Do I have to be a corporation to be a working artist?

Dear Smartly,
What are your thoughts on incorporating oneself? Have you done it? Seems like maybe a funny thing for a painter to do, but if there are good reasons to do it, maybe I will. — AC

Dear AC,
This is a great question, and I know a lot of other people are wondering the same thing. Because there are so many different creative careers, there are some applications where creating a more formal business structure might be appropriate, but with most you can just be yourself and do your thing. Let’s go through them and you can decide where you fit.

The first thing I need to say before anyone tries to sue me, is that I am not a legal or tax professional, and those are the people with the final word on corporate structures. I am just an artist with a little hutzpah, and I am happy to share with you what I know…but this post is meant to be informational only, so consultyourlawyerandaccountantbeforedoinganythingcrazy…

A few issues drive people toward establishing a corporate structure around their business, the big ones being: liability, taxes, and investors. A corporate structure can create some tax advantages, put a few layers of padding between you as an individual and the wooly world of business, and allow you to formally acquire investors — that might sound like an interesting idea until you get into the nitty-gritty of what you need to do to create and maintain that structure.

For most artists it’s much more hassle and expense than benefit, but for a handful of you it may make sense.

Here are a few simple questions to ask yourself when considering it: Do you make tons of money? Are you doing something dangerous? Do you need the support of someone else’s money to make your practice profitable, and can you make it worth their while? For an artist to establish a corporate structure around their practice, you’ll probably want to answer ‘yes’ to at least one of these, because the ‘do nothing’ alternative, is so cheap and easy, and works just fine for most individuals.

If you do nothing, you can still be a business

Anyone who hangs a shingle outside their door and declares themselves in business is instantly a Sole Proprietor. A Sole Proprietorship is defined as an unincorporated business run and owned by an individual, with no distinction between the individual and the business. This means that you as the individual are taxed for what the business does, and you are also legally responsible for what the business does. You are the business and the business is you.

You don’t need to take legal steps at the Federal or State level to declare yourself a Sole Proprietor, however your local municipality may require that you register your business and obtain a business license. San Francisco, for example, requires anyone doing business within the city limits to have a business license issued at City Hall, which is renewed (and paid for) annually.

State your name

If you’ve come up with a snappy business name other than your own, you’ll need to file a Fictitious Business Name Statement alongside your Business License with your local government. That way you protect your new name from being used by anyone else in your area, but more importantly, you’ll be able to open a bank account using the name. This is critical because it allows your bank to process payments for you. Otherwise, you’ll end up with no way to cash your checks, or access funds acquired through online payments to that name.

If you sell stuff, you’ll want a Seller’s Permit

If you’re a service based business that doesn’t sell sales-taxable items, working under your own name (ex: John Smith Dog Walking), you might not have to do anything other than a simple business license. But if you wanted to sell actual ‘things’ (ex: John Smith hand-woven dog blankets) you’ll need a Seller’s Permit issued by your state in order to collect sales tax. This is a good thing though, because it also allows you to buy the components of your wares without paying sales tax (ex: with a Seller’s Permit John Smith can purchase his organically-sourced cotton yarn sales tax-free).

This bonus is available to us sellers because the government isn’t allowed to tax you twice for any one thing. So if you want to sell a painting, you don’t have to pay sales tax on the canvas you use to create it. For me, having a Seller’s Permit allows me to buy the framing for my drawings without paying San Francisco’s 8.75% sales tax, because in theory my gallery will be charging sales tax when that framed piece is ultimately sold.

You will have to fill out an additional tax return at the end of each fiscal year (that’s in the summer) but I can vouch that in California at least, it’s really easy to do, and not nearly as complicated as an income tax return (It takes me less than an hour). One thing to keep in mind is that you are only allowed to forgo paying sales tax on the physical materials that you plan to sell. In my drawing practice, that means I can get my sheets of beautiful Fabriano Artistico paper sales tax-free, but I had to pay sales tax for my electric pencil sharpener — you dig? Even with a Seller’s Permit, you need to pay sales tax on your tools.

So, if you’re spreading Old Holland cadmiums on gold leafed wood panels and having them custom framed with hand carved hard woods — all of which you’re planning to sell… Run to your computer immediately and apply for a Seller’s Permit from your state Board of Equalization. You could save a mint on materials cost.

Unlike a free and easy Sole Prop, becoming a corporation is like doing plein air painting from inside a tank

Sole props are great for the serious business of art — and unless you’re Damien Hirst, or Takashi Murakami, you probably don’t need to form a corporation (more specifically a C Corp or an S Corp) around your practice. One of the pluses of being a Corp is you to separate yourself from the liability of your business — meaning if you get sued, it’s harder for you to lose your personal assets. You’d also follow corporate tax laws which would allow you to draw funds from the business in the form of qualified dividends which are taxed at a lower rate than regular income. But being a corp isn’t all roses and sunshine. There’s a lot of red tape wrapped around those corporate bonuses, making it highly unlikely a regular artist would want to go there.

To be a C or S Corp, you’d also have to form a Board of Directors, appoint a Registered Agent, set-up a Corporate Records Book, hold regular Board of Directors meetings in which you record the minutes, and file a separate corporate tax return with your business revenue taxed first at the corporate level before it’s distributed to you (and taxed again)… And who wants all that business up in their business?!

Of course turning your art practice into a corporation also allows you to have investors, and issue stock — a compelling idea if you’re a performance artist, but for those of us working away in our studios, it’s far more structure than we need.

There is however, a milder option, and for some it may be the right choice.

To LLC or not to LLC

An LLC, or Limited Liability Corporation, is a corporate structure that allows a separation between you as an individual and the business you run, without getting too crazy with the Board of Directors, Agents, and stock. LLCs can be as small as one person, and are structured so that business income passes directly from the LLC to you without being taxed at the corporate level first (just like with a sole proprietorship) making it far less cumbersome than a C or S Corp. But the big draw of an LLC is the liability protection it offers. With the price of your initial filing fees and your state’s annual minimum franchise tax (and some extra fees if you’re making over $250k), you’ll be able to contain any liability that you encounter within the boundaries of your business. If you are sued for something, or acquire debts in your business, the only assets that are at risk are those owned by the LLC — not the assets you own personally. This is an incredible layer of protection if you have significant personal assets you want to protect like a home or a stock portfolio.

In contrast, despite its ease of implementation, a Sole Proprietor has unlimited liability for debts or judgements made against the business. You are the business, and the business is you, so your house could be on the chopping block if your business goes under and you have debts that can’t be paid by liquidating the business assets. In theory, an LLC allows you to walk away from a failed business with the ability to fight another day, instead of being completely wiped out.

But the cost can be a factor. The minimum franchise tax that needs to be paid annually varies from state to state. In Alabama, Colorado, and Florida it’s $0. In California, it’s $800. If you add on the price of a tax professional preparing your additional LLC tax return (when I had an LLC in California the returns cost $725 to prepare), you could be looking at some serious money. So it’s worth really putting some thought into whether the liability balances it the additional cost.

The Take Away

• An LLC is worth considering if your business has issues of liability, and you have assets to protect. But for me, if I’m making work in my studio and selling through a gallery, I’ll happily stick with my sole prop, and put an extra $1525 ($800 California minimum franchise tax + $725 Tax preparation) in the bank.

• A Seller’s Permit is definitely worth getting if you have significant materials cost, and required if you are actually doing the selling.

• And Bravo to you for taking your art practice seriously, and taking the necessary steps to set it up properly as a business!

I hope this helps AC, and good luck with everything!

If you have a question you’d like answered about the business of art, please leave a comment, or send me an email directly at christina@sm-artly.com

Sincerely, Christina

If you have a question you’d like answered about the business of art, please leave a comment, or send me an email directly at christina@sm-artly.com

[Note: I’ll say it again, I’m not a lawyer or an accountant, so when it comes to your specific business you may what to consult a professional before making your decision (which is code for: don’t sue me!)]

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