Getting into business to make money off a craft you love is exhilarating, fun..but also scary. There is no getting around the legal tools needed to help protect you, your business and your clients.
While setting up a legal business has many moving parts – primarily in three major phases.
- The Legal Triad – liability protection to protect yourself personally
- A Legal Photo Client Timeline – the chronological and proper use of contracts
- Owning Your Brand – protecting the intellectual property we depend on
In this article, we are targeting on one of the three in the legal triad – business entity creation of the legal triad.
The choice of entity depends on your objectives, tax, legal and succession planning aspects of your business.
Business owners typically look to entity formation for the limited liability protection that can be provided. This is typically through creation of a limited liability company (LLC) or corporation.
Questions to ask yourself when selecting an entity:
- Do I have personal assets (including income earning potential) to protect?
- Am I engaging in high-risk activity?
- Am I giving a one-time service that can’t be redone?
- Do I have business partners? Do I intend to have business partners?
- Do I have investors? Do I plan on having investors?
- Is there potential liability to a client?
As you’ll see in many of our articles, we do not recommend sole proprietorships for the many reasons listed here. They do not shield your personal assets and make succession planning extremely difficult. The entities primarily discussion are limited liability companies and corporations. LLCs are often the most suited entity for entrepreneurs as they provide the limited liability protection with moderate financial and administrative needs.
Many small business owners, especially creatives, have a tendency to shy away from legal tools because of the unknown, financial investment and worry what clients will think. Contracts are a good example where entrepreneurs are tentative to use them and potentially scare away clients.
The reality is, contracts and business entity formation (LLC or Corp) actually convey a sense of professionalism to your clients. In a relatively unregulated industry – we must be striving to act in ways that not only protect us but set ourselves apart. When clients see you’re taking your legal steps serious their buyer’s confidence increases. This may not be a conscious, purposeful thought but the psychological benefits are huge. The more confidence a buyer has in the business – the easier the decision to buy into the entrepreneur the less resistance to the financial investment and an overall happier experience.
Easy Succession Planning
For many business owners we are not thinking about the end. The reality is – we will not be doing business or our entire lives. The long-term plan should be to either grow a business with team members to help support your business, multiple income streams or to sell off this valuable, profitable business you are creating.
Creating an entity separate from yourself (NOT a sole prop!) allows for all business assets (logo, name, photographs, contracts, monies, property etc.) to be easily sold when retirement comes. If all your assets are connected to you personally it can be sold but would require additional legal administrative steps and financial outlay.
Perhaps the most fun part of this – you can make more money selling your business than a sole proprietor would.There is not a hard set formula but in my legal experience – LLC and Corp that are sold off often reap a bigger financial return than sole proprietors.
The Tax Benefits
And lastly, tax benefits are also another valuable evaluation when determining which business entity is best for you.
An important feature of an LLC is that the Internal Revenue Service (IRS) allows business owners to choose the way their business will be taxed.
- LLC as a Sole Proprietorship: If you choose to set up your LLC as a sole proprietor, you’ll have to report whatever profit or loss the business generates on your personal tax return.
- LLC as a C Corporation: If you elect for your LLC to be taxed as a C corporation, the corporation will have to pay a tax on profits.
- LLC as an S Corporation: LLCs set up as S corporations but don’t pay any corporate taxes on the income.
Deductions and benefits can provide tax benefits:
- Retirement plans, such as a tax-deferred trust can be set up as fringe benefit and may be tax deductible for the corporation.
- Medical insurance for families may be fully deductible.
- Losses are fully deductible for a corporation, whereas an individual running a sole proprietorship must prove there was a profit motive before deducting losses.
This is not an exhaustive list but provides a starting point to see the benefits that an entity can allow for business expansion and limits on taxes paid.
If you’d like to by-pass cobbling together the legal stuff through articles and get the step-by-step delivered to you enroll in Real Legal – my legal workshop that walks you step-by-step through entity formation, taxes, trademark, copyright and more!