You finally have all the camera equipment you need and now you believe it is the time to get serious about your business. Are you looking at alternatives to be legitimately prepared but you are confused about the company structure that you should adopt to save yourself from tax and liabilities? So, what is LLC and should I make my photography business an LLC?
The answer is simple! If you think your work involves a lot of risks and you have clients who can actually sue you big time for anything done wrong then you need an LLC. Otherwise, for small budget business LLC is an expensive way to go.
If you have heard about LLC somewhere but not too sure what it means and how it can help your photography business, we have it covered for you.
Let me help you understand this clearly.
LLC (Limited Liability Company) is a structure of a private company where owners are legally responsible for its debts only to the extent of money and capital they invested.
It is a combination of features of a corporation and a partnership or sole proprietorship. LLC has to be dissolved when a member dies or becomes bankrupt. On the contrary, it does not happen in a corporation because it can exist in perpetuity. So it is important that you have a business continuation agreement with your partner if you are going to opt for an LLC.
LLC (Limited Liability Company)
When you start your business, you want to make sure that your personal assets are protected from any liability that comes under your business. When you are a sole proprietor, obviously you and your business are responsible for any wrong actions taken by you or in a situation where you become bankrupt, your personal assets will also be sued. So, if you decide to be a sole proprietor, it is necessary that you protect yourself with insurance cover.
But, eventually, when you start dealing with bigger clients which involves a lot of monetary risks, you should adopt for an LLC. It gives you the protection of a company so that only your business assets are liable when you don’t have money to pay.
An LLC is an easy way than forming a corporation because it provides more flexibility with the protection.
The factors that you need to keep in mind to decide whether it should be a sole proprietorship or an LLC:
- Risk Intensity – If you have too much money at stake and it is big numbers (more than $90000) that you are dealing with, then LLC should be your choice. But most photographers start low and do not earn enough to need an LLC to protect their money. Getting insurance is a cheaper way to protect yourself.
- The budget of your business – Again, if you are going to make $10000 or so per year then a sole proprietorship is best for you. Maybe you should focus on expanding your business first and invest in other areas for now. Though you can create an LLC for your assets and still opt for a sole proprietorship with IRS for tax purposes.
- The separate business entity – With a Sole Proprietorship, your business assets are mingled with your non-business assets. So when your business becomes liable for some action, all of your assets may be used to satisfy that action. With LLC you can avoid this situation and only your business assets are liable.
How Can an LLC Protect You?
- If you miss a shot with your client due to any reason, the client cannot claim your personal assets.
- If you are shooting a fashion show and a guest encounters an accident due to your negligence, your LLC cannot protect you because you don’t have any contract with the guest.
- When your client does not like the photos you clicked, he cannot sue your personal belongings because LLC will protect you there.
- You cannot protect your personal assets if you are caught in tax frauds or human rights sue you.
Basically, having an LLC does not make you any superior to the ones not having it. So, don’t make your photography business an LLC if you can just do fine without it. But, if you are really a risk-averse person then you can opt for LLC.
If you don’t have much money and assets and photography is something you are doing as a part-time job then I would suggest you look for other options. Also, if you want to become a publically listed company in the future, LLC might not be the best option for you.
Though LLC does increase the credibility of your business and getting suppliers and loans might get easier for you. Another advantage is that you don’t need to be a citizen of the country or permanent resident of the country. Most importantly, you don’t need to go through the hassles of filing a tax return and avoid double taxation.
LLC is a disregarded entity which means that for federal tax purposes, it will not add to your compliance burden. Also, there are no direct tax benefits, so getting protected from liability should be your goal.
It is important that you inform your investors about the risks involved in the business; otherwise, you might be facing a lawsuit for hiding the facts or for partial information.
We would suggest you go through the State laws because it is different for different areas. Good thing is that there is no limitation on a number of LLC members.
Related: Photography Laws: Can a Photographer Use My Photos Without My Permission?
The steps that you will need to follow to be an LLC:
- Chose a legal name for your company and get it registered.
- File your article of incorporation with your Secretary of State and designate a registered agent (Service Company or an LLC member). You need to pay the filing fee.
- Decide your partners, shareholders, and managers and create an LLC operating agreement.
- Apply for business license and certificates specific to the photography business.
- File form SS-4 or apply online at the IRS website to obtain an Employer Identification Number (EIN).
- Apply for other ID numbers required by state and local government.
- Set up an LLC bank account to separate it from your personal account.
You don’t need an attorney to form an LLC. If you are an individual owner but if you have multiple partners you should consult an attorney. There are numerous online services also available like LegalZoom and RocketLawyer which can do the work for you in a way lesser fee.
Tip – Don’t forget to file your annual report filings required by the state to avoid penalties. Late fee or even suspension or dissolution of an LLC.
Related: What a Photographer Needs to Get Started?
What If You Want to Change Partnership LLC to Single Member LLC?
You need to file Form 8832 “Entity Classification Election”. Once you make changes in the tax classification, you cannot back out for another five years. So, be sure that it is something you want to do for sure. Make sure that your LLC has one member. A multi-member LLC cannot be classified as a disregarded entity. But, you don’t need to amend the Operating Agreement or Article of Organization
There are no real tax differences between the single-member and multi-member. They both are by default pass-through tax entities. That means that the income of LLC passes through and is taxed at the owner’s individual level.
If you are still not able to decide whether you should go for an LLC or not then I would suggest you talk to your accountant.
Yes, you will need one if you want to run your business for a long time. An accountant will help you save your money and help you avoid it to in wrong places. He will even set the whole thing for you. Do as much research you can and read plenty of articles like this one.
Also, you will need an accountant anyway for keeping accounting books records. Make sure everything is in writing, from why it was done to how it was done. Keep your records clean because you don’t want IRS knocking at your door.
If you report a loss for consecutive three years, legitimate or not, it will get you audited. Only if you report a profit in three out of five years, the business will be presumed to be for profit. If you don’t meet the standards, then there is a bumpy road ahead with IRS chasing you behind.
You can also seek out a local Small Business Administration office. They can provide you a great deal of advice by actually qualified people.
Business always comes with risks. It is always better to ensure that it does not cost you more than you invest. Photography, in particular, is mostly considered as a part-time job if you are not making much out of it. But don’t let others put you down. Idea is to be prepared for any major loss.
Minor setbacks are the part and parcel of business life. There are a lot of options to protect yourself and if you think LLC works for you, then go for it.