LLC for Pawnshops

Why Starting an LLC for a Pawnshop Is Important

Personal Asset Protection

The top reason to form an LLC for a pawnshop is to gain access to the personal asset protection provided by this business structure. Whether you operate a small shop by yourself or you’ve joined with other pawnbrokers to open a large pawnshop, you need the limited liability protections that an LLC can provide.

For example, let’s say that a customer slips on a wet spot on your floor, falls over, and injures themselves. In this circumstance, if you operate your pawnshop as a sole proprietorship or general partnership, your personal assets — like your house, car, personal bank accounts, etc. — would be at risk if you are sued.

On the other hand, if you form an LLC for your pawnshop before you ever make your first sale, and you operate and maintain that LLC in a compliant fashion, the scope of the lawsuit will be limited to your business assets. In other words, your personal assets will be protected by the business structure you’ve chosen.

Taxation

However, this is just the tip of the iceberg when it comes to the advantages of the LLC for pawnshops. Another important aspect is taxation. The LLC actually provides its owners with a selection of options regarding how they want the business to be taxed, which can save you a considerable amount of money compared to simply operating as an informal business entity.

Sole Proprietorship/General Partnership

Your pawnshop LLC can be taxed as a sole proprietorship (for single-member LLCs) or general partnership (for multi-member LLCs), which is the default option. With this tax structure, your pawnshop business itself does not pay taxes, but rather the profits are passed through the business entity and you pay taxes on that money when you file your own personal taxes.

C Corporation

You can also choose for your pawnshop to be taxed as a C corporation, although this option isn’t very popular because it subjects your business to what’s known as double taxation — meaning that your profits are taxed first on the corporate level and again on the personal level when they’re distributed to you as an owner.

S Corporation

The other option is S corporation taxation. There are quite a few limitations to electing S corp taxation, but most U.S.-based pawnshops have no trouble meeting these requirements — your business cannot have more than 100 owners, they all must be either residents or citizens of the United States, etc.

S corp taxation can help your pawnshop save money by reducing your self-employment tax burden. Instead of paying self-employment taxes (a 15.3% tax that includes the employer and employee portions of Medicare and Social Security) on all of your business income, you can pay yourself a reasonable salary for your role and only pay self-employment tax on that portion of your income, while you can reinvest the rest of it into your business without paying this tax.

Compared to operating a sole proprietorship or general partnership pawnshop, the S corp taxation model can save you quite a bit of cash that you can use to buy more inventory or make improvements to your store, rather than writing a big check to Uncle Sam.

Enhanced Credibility and Name Uniqueness

Finally, an LLC structure can enhance the credibility of your pawnshop business venture. Informal business entities don’t have exclusive assumed business names and typically operate under the personal name(s) of their owner(s). For instance, if your name is Johnny Smith and you operate a pawnshop, your company’s name is also “Johnny Smith,” which obviously isn’t a great name for any business.

In this scenario, you could register a DBA (doing business as) name to give your business the ability to operate under an assumed business name, but DBAs have no exclusivity regarding their naming rights in many states. This means that if another pawnshop wants to use your DBA name as their own, they’re not only allowed to do so, but they can actually register a formal business entity with that name, preventing you from continuing to use your own assumed name.

With an LLC, you not only have the rights to exclusive use of a business name, but you will also have either the phrase “limited liability company” or the letters “LLC” in that business name. This provides your business with a jolt of respectability because customers respect the professionalism displayed by an LLC. Also, they typically feel more comfortable writing checks to a business entity rather than to an individual.

What Is an LLC?

First off, let’s quickly outline what an LLC is. LLCs are formal legal entities that are typically taxed similarly to sole proprietorships and general partnerships, in that the owners include any company profits or losses into their personal returns — the LLC itself does not owe income taxes. An LLC may also elect to be taxed like a corporation, although this is not a very common option.

There are similarities to corporations too, especially when it comes to financial responsibilities. In an LLC, the owners or members are not usually personally accountable for the financial status of the business. This means that if someone sues your LLC, your personal assets are not at risk. See more on our LLC definition page.

How to Start an LLC for a Pawnshop

The formation process for LLCs varies depending on which state you’re forming one in, but in general, the process has some universal steps that need to be taken no matter what state your business is located in. If you want a comprehensive overview of all the steps required to form an LLC, check out our complete LLC guide on the topic. The basic steps in the LLC formation process in any state are as follows:

1) Choose an LLC name

Coming up with the perfect name for your new LLC is an important step. You’ll need to choose a name that represents your company and describes what you do, and you’ll also have to make sure it isn’t already in use by checking your state’s business database.

2) Designate a registered agent

Your LLC’s registered agent (which can be an individual or a professional service) is responsible for receiving important document deliveries from the state — like service of process, annual report reminders, etc. — and forwarding them to you. The registered agent ensures that the state always has a reliable point of contact for your business.

3) File your formation documents with the state

The form used to create an LLC is usually called the Articles of Organization, although the name can vary (some states call it the Certificate of Formation or something similar). You’ll need to provide the state with some basic information about your business and its owners. In exchange, the state will formally create your LLC.

4) Acquire an EIN

The Employer Identification Number (EIN) is a federal tax ID number that essentially functions as a Social Security number for a business. The EIN allows your business to hire employees, pay taxes, apply for bank loans, and more. You can easily obtain an EIN from the Internal Revenue Service free of charge.

5) Create an LLC operating agreement

Most states don’t require operating agreements but every LLC should have one regardless. This is an internal document that outlines several key operational aspects of your LLC. The value of the operating agreement is how it can help prevent ownership disputes down the line by clearly explaining how the LLC will be run.

6) Create a financial infrastructure

You will need a business bank account for your LLC, and you’ll probably want a business credit card for work-related expenses as well. It’s also a good idea to use accounting software like QuickBooks or even hire an accountant to handle your bookkeeping for you.

7) Handle taxes, licenses, and permits

Depending on your state, you may need a general business license to operate your LLC in compliance with state requirements. There are typically several licenses required to operate a compliant pawnshop, but these vary considerably by state and locality. You will most likely need at least a pawnbroker’s license, a secondhand seller permit, and a precious metals dealer permit. Don’t forget to check with your state to see if there are franchise or privilege taxes assessed on LLCs, and also see if your municipal and/or county government entities have any further licensing requirements.

8) Understand maintenance requirements (annual reports, franchise taxes, etc.)

Again, these requirements can vary by state, but most states require some sort of regular report to ensure that your LLC’s info is up-to-date in the state’s business database. Some states require reports each year, while others only require them biannually or not at all. No matter what your state requires, you’ll need to stay on top of it to keep your LLC in good standing.

Additional Resources for Starting a Pawnshop

1) PawnMaster

PawnMaster is the leading software supplier for the pawn industry, and they’re a great resource for anyone looking to start their own pawnshop. They offer point-of-service and inventory management tools that are used by more pawnshops than any other software product. Their powerful software also has optional add-ons for compliance, security, onboarding services, hardware integrations, and more.

2) PawnMaster Resources

The PawnMaster website is a great resource in more ways than one, as the “Resources” section of their site includes indispensable knowledge for any pawnshop owner. They have extensive resources on state-by-state regulations, and they also provide links to federal regulations, tax information, and small business development info.

3) National Pawnbrokers Association

The NPA is the leading advocacy group in America for pawnshops and pawnbrokers, and they’re an incredibly valuable resource for anyone in the industry. They offer networking opportunities, webinars, events and conferences, educational resources, business solutions, and communications info.

4) 9 Business Lessons From a Pawnshop Pro

This article from Business News Daily is far from recent, as it was written back in 2011, but all of the information you’ll find here is still highly relevant today. In it, veteran pawnbroker Robbie Whitten shares his tips and tricks from 30-plus years in the industry, from not judging your customers’ physical appearances to consistently rotating inventory around the store.

5) Starting a Pawnshop

This is an article from Profitable Venture that provides a comprehensive breakdown of everything that goes into the process of starting a new pawnshop. Split up into ten easy-to-read chapters, this resource covers everything from market research and feasibility studies to cost analysis and marketing.