LLCs, S-Corps, Sole-Proprietor, and Other Business Entities for Artists
Rus Garofalo and Eric Stoddard of Brass Taxes break down the common types of business entities artists use.
A help or a headache? Worth it or not worth it? Artists often hear that they should form an LLC or other business entity, but they are rarely given a clear idea as to why or why not.
In this post, Rus Garofalo and Eric Stoddard from Brass Taxes will review questions to consider when you earn income from your creative work, and explain the common types of business entities artists use.
LLCs
Garofalo summarizes an LLC succinctly as a legal entity choice, and not a tax choice. If you elect to start an LLC, you can be taxed as any of the following:
- Sole Proprietor (Default of a single member of an LLC)
- Partnership (Default as a multi-member LLC)
- S-Corporation (aka Loan Out Corporation, typically one person who wants to be taxed as a separate entity)
- C-Corporation (Most companies are this: Coca-Cola, Ford, Apple, etc.)
You’ll fill out different tax forms depending on which category you select or fall into.
Sole Proprietor
A sole proprietor, says Garofalo, is just what you are by default. “You don’t need to do anything to be a sole proprietor, or to be considered a business,” he says. It is the same thing as being a contractor, emphasized Stoddard.
If you set up an LLC, and you’re the only member of an LLC, the government will assume you’re an LLC taxed as a sole proprietor. That LLC will report its money and your money on your personal taxes on the Schedule C in the same place that a sole proprietor does.
Reasons Not to Set Up an LLC
You are automatically a business as soon as you get paid money without taxes being taken out. For example, if you’re a graphic designer and someone pays you $5,000 for freelance design work, you’re a business and you have to report that income. Though you may feel you need to do something to “become” a business, you do not.
When asked whether or not an LLC is necessary, Garofalo and Stoddard say that their default short answer to most people is “No, a lot of people shouldn’t.”
Once you set up an LLC, you’re “creating a tax baby,” says Garofalo. “It takes time out of your life to learn and deal with the LLC, and is not always valuable enough to justify it,” he adds.
Here are a few reasons why you may not want to set up an LLC:
- It takes time to administer, which may be burdensome for you.
- There’s an initial set-up cost: $200-$1,200 for an LLC or an S-Corp.
- There’s also an annual cost just for having an entity, this is before any additional tax returns or taxes to pay, for maintaining the LLC or S-Corp: typically $100-$500 ($800 if you’re in California).
- For anything other than a sole proprietorship, you have to do a separate tax return before your personal return, which adds complexity to your taxes.
- As an artist, you’re allowed to write off ordinary and necessary business expenses without having an LLC.
If you would like to have a business name, such as a theater company name, a music ensemble name, or a design business name, consider getting a unique DBA (Doing Business As). The DBA is a way that you can legally sign up for a brand name or a company name without having to create a legal entity. Creating a DBA may help you to command more money for your goods or services. For example, setting up a business called “Graphic Design Stars & Associates” vs. just your name. Setting up a DBA is typically a $75-80 one-time cost, and you can have multiples of these depending on your use case.
For those concerned about using their Social Security number in official documents, consider getting an EIN tax-ID number, which you can use in place of your Social Security number (SSN) and you can obtain it for free through the IRS. You are allowed to get an EIN as part of your sole proprietorship, and only get once since it is tied to your SSN. “The EIN number is just on the IRS website, and the DBA is typically going to be a local city or state thing, so that’ll depend on where you’re based,” says Stoddard.
Reasons to Set Up an LLC
When deciding whether or not to set up an LLC, there is no one-size-fits-all answer. There are valid reasons why it makes sense to set up an LLC. Here are a few of them:
- Incorporating makes sense for tax reasons for people with high expenses due to changes in the federal tax code under President Trump. An LLC S-Corp can help you pay less taxes in certain situations. For example, if you’re an W-2 actor who is paying out 20% of your earnings to your manager, agent, etc.
- It creates a buffer between peoples’ business and personal assets, which, if used correctly, may help if you’re sued. However, it will not protect you from getting sued as an LLC and an individual. You will also likely want to look into liability insurance for businesses—an added protection.
- It can potentially help you to command more money for your goods or services. For example, if you set up a business called “Graphic Design Stars & Associates” vs. just your name.*
*Note: you can also accomplish this easily and cheaply with a DBA!
The Tax Benefits of an S-Corp
“An S-Corp is usually a corporation with one owner or a small number of owners,” says Garofalo. “You can extract money out of it in two ways: as an employee, or as a stockholder. It’s kind of messed up, but stockholders pay lower taxes than people working for that money.”
An S-Corp might be useful if you consistently expect (3+ years) a self-employment PROFIT of $75,000 and live outside New York City, or $100,000 and live within New York City.
Income tax for individuals works this way: Your first $13,000 is the standard deduction and you don’t pay any income tax on that money. For the next $9,950, you pay 10% of that money. And for the next $30,000 you pay 12% of that money, and so on.
When you’re a freelancer, a partnership, or an S-Corp, you also pay self-employment tax, which is also known as Social Security and Medicare, which is 15% in addition to your income tax.
With an S-Corp, you can pay yourself both as an employee and as a stockholder. While you will pay Social Security and Medicare on your salary, when you extract money from an S-corp as a stockholder, you can avoid paying Social Security and Medicare taxes (15%) on the stockholder payout.
How to Set Up an Entity
You can set up an LLC entity at a pretty low cost on your own ($), which Garofalo and Stoddard say is not as hard as it seems!
If you’re willing to budget some additional funds, you could use online software ($$) like LegalZoom. More expensive options with more advanced and personalized help include the company Accumera ($$$), or a lawyer ($$$$). They suggest the lawyer route when entering into business with multiple partners or when dealing with any significant intellectual property.
When to Ask for Tax Help
Garofalo and Stoddard suggest getting tax help if you’re forming an entity beyond a single-member LLC, if you’re setting up an entity that has a separate tax return, or when you’re trying to make untaxed income. You should possibly get tax help if you anticipate any big life changes (marriage, kids, etc.), when working/doing business in different states, or if you want to understand what is happening and make it better.
Brass Taxes works primarily and almost exclusively with people who are W-2 and 1999 or just 1099, freelancing, or trying to have a creative career. Garofalo underscores the importance of your tax person 1) understanding your industry and 2) being someone you’re comfortable talking with!
If you’re interested in working with Brass Taxes, they are offering $50 off for new clients with the code LLC50.
About Brass Taxes
Brass Taxes is a team of tax preparers who promise to deliver personalized tax guidance with a focus on transparency and education. In addition to being tax experts, their team comes from a myriad of creative backgrounds, making for a fun and personable appointment with their knowledge of art, music, theater, comedy, fashion, food, literature, film, podcasts, dance, and more.
–Compiled by Amy Aronoff, Senior Communications Officer
These insights were shared as part of “LLCs, S-Corps, Sole-Proprietor, and Other Business Entities for Artists – Explained!,” a presentation Brass Taxes gave in May 2023.
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This expertise comes to NYFA courtesy of NYFA Fiscal Sponsorship. NYFA Fiscal Sponsorship’s quarterly no-fee application deadlines are March 31, June 30, September 30, and December 31. We also accept Out-of-Cycle Review applications year-round. Reach out to us at [email protected] for more information.
