places to sell sneakers.  [su_note note_color="#dbeafc"] They have all the info you need, including:

• Get to Know the Sneaker Resale Market
• How to Start Reselling Shoes
  • Step 1. How to Buy Shoes
    • Where to Get Cheap Sneakers to Resell
    • How to Know if Shoes Are Fake
    • What is the Sneaker Resale Value?
    • How Much to Pay For Used Shoes
  • Step 2. How to Clean Shoes
  • Step 3: Photograph Your Sneakers
  • Step 4. Where Can I Sell Shoes?
  • Step 5. Shipping Services Are Crucial
• How to Grow a Sneaker Flipping Company
• FAQs
• Get Started Selling High Quality Sneakers

[/su_note] Click any of the links above to jump ahead to that section.

Get to Know the Sneaker Resale Market

The sneaker reselling industry includes two main segments:

1. Retailers and Ecommerce Stores: A sneaker business using this model will buy shoes in bulk and sell them in their stores.
2. Used Sneaker Resellers: These companies focus on used rare sneakers that they can cheaply buy and sell for more on the sneaker resale market.

The combined industries have nearly $75.3 billion value and are expected to continue growing by 1-2% annually. Check out the table below to find more statistics about the sneaker game.

Sneaker Industry Statistics
	Used Shoes	Shoes	Combined
Revenue (in billions)	$14.18	$61.10	$75.28
Profit	8.20%	3.50%	4.39%
Profit in Billions	$1.16	$2.14	$3.30
Number of Employees	277,000	320,000	597,000
Number of Businesses	71,162	12,848	84,010
Employees Per Business	3.892	24.907	7.106
Revenue per Employee	$51,183.39	$190,937.50	$126,093.47
Expected Solo Entrepreneur Revenue	$51,183.39	$190,937.50	$126,093.47
Expected Average Revenue	$199,232.74	$4,755,603.99	$896,057.61
Expected High Revenue	$941,800,000.00	$6,377,900,000.00	$6,377,900,000.00
Largest Company	Savers	Footlocker	Footlocker
Source (IBIS World is Pay Walled)	IBIS Industry Link 1	IBIS Industry Link 2

Now that you've got an idea of just how profitable this industry can be, let's look at the different routes to getting your share.

How Much Money Do I Need to Start Reselling Sneakers?

You’d be surprised how little money you need to become a shoe reseller. Tia started reselling shoes and other clothes at thrift stores. She told us: [su_quote]You only need like $50 to start. I would buy them, mark them up, and sell on eBay. As I grew I opened my own store.[/su_quote] You can easily start with less than $1,000 if you have your own website and more than 1 pair of shoes to sell, but if you want your own retail store, you’ll need $100K+ normally.

What Are the Best Shoes to Resell?

The sneaker community is looking for rare sneakers that are stylish. Check this list of brands you should look for when buying:

• Limited Edition Sneakers
• Nike Air Jordan
• Original Air Jordans
• Yeezy’s (Kanye West Shoes)
• Nike Air Mag
• Hoka Shoes
• Hey Dude Shoes
• Golden Goose Shoes
• Mephisto Shoes

Tia explained: [su_quote]The best shoes to resell in store are between $200-400, while online is a little higher.[/su_quote] Check out our interview with her below. [su_youtube url="https://www.youtube.com/watch?v=dJryzKeGwtU"]

What Are the Most Expensive Shoes in the World?

The most expensive shoes in the world cost a whopping $20 million dollars. Antonio Vietri created the Moon Star Shoes from meteorite, 30 carats of diamonds, and solid gold. You’re not likely to get your hands on these, but there are plenty of other valuable shoes you can resell. Check out more of the most expensive shoes.

About Sneak City: From $50 to $350K/Month Selling Sneakers

Sneak City is 5 years old and started out of Tia’s parents’ garage as a way to make money during college. Her sneaker reseller business became too big for her parents’ garage, so she got her first retail store, which she also uses to ship the shoes she sells on online marketplaces.  Sneak City is currently making $4.2 million per year and is an omnichannel seller using Shopify. They told us: [su_quote]We make about 50% of our sales in-store and the rest selling shoes online. The best place to sell shoes online is Instagram.[/su_quote]

How to Start Reselling Shoes

Flipping shoes can be a profitable side hustle. Tia told us what a day looks like in the sneakers reselling business. Her day consists of five primary tasks while buying and selling sneakers.

1. Buying Shoes
2. Repairing and Cleaning Shoes
3. Photographing Sneakers
4. Adding Products to Instagram And Website Through Automation
5. Shipping

Let’s look at each of these steps in greater detail. 

Step 1. How to Buy Shoes for Resale

You’ll want to understand sneaker reselling before you buy sneakers because people will try to sell you fake shoes. Avoid getting tricked by a side hustle when people sell used sneakers. Tia told us: [su_quote]You make money when you buy the shoe, not on the shoe resale.[/su_quote] It’s important to remember this because when you resell sneakers, the resale value is normally already specified by major resellers. The goal is to buy low, sell high, and make money on the difference. You’ll want to know:

• Where to buy shoes
• How to tell if shoes are fake
• How much to price used shoes
• How much to pay for used sneakers

Let’s start by discussing the best places to buy shoes.

Where to Get Cheap Sneakers to Resell

There are a lot of places you can go to find a new pair of hyped shoes to resell in the sneaker world. You should consider the following locations when looking to start a side hustle reselling shoes:

1. Wholesalers/Distributors: You can buy new Nike shoes and other brands that have limited releases from wholesalers and distributors. Flipping items this way creates profit from the difference between the wholesale price and the manufacturer’s suggested retail price (MSRP).
2. Reselling Apps: You can find shoes on online services like Offerup, eBay, and Facebook Marketplace. You’ll be responsible for meeting the person, assessing the shoes’ value, identifying fake ones, and negotiating price, 
3. Thrift Stores: Many people get into making money reselling shoes by starting at thrift stores.
4. Facebook Groups: There are multiple sneaker reselling Facebook groups with more than 1,000 people in them. You’ll be able to find some there. You can check for ones in your area as well by adding your city to the search.
5. Sneaker Con: Many locations have shoe conferences and trade shows where sneaker reselling occurs. Find niche market conferences.

Tia has used many of these strategies but explained: [su_quote]Now we buy 80% of our sneakers in store.[/su_quote] Keep reading to find out how to detect counterfeit shoes.

How to Know if Shoes Are Fake

Tia provided a list of ways to check if used shoes are fake. They include:

1. Nike does not use stitch guides. If you can see the holes of a stitch guide under a black light, the shoes are fake Nikes.
2. Check for a chemical smell. If it smells like chemicals, they are fake. If it smells like dirty feet, it’s harder to tell.
3. Check the box. If you know what a Nike box looks like, a fake box will often be “too bright.”
4. Shoes are too soft. Fake Nikes don’t use real leather, but instead use low grade materials.

You may also come across shoes that have the GOAT clean certification. If you do encounter this label, this is a good thing. It means the previous reseller sent the sneaker into GOAT and had them certified as legitimate clean resell sneakers. Next, let’s look at how to value shoes.

What is the Sneaker Resale Value?

You can look at the prices of shoes on online marketplaces like StockX and Goat. Tia recommends checking the shoe price on StockX. Shoes that sell on StockX are always new shoes. If they do not pass their inspection, StockX will send them back to you and return the customer’s money. This process makes StockX’s price the highest value you should expect to get for a product. You can also check other online marketplaces to get a better range of prices.

How Much to Pay for Used Shoes 

Tia explained she will normally take the StockX price minus 30% to get the price to pay a customer when she buys used shoes for reselling. IBIS World recommends keeping purchases between 43.8% and 71% of revenue. So Sneak City is paying on the high end of what most people or companies pay when buying and selling shoes. Check out the Sneak City video where they buy $100K of shoes at Sneaker Con. [su_youtube url="https://www.youtube.com/watch?v=CfA8eFAqcnA"] Cleaning shoes is the next part of sneaker reselling.

Step 2. How to Clean Shoes

Sneaker resellers can’t sell sneakers without cleaning them. You’ll want to make sure the shoes look nice and smell nice. It will make sneaker reselling easier, keep buyers happy, and potentially increase your seller rating.  Nobody wants to buy a pair of old sneakers with mud that smell like feet. Take the time to learn how to clean and sanitize the shoes before flipping sneakers. All you really need is some soapy water, and they’ll clean up nicely. Check out the video below. [su_youtube url="https://youtu.be/nta02Phk19U"] Some terms you can search to find common ways of cleaning Nikes and other shoes include:

• How to clean leather shoes
• Clean white shoes
• How to clean suede shoes
• How to remove odor from shoes

Next let’s talk about photographing sneakers.

Step 3: Photograph Your Sneakers

Sneaker reselling requires pictures of the shoes to help people understand the condition. Depending on where you list the sneakers, you’ll find different photography requirements. Here are some common types:

• Amazon: Main image should be jpeg, png, tiff, or gif with a 1600 pixel long side. The product should fill 85% of the image and the file name should be identical to the title of the listing. Learn more.
• StockX: Reselling sneakers on StockX does not require pictures because they already have the pictures, and they only allow sneaker reselling of a brand new pair. You’ll have to send the shoes to StockX for them to inspect them before you get paid.
• GOAT: Sneaker reselling on GOAT requires pictures if you have less than a 100% seller rating, the pair sold is used, or the new shoes have defects. The photos will be rejected if you can’t see both shoes clearly.

When in doubt, go with Amazon photography rules for reselling shoes on the secondary market. Customers are used to the white backgrounds. On your own site and social media, you may also want to use photos like the ones in this guide on photographing sneakers.

Step 4. Where Can I Sell Shoes?

We asked Tia about the best places to sell sneakers and she told us: [su_quote]Sell on Offerup or eBay starting off, but we use Shopify. It has hiccups, though. We pay almost 4% on every transaction.[/su_quote] She went on to explain that after she takes pictures, she posts them to Instagram, which she considers one of the best places to sell shoes. From there, she uses automation to add the sneaker resell listing to Shopify, pushing the listing to other places to sell used shoes, including:

• Facebook, Instagram, Pinterest, and other social media
• Shopify
• Google
• Email
• Wholesale Channels
• Handshake
• Amazon

Tia said they use: [su_quote]All of them. Instagram and Tiktok are most beneficial.[/su_quote] You can learn more about Shopify Sales Channels. Don’t forget you can resell shoes on apps like GOAT and StockX as well.

Step 5. Shipping Services Are Crucial

Shipping is a major part of sneaker reselling. Tia told us that the first thing she does every morning is prepare for shipping the shoes that were sold overnight. The common providers of shipping in the US are FedEx, UPS, and USPS. If you are buying and selling sneakers on platforms like GOAT and StockX, you’ll need to ship them to the platform to be verified. Now that you know how to resell sneakers, let’s look at how Tia grew Sneak City.

How to Grow a Sneaker Flipping Company

Tia gave several pieces of advice on how to start reselling shoes that are specifically focused on growing the business. We’ll discuss:

1. The importance of a job when starting out
2. How to set Up a sneaker store 
3. How to grow the business
4. How to increase your social media following

Let’s look at each item in the list.

Start Sneaker Reselling as an Employee

You’ll probably want to have a job when you first start because sneaker reselling is expensive. Retail prices of Nike, Adidas, and other shoes can quickly add up. In fact, sneaker culture has shoes with a resale value of up to $50K at the time of writing.  Most of those shoes are tied to a famous basketball player like Lebron James or Air Jordan. Rappers also have a niche market that often attracts sneaker culture. Check out some of the highest offers for people wondering how to sell shoes online.

How to Set Up Your Sneaker Reseller Locations

You’ll need to consider the layout when you open resell shoe stores. Tia gave some ideas on setting up a store.

1. Choose a location.
2. Buy security cameras and a roll-down gate, and consider hiring an overnight security guard.
3. Separate shoes between one-offs, bulk shoes, and high-value shoes.  
4. Keep one-offs on one side, bulk shoes on the other side, and high-value shoes behind the counter.
5. Wrap the high-value sneakers to keep them in good condition. 
6. Keep each shoe brand together and sort them by size with the largest size at the top and the lowest size at the bottom. 

Tia and her partners were hesitant when they opened their first store, but looking back on the experience and with greater confidence after their initial success, they discussed the importance of growth.

Importance of Growth

Tia warned: [su_quote]Anything you’re going to grow from is going to make you uncomfortable.[/su_quote] She started in her parents' garage but grew to the point they asked her to get a space after a few months of running her side hustle selling Yeezys and Vintage Air Jordans. So she bought her first standalone location. When one store wasn’t enough, she opened a second retail space. Tia recently upgraded one of her resell sneaker stores to a mall with $13.5K monthly rent. She told us: [su_quote]More expensive stores have higher profit margins.[/su_quote]  She explained, [su_quote]Standalone [stores] are harder than malls. A mall has more exposure, but a lot higher costs.[/su_quote] This brings us to another point of how to resell sneakers: exposure.

Social Media for Sneaker Resellers

For those wondering where to sell shoes, Tia told us: [su_quote]YouTube videos have been tremendous to sell my shoes.[/su_quote] Sneak City’s Youtube store has 130K followers, and it helps them sell more sneakers at the resale price. She explained how to resell shoes without it feeling like you are creating special content.  [su_quote]We record a video when people come into our store. That way, we can share interesting transactions that people can learn from.[/su_quote] They also travel worldwide with custom merch and record videos about how to start reselling sneakers.

Frequently Asked Questions About Selling Shoes

What is the biggest expense for shoe resellers?

The primary expense to buy and sell sneakers on the resale market is the cost of the pair of shoes. Other expenses you should be aware of include shipping and boxes, which cost approximately $1 per box when you buy the boxes in bulk.

How to Sell on Stock X

1. Sign up for StockX
2. Select a payout method and currency 
3. Create a listing 
4. Print a shipping label
5. Ship shoes to StockX within two business days
6. StockX verifies your shoes
7. Get paid

Head to StockX to learn how to shoe resell on StockX.

How to Sell Shoes on GOAT

If you want to resell an Original Air Jordan or other sneaker on GOAT, you’ll need to:

1. Apply to sell on GOAT (They don’t give a timeline for approval because they only allow enough sellers to verify all transactions.)
2. Wait for approval
3. List items using SKU
4. Take pictures of the shoes
5. Print a shipping label
6. GOAT inspects shoes
7. Get paid

Learn more about how to sell your Nike Air Jordan sneakers or other shoes on GOAT.

Get Started Selling High Quality Sneakers

We’ve discussed where to sell sneakers, interacting with potential buyers, the best place to sell sneakers, and how to sell on GOAT.  If you’re ready to start reselling shoes, consider checking out some of our other blogs to get familiar with all the business registration requirements. Then tell us: Where have you had the most success reselling your sneakers?