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When should I set up a legal business?

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You’ve caught the business bug bug. You have come to realize that you’re really good at it.

Friends start liking all your posts and asking you to for your services/product.

Money (maybe) starts heading your way in exchange for your talent.

So, what now?

You know you want to stay out of trouble with the law, especially the IRS. Good!

But it is still confusing on when and how to set-up your legal business. 

This article will walk you through some of these top questions to help you not only secure the proper legal requirements but to have peace of mind so you can get back to photography.

The Test.

We see it time and time again in social media groups. Misinformation told that if you haven’t made more than $XXX then you’re a hobbyist and shouldn’t worry about any of the business legalities.

Being a legal business is more than just the revenue you’re bringing in.

First, whether you’re making money or not, if you’re putting yourself out there is when the government wants to know and wants their piece of the pie.  This includes the setting up of your entity (LLC or Corp), filing of a trade name (DBA, if applicable), business license and permits (the government giving you permission to do a specific activity in a specific area).

Second, for tax reporting purposes, you are not simply classified as a hobbyist because you’re under a certain threshold.  In general, people have hobbies for recreation, not to make a profit. Businesses, on the other hand, usually operate at either a profit or a loss.

Here is a quick factor list (meaning, you don’t need all of them to determine your classification) for review:

  • Do you intend to be profitable?
  • Does your time and effort reflect an attempt to be profitable?
  • Do you have enough knowledge to turn it into a business?
  • Do you expect to make a profit in the future?
  • Have you made a profit doing a same or similar activity in the past?
  • Are your losses part of normal business setup or circumstances you can’t control?

This may feel overwhelming so let’s center on this.  If you made profit in three of the last five years, or are intending to make a profit- the IRS considers your activity for-profit and a business.

If this is you, you have to meet the local government jurisdiction requirements + IRS requirements for businesses NOW!

Let’s ignore the money.

Ignore the money? What?

Yes, just because you’re not making money doesn’t mean you don’t have potential liability.  While it is not required for entrepreneurs to select an entity with limited liability protection (like an LLC or a corporation), it is a HUGE recommendation.  Even if your profit is $0. Even if your revenue is $0 due to model calls. You are still opening yourself up for liability.

Imagine this, you advertise for a model call.  You formulate a wonderful vision and plan.  While having your client follow advice, then do not get results.  There is a potential for liability there.  She could potentially pursue you for damages – ahh!

Not only is this a real possibility, but if you have not taken the steps to put protective division between your personal and business assets – she can touch them all when an issue happens.  Whereas, if you’ve taken the steps to set up a legal business entity separate from yourself (NOT a DBA, fictitious name, assumed name), the damages pursuit may only be limited to the assets within the business.

You surely don’t want your personal assets, including your income earning potential, to be touched when an issue happens. 

Because it is not IF an issue happens in business, it is when.

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Hi, I'm Rachel.
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I'm a multi-faceted entrepreneur, business strategist and intellectual property attorney ready to help you start building the life + business you dream of!

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