Entertainment Law

Why All Artists Should Incorporate Themselves

I represent a lot of new, up-and-coming, and rising artists, designers and entertainers. One of the first pieces of advice that I give them is that they should incorporate themselves. I tell them that all of my established entertainment and design clients are incorporated. Here are the top three reasons to become a corporation:

(1) Liability : If you are a corporation and if you always act as a corporation, then you will not be personally liable for any damages and lawsuits that may arise out of your business. Sign all contracts in your corporate capacity – that way if the deal goes bad, or the performance flops or there is an accident at the venue, your personal assets (home, etc) are not at risk. That’s one of the fundamental reasons corporations exist – to shield shareholders (even if there is only one shareholder) from liability.
(2) Professionalism: Particularly for young artists, when you have a corporation formed, it sends a message to executives, agents and others you are dealing with that you are handling your career professionally. It tells people you have gotten legal advice and have thought out how you want to deal with business issues. It also forces you to keep track of income and expenses and to think about your career from a business perspective.
uncle-sam-taxes(3)Taxes: There are major tax benefits to incorporating – especially now that the Alternative Minimum Tax (AMT) is in place. If you earn around or over $50,000 you are likely going to get hit with some AMT payment. Why is this more unfair for artists and entertainers? Because they don’t keep all their income – some have a manager (getting 10-20% of income); some have an agent (10-20%); some have a lawyer (5-10%); some have all three (15-50%). So they are getting hit with an AMT on income they don’t keep and which is getting further taxed on the manager’s, agent’s or lawyer’s tax returns (a nice double hit for Uncle Sam). On top of that, if you are filing personally you may not be able to deduct business expenses like flying to a job site or buying clothes specific for a shoot or an audition. In order to make these expenses deductible under the “qualifying performance artist” exemption in the IRS code, an artist can earn no more that an adjusted gross income of $16,000 per year. That figure was set in 1986 when the exemption was created and has never been increased.

But if you are incorporated, then most (if not all) of these expenses are tax deductible; state and local taxes you pay would also be deductible on your federal tax returns. That’s a huge benefit and savings that cannot be ignored.

Conclusion The only downside to incorporating is the upfront costs (between $500-$2,000); some annual fees to the Department of State (around $100) and the additional fee to your accountant for some extra paperwork. But the upfront costs are spread out over the course of your career since you only pay them once and the tax benefits should far exceed the minimal additional annual costs. It’s too late for this tax return due in a few days, but incorporating now will allow artists to have the benefits of it for the majority of 2015.

I know that for many creative people, thinking about the business aspects of their career is not sexy, exciting or fun. It is however necessary.

5 replies on “Why All Artists Should Incorporate Themselves”

Incorporate yourself ?

I find this an awful expression for setting up a corporate entity for your business. The expression might lead people to believe that if they incorporate their BUSINESS they are no longer liable as an individual “for accidents occurring at the venue” so long as they are acting in their capacity as an officer or employee of the corporate entity, as you appear to suggest in your post.

Without addressing all the issues raised by your post I think you should clarify, as you must know, that running a business through a corporate or other entity will in no way limit your liability if your negligence causes “an accident at the venue.” Your entity will be sued and you will be sued as well in your capacity as the individual that caused the accident and all your personal assets may be reached (including your interest in the entity which is a personal asset).

It’s when you have an employee that causes the accident that the entity can shield your personal assets. In any event, what you really should look into irrespective of the legal form of your business is the appropriate liability insurance.

What I meant by “incorporate yourself” is that most entertainers use their name as their company name: “Carlos Danger LLC” or “Danger Incorporated LLC” in your case for example. I don’t think people would get the impression from my blog post that if you personally run someone over with your corporate car that you are not also personally responsible for damages as well as your company. The corporate protection can extend beyond just when an employee does something wrong – in a commercial dispute (as opposed to an injury matter) even if you did all the negotiation and communication, as long as you did so as a corporate officer, you are not personally responsible if the deal goes south.

What I would like to add is that there are substantial differences in taxation treatment of C-corporations, S-corporations, and Limited Liability Corporations (LLC’s). From a taxation point of view, C-corporations are entirely separate. Profits distributed to small business owners are typically done through salaries and/or dividend distributions. Any leftover profits are then taxed at the corporate level before it can be distributed. Effectively, the goal for a private C-corporation is to pay all its profits out as salaries and/or dividends as to not incur the corporate profit. This annoying issue is sometimes referred as the “double taxation” issue mentioned as it relates to corporations.

For most small business owners (as in the case of artists), I would say that 99% of them should choose an S-Corporation (which is typically an election made at the outset) or an LLC. S-Corporations & LLCs (from a taxation point of view) are flow-through entities. Any profits are taxed only once. There are no potential and complicated “double taxation” issues. Typically, profits are distributed as salaries and anything left over is considered business income (typically taxed lower than salaries).

From a tax filing point of view, LLC’s are slightly easier than S-Corporations to deal with. S-Corporations have to file an 1120-S and then a K-1 has to be issued to each of the shareholders. With LLC’s, most of the tax filings are contained within the body of the 1040’s and its many Schedules.

There are some minor differences between LLCs and corporations in terms of public and state reporting and privacy issues. LLC’s give slightly more privacy than corporations. Personally, I prefer S-Corps but many small business owners use LLCs and are perfectly fine with it.

A potential downside of using corporations is that in most courts, the president/owner may not legally represent the corporation. You have to hire a lawyer. But this is not always the case with small claims courts. Typically, someone needs to bring up the issue that corporations must be represented by a lawyer in good standing. For the vast majority of small business owners, this is “downside” really isn’t a downside at all.

“– in a commercial dispute (as opposed to an injury matter) even if you did all the negotiation and communication, as long as you did so as a corporate officer, you are not personally responsible if the deal goes south.”

As I said, I didn’t address the multiple issues raised.

Suffice to say, either you’re sufficiently capitalized to the extent perceived as necessary by the other party(ies) or not in which case they may expect a personal guarantee. Bank financing. Trade creditor. Retail customer. Large dollar deal with company X. Some deals you will be home free because the other party will be satisfied and others will want access to your personal assets should the deal “go south.”

Though I certainly agree with you that there are mostly upsides to operating through an entity (though, as Chan said, picking the appropriate entity where C-corp is often not ideal).

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