Travel Agency Business Structures: How to Choose
Let me be brutally honest: there’s no silver bullet regarding which travel agency business structures are best. Really, the best person for you to chat with on this is your tax person or travel attorney. But … while you’re waiting for them to call back (cue elevator muzak), I’ve got some pretty handy information for you. 😊
Here’s how this is gonna go down:
- Call/email your tax person to set up a time to chat on the best business structure for your situation. Don’t have one? You’ll want to find one. A great tax person is invaluable to your new travel agency and can help you save moola on your taxes.
- We’ll chat on the different types of travel agency business structures available and the pros/cons of each.
- You’re going to do a Happy Dance (and I’ll do the background singing… it’s gonna be so great!!).
First Things First: Laying The Foundation
Before we even get our hands dirty with travel agency business structures, let's do a quick primer:
1. DBA (Doing Business As):
While DBA is not a type of business structure, it’s worth reviewing because I’ll be throwing around this acronym a lot. Why? Because most Sole Proprietors will need to file a DBA, and with the other business structures you’ll need to file a DBA when using any business name other than the legal business name.
Most Sole Proprietors will need to file a DBA, and with the other business structures you’ll need to file a DBA when using a business name other than the legal business name.
To understand the purpose of a DBA, we have to step back a bit. Let’s look at this scenario: I’m Steph Lee, owner of Host Agency Reviews. When my advertisers pay me, they don’t make the check out to Steph Lee, they make it out to Host Agency Reviews. When I go to cash those checks, the bank has to somehow know Steph Lee and Host Agency Reviews are the same, right? (And the government wants to know the person behind the business for obvious reasons.) A DBA lets 'em know that I'm the wizard behind the curtain.
That’s where our handy dandy DBA filing comes in! When you open your business bank account, you will likely be required to provide a DBA to prove that you’re the person the money should be going to.
The other thing to know is that the DBA is called different things in different places. In Canada, O/A (Operating As) or T/A (Trading As) are DBA's equivalents. In the US, "trade name," "assumed business name," and "fictitious business name" are all are just synonyms for DBA. *Sigh.* Bureaucracy. 🙂
Federal Employee Identification Number (sometimes referred to as an "EIN") is a 9-digit number Uncle Sam uses to identify businesses in the US. For a Sole Proprietor, you don’t technically need a FEIN unless the IRS’ says so. But here’s a little secret . . . get one anyway! Here’s why:
- If you don’t have an FEIN, you’ll be using your social security number. Now, you don’t want your social security number floating all over, do you?
- Many host agencies require that you have a FEIN number in order to sign up.
The FEIN application doesn’t take long to fill out and—this is one thing the IRS is quick about— your brand spankin' new FEIN is issued immediately on the site! Plus, it’s free! So why the heck not?!
3. Tax Professionals Are Your Friend:
I'm serious. Go get one right now. Finding a good one is like dating. Ask your friends to set you up with a good one. You might run into some doozies, but you'll find love soon enough.
Getting to Know the Types of Travel Agency Business Structures:
Okay, let’s start from the ground up. What types of legal travel agency business structures are out there for your new biz? There’s a few options here in the United States and Canada:
- Sole Proprietor
- LLC (Limited Liability Corporation)
- Corporation (S. Corp)
Let’s start with the least expensive and simplest to implement, then we’ll work our way up.
1. SOLE PROPRIETOR
A Sole Proprietor is the easiest business structure to set up and has a sole owner . . . you! It’s easy to implement because you don't have to mess with the legal paperwork that comes with setting up a separate business entity. You and your business are like conjoined twins. SCORE!
There’s a dark side to that, of course (beyond sharing organs). Because you and your business are one and the same in the eyes of the government, that translates to two potential downers for you:
- You’re held responsible for any debt of your company. (Bankruptcy!!! Oh no!)
- If someone names your company in a lawsuit—bad news—that means they’re also suing you as an individual.
Quick reminder: Sole Prop. requirements vary by location so check out NOLO.com’s state-by-state guide to setting up a Sole Proprietor for specifics on what you need to get set up in your state. And remember, you're probably going to need that DBA we talked about earlier.
Tax Note: As a Sole Proprietor, while you and your business are seen as one entity, you’re still a business and that has certain responsibilities . . . Like filing quarterly estimated taxes! You aren’t paying income tax, but you do pay self-employment tax (those are your estimated taxes).
2. LIMITED LIABILITY CORPORATION (LLC)
Now we’re getting into the big time—we’ve added the word Corporation to our business structure! YAY!
Sadly, with the word Corporation, comes big(ger) price tags. The cost of an LLC filing is typically around $100-200 but states like California charge an additional $800 tax on top of the filing fee. But here's an olive branch! You’re getting personal liability protection! But, more sad news—I hate to put you on a roller coaster ride here—you'll pay a price for that personal liability protection with more paperwork and higher administrative costs.
Some things you should prepare to do to set up your travel agency's LLC:
- Set up a FEIN
- File your Articles of Incorporation (don’t be scared, it’s super easy)
- Create an Operating Agreement (I can’t lie; this one is not as fun)
- Publish a public notice (only for some states)
NOLO.com has a fabulous state-by-state guide on how to form an LLC you’ll definitely want to take a gander at it. It has pricing, the exact steps to file your Article of Incorporation, and tells you whether your state has any publication requirements, and loads more! I heart it.
For most of the readers of our site, if you started as a Sole Proprietor/Partnership and your agency is successful, chances are you’ll be transitioning to an LLC down the road so bookmark this article!
Two Quick Tips:
1. An LLC provides personal liability protection, but not if you use your social security number or personal financial information to obtain financing or credit.
2. LLC owners do not need to be US citizens or permanent residents because an LLC travel agency business structure does not have residency requirements. This is something for folks who don’t have a permanent US residency or citizenship will want to note!
Yet Another Tax Note:
Your business income and expenses are reported on your personal tax return. If you’re a single-member LLC, you are viewed as a “disregarded” entity. This means that when tax time comes, you report the LLC’s income/expenses in a Schedule C ─the same schedule used by Sole Proprietors.
A Partnership actually isn't a business structure, it's more of a business type. Anytime you have two or more business partners, you're going to be looking at a partnership.
If you have a Sole Proprietor set up with more than one owner and it's called a General Partnership. Weird. I know. Like a Sole Proprietorship, a General Partnership is easy to set up. Again, the downside is that the law views you and your business as the same entity so you are both held personally liable for any debts of your company. So if your partner makes bad choices, that will come back to you.
An LLP not only limits your personal liability for the debts of the business, but it also limits your liability for any wrongdoings of your partners.
Now, what if you don't quite want to be an LLC, but you want more personal protection than what you'd find with a General Partnership? That's where the Limited Liability Partnership (LLP) comes in. Not all states have this option but it essentially limits your personal liability. And what's important here is that an LLP not only limits your personal liability for the debts of the business, but it also limits your liability for any wrongdoings of your partners.
When you're looking at an LLC structure but have more than one owner, you've now entered the territory of an LLC with the tax classification of a Partnership.
Let’s go verbatim with the IRS site here, “A Partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax.”1 The profits/loss of your company will “pass-through” to your personal tax return and you pay those pesky estimated taxes in lieu of income tax.
If setting up a partnership, I’d recommend talking to other entrepreneurs that have experience with partnerships and ask them what they wished they’d known going in. If you don’t know anyone involved in a partnership, check out this Entrepreneur article. Or, Google has all sorts of advice just waiting for you. 😊
Also, I highly, highly encourage you to spend the money on a travel attorney and have them write up a partnership agreement. Like a marriage, taking a business partner should not be taken lightly! Your attorney can also help walk you through the process and offer some sage advice!
4. S. CORPORATION & C. Corporation
Because only ~.00001% of readers on the site might find this useful, I'm going to breeze through, offering a little background info for S. Corp. business models.
"S. Corp" refers to, "the provisions allotting S status to companies are enumerated in Subchapter S of Chapter 1 of the Internal Revenue Code."2 Wow, that really clarifies things, doesn't it? Here's what you really need to know about an S. Corp . . . it's not really a business structure, it's a tax designation
I'm not trying to pull one over on you by including info on S. Corp in an article dedicated to travel agency business structures. The benefit to some agencies of an S Corp taxation status is that the company only pays self-employment taxes on the owner’s salary. With S Corps, any profits left in the business or distributed to shareholders are not subject to the 15.3% self-employment taxes. That adds up!
Sounds dreamy eh? Well just remember that you'll need to factor in additional costs of unemployment insurance, payroll administration fees, more complicated taxes and in some states, and additional fees for being an S Corp.
Wondering if it makes financial sense to change from being taxed as a single-member LLC to being taxed as an S Corp? Or do you have 100+ shareholders and need to think about a C. Corp? If that’s you, stop reading right now and call an attorney pronto to make sure it’s done correctly (ahem, not consulting me 🙂). So, let’s not waste any more time on this!
Deciding on a Travel Agency Business Structure: Questions to Ask
A Sole Proprietor will be the best fit for most of our readers because it’s a nice stepping stone into the world of entrepreneurship. That said, maybe you want to explore it more. What’s the difference between the business structures? I think the easiest way to look at it is to keep in mind that structures differ by:
- how much personal liability protection do they offer you?
- how much they’re going to cost?
- how much work they are to start/upkeep?
- how they’re viewed by Uncle Sam?
So, which business structure is right for your travel agency? Let’s dig a little deeper into a few of the questions to help you narrow it down.
Question #1 Personal Liability Protection: What do I have to lose?
No, seriously. If you’ve got a lot of personal assets (think: nice car, amazing stamp collection, boat, private island, etc.), you’ll probably want to consider a travel agency business structure like an LLC to protect your assets.
If you’ve got a lot of personal assets (think: nice car, amazing stamp collection, boat, private island, etc.), you’ll probably want to consider a travel agency business structure like an LLC
With an LLC, the law sees you (as a person) separate from your company. This means if your travel agency is named in a lawsuit or your agency files bankruptcy, your personal assets are not fair game.
Another thing to consider is that higher-profile travel agencies are more likely to need greater legal protection since they have a bigger target on their back. An LLC structure is a good bet.
Of course, because your personal assets are protected, that means more paperwork, which means you can expect it to cost a bit more.
Question #2: What is my level of risk tolerance?
The way I look at it, your level of risk tolerance comes down to 4 things:
1. How much you’re worth
2. How much you’ve invested
3. How much your travel agency makes/is expected to make
4. How much risk you’re comfortable with
If you’re starting up your travel agency, don’t have a ton of cash, and plan on booking only friends and family, let's be honest . . . your risk of going bankrupt or being sued are pretty slim. So to start, you might feel comfortable with a Sole Proprietor structure that is easier to implement, costs less, but doesn’t protect your personal assets.
However, if you’ve got a private island and have pet dolphins, you may not want to risk it. In this case, I’ll assume you’d be more than happy to pony up the cash for a business structure that protects Flipper and her pod.
For a more realistic scenario—come back down to Earth, Steph—if you’re opening a storefront, hiring employees, or taking out a business loan, then you’ve got a lot on the line and probably want to go with a business structure that protects your personal assets in case things head south.
Question #3: How much do I want to spend?
Starting up a travel agency can be stressful for most entrepreneurs. As you’re getting set up, you’re putting money out and nothing is coming back!
Filing as a Sole Proprietor can be done in most states for less than $100. Contrast that with the cost of an LLC ($100-$200 in most states + higher tax preparer costs due to more forms + legal fees of getting setup + higher administrative costs).
Remember, you can always start as a Sole Proprietor and change your travel agency’s business structure at a later date.
OMG, We’re Done … Happy Dance!
No, no, no . . . I did NOT forget about the Happy Dance part. So, I’m going to throwback to one of my old school favorites. N’Sync’s Bye, Bye, Bye.
Ahem, here’s your dance part (compliments of Darren’s Dance Grooves, a VHS (what!?!?!) I really did purchase to learn the Bye, Bye, Bye dance):
And if you need a refresher on the part I’ll be singing, here’s the music video for you:
It Was So Nice to Chat!
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[Editor's Note: This article was originally published in Aug. 2020. We updated it with all the latest and greatest info and republished it on the post date above! We made a very important correction to clarify groups of dolphins are regarded as "pods". . . not a clan, posse, or entourage. ]