What type of business entity should I form for my photography?
As an amateur photographer looking to move to the next level you need to decide at the outset what form of legal entity will work best for you. Even if you don’t choose a corporate form of business, you are still choosing a form of business – called sole proprietorship. So it is important to look at each of the business entity types and select the one that will serve your current plus future needs.
At the most basic level there is the sole proprietorship form of business. With this you basically just setup your company name and then all revenues, expenses and liabilities associated with being in business are attributed to you personally. We recommend that you set up a separate business checking account if you go with this choice as it will prevent your business and personal income from being comingled. In the United States, when it comes time to file your personal taxes at the end of the year you will use a form called Schedule C to enter your revenues and expenses.
When you first start out it’s a good idea to look at a Schedule C and model your categorization of expenses along the lines of the form. This will help you categorize your expenses so you can easily sum them and enter them onto your tax form when the time comes to file taxes. While not all of your expenses will fall into these categories, a majority of them will and you can summarize any other expenses and add them to the form as miscellaneous expenses.
As a fine art photographer, liability is extremely limited and carrying a separate insurance policy is probably not warranted. However, wedding, portrait and commercial photographers will benefit from carrying an umbrella insurance policy to protect them from accidents that could occur in the process of their work. Call your insurance agent about a quote for this kind of policy and I think you’ll find they are quite reasonable.
LIMITED LIABILITY COMPANY (LLC):
A limited liability company is a business entity which allows you to operate as an individual with some protection from liability. To setup this form of business you will need to complete paperwork to establish an LLC which you can find online and generally at your state tax commission’s web site also. You don’t require a lawyer to set it up, but you must follow the directions closely and file it with your state. Your state will register your LLC and send you an acknowledgement designating you as an LLC. You must setup a separate banking account for the LLC, otherwise your limited liability can be compromised – which is known as “piercing the veil” by comingling your personal and business funds.
The benefits of establishing your business as an LLC is that it combines the lower pass-through taxation of a sole proprietorship with the limited liability protection of a corporation.
A partnership is a form of sole proprietor entity in which each partner owns a percentage of the business. The percentage ownership does not have to be equal and can be any allocation desired by the partners. You can have partnerships that are 50/50 splits or even 70/30 or 50/25/25 among the partners. With this type of arrangement, each partner is responsible financially for their percentage ownership in the business expenses and liabilities and share in the profits generally according to the percentage of their ownership.
As with a sole proprietorship, each partner’s share of income and expenses pass-through to their individual tax returns. It is rare though that you ever see this type of business entity setup for a photography endeavor. A husband and wife team’s business income would be handled on their joint return and not be split into percentages, even if they each held a 50/50 split in their company.
S corporations are ordinary business corporations that elect to pass corporate income, losses, deductions, and credit through to their shareholders for federal tax purposes. Therefore, taxation of S corporations resembles that of partnerships. As with partnerships, the income, deductions, and tax credits of an S corporation flow through to shareholders annually, regardless of whether distributions are made. Thus, income is taxed at the shareholder level and not at the corporate level.
The term “S corporation” means a “small business corporation” which has made an election under § 1362(a) to be taxed as an S corporation. A corporation is “eligible” if it:
- Has no more than 100 shareholders,
- Has shareholders who are all individuals
- Has no nonresident aliens as shareholders,
- And has only one class of stock
The benefit of this type of business form is that the shareholders have the separation from liability that a corporate entity enjoys without the double taxation of corporate entities.
A corporation is a company or group of individuals recognized to operate as a business. A corporation most often offers stock to those who want to own the company which gives them an ownership interest to the income and expenses of the corporation in return for the money they receive for the stock. The owners of the stock may or may not be part of the management of the corporation, but they receive income from their investment in the company and their liability is limited to the amount of their investment.
Some photography endeavors are incorporated as a means to indemnify the owners from creditors so that only their investment in the company are at risk and not their personal assets. However the incorporation process and annual filings required often create a fair amount of overhead many photographers don’t want to take the time to keep up with when other business forms and an insurance policy can often achieve the same outcome.
So, what is the right form of business entity for you?
For a landscape/fine art photographer you will most often find that the sole proprietorship form makes the most sense. With it, your income from photography is offset by your expenses of creating your images and you pay taxes on your profits at the lower personal tax rate. As a fine art photographer, odds are that your shooting activities aren’t going to put you in a situation where you might cause damage or injury so this is a pretty safe way to setup your business. Most of the time your personal insurance will cover any accidents that might happen while you are out shooting.
On the other hand, photographers who are shooting events, weddings, portraiture and commercial work that requires being on another’s property are at risk of involuntarily damaging someone’s property in the process of creating an image and need to add a good insurance policy. In doing so, you get the benefits of the lower personal tax rates and liability coverage for your actions.
For photographers whose business involves working on location for a client, a Limited Liability Company is one of the better forms of business to operate under. You get the pass-through benefit of income and expenses to your personal tax return with it’s lower favorable tax rates and a bit more protection of your personal assets. Possibly the best of all worlds. You could go even further and fully incorporate your business, but most small businesses don’t want the reporting burdens that come with maintaining a corporate license. Personally, I would select an LLC with a broad coverage umbrella insurance policy and make sure I use a separate checking account for handling income and expenses – then get out there and bring in some business!
For an excellent additional explanation, check out attorney Sara F. Hawkins‘ blog on business entities.