Best Legal Structures for an Art Business
Art Business Legal structure was likely not taught in art school. This short post is a quick overview of the topic.
We are NOT lawyers! This is not legal advice, but may help you converse with your future lawyer, possibly a volunteer lawyer for the arts.
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If you’re an artist, photographer, writer, or any other type of self-employed creative worker, you are required to register as a business.This will actually help you in the long run. Registering a business entitles you to a number of protections and benefits, including (but not limited to):
- Reducing your personal liability in case of a lawsuit
- Potentially reducing your tax burden
- Access to public grants and funding (PPP during pandemic required registration)
Although there are a variety of legal structures possible, some of them are a better fit for a creative business than others. Let’s take a brief look at the three most popular ones and discuss the advantages and disadvantages of each.
Sole-proprietorship
This is the simplest business structure and is a good place to start for artists just beginning to sell their work. A sole-proprietorship treats the artist and the business as a single entity. The government (both state and federal) utilizes your social security number as your “identity.” With this basic type of business, you can deduct business-related expenses such as your materials, travel costs to work-related events, studio rent, subcontractors etc.
That said, because you and your business are considered a single entity, you are personally liable for all business debts or damages should someone bring a lawsuit against you and win. Additionally, all business income is considered personal income and will be taxed at your personal income tax rate, including Federal Insurance Contributions Act (FICA) taxes, i.e. social security and medicare contributions. This may end up increasing what you owe in taxes, though it will depend on how much you make.
Limited Liability Corporation (LLC)
An LLC is the next step up from sole-proprietorship, though depending on the type of LLC you choose, it can be very similar. LLCs are generally very flexible when it comes to how they are taxed and grant you additional liability protection in case of business debt or lawsuits. To date, there have been very few cases where liability has penetrated the LLC, but usually this is the result of abuse of the structure.
Another advantage is that an LLC enables you to hire employees, which a sole-proprietorship doesn’t allow. Both a sole-proprietor and an LLC can hire subcontractors. There are very particular laws on the difference between the two and it is worth getting familiar with the nuance between a contractor and an employee to ensure you are operating within the law. You can also deduct business expenses from your taxable income under an LLC.
LLCs can be considered single member, meaning you’re the only owner, or multi-member, meaning you have partners. Like a sole-proprietorship, income is only taxed at the individual member level as personal income for each member, regardless of the number of partners involved. Income under an LLC is treated as personal income, and as such, you are required to also pay a self-employment tax that goes towards things like social security, Medicare, etc.
LLC’s cost money to register and maintain depending on the state in which they reside. Filing taxes is also slightly more complicated than sole-proprietorship.
S Corporation
S corporations (S corps for short) are significantly different than the previous two structures in that they are a tax classification rather than a business structure. To receive this classification, you need to register as an LLC first.
Once you obtain S-Corp status, business income is treated separately from your personal income. That is, anything the business earns is taxed as a business, while you will pay taxes on your personal income separately. Owners of S corps who operate or run their business pay themselves a salary as an employee even if they are the only person in the business.
Like LLCs, S corps shield personal assets from liability in case of business debt or lawsuit. Additionally, S corps can hire employees, deduct business expenses, and they enjoy all the benefits of an LLC and greater liability protection for the owners of the company.
Generally speaking, and very much a back of the envelope calculation, it’s a good idea to switch over to an S corp if your take home income from your business is greater than $100,000. This will help lower your personal tax rate, any additional income beyond your salary is taxed at the corporate rate which is lower than higher level personal income tax rates. Yes, that last sentence was complicated, but if your business is at this point it is probably a good idea to hire an accountant and possibly a lawyer to ensure you are making the most prudent business decisions.
S-Corps have registration fees as well as annual maintenance fees (depending on the state of residence, and expectations for corporate governance like meetings of shareholders and board members. Filing taxes is more complicated as more forms must be filled out to appease government agencies.
Choosing the right business structure is crucial to your success. It’s a good idea to consult with an accountant or tax lawyer before you file any paperwork with federal or state governments.
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