Sole Proprietorship

Most artists operate as sole-proprietors. A sole proprietorship is a business run by one person—you. This is the most popular structure because it’s the simplest to set up and run.

In this type of business structure, there’s no legal separation between you as a person and your business. In the eyes of the law, your business funds and your personal funds are all intermingled, and anything that happens to your business also happens to you personally (not to scare you, but if you get sued, for example, you’d be held personally liable).

You actually don’t have to file ANY formal paperwork or take any steps to start your sole proprietorship. You just have to start doing business. That being said, you DO need to make sure you’re registered for the proper permits as necessary (sales tax permit, for example). You will likely have to pay self-employment taxes and estimated quarterly taxes. In addition to your annual return, you will need to file quarterly. You will likely use a Schedule C and 1040 return but always consult with a personal accountant to make sure you are in compliance.

If you’re going to be doing business under a name that’s different from your own, you need to register a DBA (‘doing business as’) for that name. Check with your county registrar to make sure the name isn’t currently being used, and then follow your local guidelines to file. You may want to go the extra mile to trademark your name to ensue you’re completely safe to use it.

If you want to hire employees, you absolutely can! But you do need to have an EIN (employee identification number) to do so, which you can register for on the IRS website. You must also follow all state, local, and federal laws regarding those hires.

PROS:

• Inexpensive to create 
• No federal government requirements
• No legal documents to file
• No one else to split profits with
• Taxes are uncomplicated 
• Can hire employees
• Easy to discontinue 

CONS:

• Owner is liable for business debt
• Limited access to capital (no partner)

Partnership

If you have a collaborator in your art business or you are an art collective where more than one artist owns part of the business, you may want to look into a partnership.

There are a few ways you can do this. You can establish a general partnership (where everything is divided equally), a limited partnership, or a limited liability partnership.

While a partnership is not technically a taxable entity, you will still need to file an annual return—but you will each be taxed on the income through your individual tax returns. There are some benefits to the partnership model, like sharing the financial burden of a new business and not paying income taxes on that partnership. However, you are personally liable for the other’s debt and have to trust your partners in paying their portion.

LLC (Limited Liability Company)

In a limited liability company, the owner(s) are not personally responsible for debts and obligations; your personal assets are protected. That means that if you’re sued, unlike with a sole proprietorship, your personal savings, house, car, etc… aren’t on the line, because they’re considered totally separate from your business assets. This “limited liability” is the main reason people choose to register as an LLC over a sole proprietorship. They also need less maintenance than full-fledged corps.

To start an LLC, you need to register with your state and pay a fee. Some states require annual fees to maintain your LLC status. Depending on your state, you may have to have certain paperwork to file in addition—you’ll have to look into what your state requires. You can fill out the paperwork yourself, hire a lawyer or in many states your accountant can set up the LLC.

You’ll need to be super diligent about keeping your personal funds separate from your business funds and tracking everything, since intermingling your personal and business money in an LLC could result in you losing your limited liability protection.

Regarding taxes, “depending on elections made by the LLC and the number of members (owners), the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return” –IRS.gov. That’s a tad confusing, but basically it means that an LLC may use different forms and regulations for filing taxes depending on which of those options (corporation, partnership, or individual/sole prop) you choose. A CPA can help you make the choice.

Like a sole proprietorship, an LLC can also hire employees as long as it follows all guidelines and laws.

PROS:

• Protection of personal assets
• Ease of setup: Most LLC forms are only a single page for single member LLCs
• Taxes are fairly easy to file
• Can hire employees
• May appear more “trustworthy” or “established”
• Can include multiple owners

CONS:

• Registration fees and annual fees may apply (more expensive than a sole prop)
• Requires more documentation and paperwork to file

S Corp

S Corps, a midpoint between LLCs and regular corps, offer potential savings for artists making substantial money each year.

The difference is that in an S corp, owners pay themselves salaries plus receive dividends from any additional profits the corporation may earn, while an LLC is a "pass-through entity," which means that all the income and expenses from the business get reported on the LLC operator's personal income tax return

PROS:

• The key advantage of an S corp is that it offers tax benefits when it comes to excess profits, known as distributions.
• The S corp pays its employees a "reasonable" salary, which means it should be tied to industry norms, while also deducting payroll expenses like federal taxes and FICA. Then, any remaining profits from the company can be distributed to the owners as dividends, which are taxed at a lower rate than income

CONS:

S corps have more strict guidelines than LLCs. You must meet the following standards to create an S corp:

• Must be a U.S. citizen or resident
• Cannot have more than 100 shareholders (a spouse is considered a separate shareholder for the purpose of this rule)
• Corporation can only have one class of stock
• Profits and losses must be distributed to the shareholders in proportion to the shareholder's interest. For example, you can't have disproportionate distributions of dividends or losses. If a shareholder owns 10 percent of the S corp, he or she must receive 10 percent of the profits or losses
• It costs more to form an S corp
• Shareholders must adhere to the requirements at all times. If they don't, they risk disallowing the S corp election, and the corporation would be treated as a C corp with its corresponding restrictions.
• Passive income limitation: You can't have more than 25 percent of gross receipts from passive activities, such as real estate investment
• There can be additional state taxes for S corps
• Shareholders should pay attention to paying themselves a "reasonable" salary for the work they perform for the S corp, since the IRS is increasingly scrutinizing S corps for this

You can also always change your business structure. It’s very easy to start out as a sole prop and register later to become an LLC or S Corp.

As always, check with your lawyer and/or accountant. This is an informational article, not legal or financial advice.