Welcome to Teaching Tuesday! Today we’re going to be talking about the different legal entities for your photography business.
Why is this important? When you’re self-employed and in business for yourself, it’s important to realize the legal risks associated with owning and operating any business, from opening yourself up personally to potential creditors to lawsuits from clients/customers to tax consequences. Which corporate structure you choose will have an impact on these matters.
There are a number of options for business entities including, but not limited to, sole proprietorship, corporation, limited liability company (LLC), partnership, or limited partnership. However, the business entities that are likely most relevant to self-employed photographers are the sole proprietorship, corporation and LLC, which will be discussed in turn below. *Disclaimer: you should always speak with a local attorney and accountant about your specific situation to determine what is right for you.*
When you are starting out in business and you have done nothing to formalize it, then you are most likely functioning as a sole proprietor. A sole proprietor is someone who is in business but has not formed a formal business entity; no papers have been filed, nothing has been done to create a corporation or an LLC, for example. The main benefit of this is that it’s free.
The main downfall of being a sole proprietor, is that you and your business are one and the same. There is no legal distinction or separation between you personally and your business. This means that you’re opening yourself up to liability from creditors and clients if they sue you and win (meaning, you could then owe them money). A creditor can reach your personal assets (for example, your savings or checking accounts), instead of being limited to the financial assets of your business, if your business was a corporation or an LLC.
When you are a sole proprietor, you will most likely need to file a fictitious name application. This will be discussed in a later post.
Corporation (for profit)
A corporation is a business entity that is separate from yourself. The corporation has it’s own legal identity that is separate from you personally. A corporation is formed by filing Articles of Incorporation (though sometimes it’s called something else, like a Certificate of Incorporation as in Delaware) in your state, usually with the Department of State, Division of Corporations (though each state may call it something a little different). A corporation is more formal in that you need governing documents, such as Bylaws that govern how the corporation is to function and how decisions are made, and written Minutes/Resolutions that approve certain actions that you take. You will also issue stock to yourself as the owner of the corporation.
The benefit of being a corporation is that you personally are a separate legal entity from the corporation, so that there is limited personal liability and it is more difficult to get to your personal financial assets (there is still the possibility in some circumstances (too lengthy to discuss here), so it’s not absolute, but it’s definitely another layer of protection you do not get being a sole proprietor).
The downside as compared to being a sole proprietor is that it does cost money to form the corporation and it takes a bit more work to maintain the formal paperwork, including an annual report that you will need to file with the division/department where you formed the corporation. However, this is a small price to pay for separation of your personal assets from the business liabilities. Also, this cost should be viewed as the cost of doing business – it’s important to be set up with the right business structure.
Taxes: you need to speak with an accountant if you choose to be a corporation because traditional corporations are taxed at both a corporate and a shareholder/owner level (double taxation). However, you can file to be an S-corp so that the profit/losses flow through to your personal taxes and you are only taxed once. Again, TALK TO AN ACCOUNTANT!
Limited Liability Company (LLC)
An LLC is a business entity that is similar to a corporation in that it is a legal entity that is separate from you personally and therefore provides protection from personal liability. An LLC is formed by filing Articles of Organization in your state, usually again, with the Department of State, Division of Corporations. The LLC is governed by an Operating Agreement and has members with member interests instead of shareholders like with a corporation. You can be a single-member LLC so this works well for a self-employed photographer who is the only member of the LLC.
The main benefit of being an LLC is the protection from personal liability and the taxation as a partnership (see below). You have a lot of flexibility when setting up how the day-to-day operations are managed and how decisions are made.
The downside is that there is more work upfront to get the Operating Agreement just right for you, but requires less paperwork down the road (compared to corporations that require more formal meeting minutes, resolutions, etc.), which is also a benefit. Again, as with the corporation, you will have to pay money to file the Articles of Organization and to file an annual report, all the cost of doing business.
Taxes: with the LLC, you can choose to be taxed as a partnership, which means that the profit/losses flow through to you personally, which means there is one level of taxation (as compared to a traditional corporation that has double taxation). Again, TALK TO AN ACCOUNTANT.
While I cannot tell you what is best for you without knowing your exact situation (which is why you should speak to a lawyer in your state), LLCs is often a popular choice for new businesses.
Even though you can form a corporation or an LLC by yourself by filing the correct paperwork in your state, it’s always better to consult a lawyer so that you know you’re doing everything right. Or, if you’re going to form the entity yourself, at least consult a lawyer so that you have the proper governing documents because forming a corporation or LLC is not the only step needed, just the first step. You can’t just form a corporation or an LLC and call yourself a corporation or an LLC, you actually need to operate and function as a corporation or an LLC. I see this all too often – “I’m an LLC” – when really, all they did was file Articles of Organization but don’t have an Operating Agreement or formally function as an LLC. You could lose whatever liability protection you have by not actually functioning as the business entity you claim to be.
Next week’s Teaching Tuesday will discuss fictitious names.
DISCLAIMER: Information found on this blog is not legal advice, it is merely a discussion of legal topics that affect photographers for educational purposes only. I am not your attorney and there is no attorney-client relationship or privilege of any kind. Further, this discussion is not a substitute for legal advice.