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.
(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.