HOBBY TO PRO PHOTO Module 3, Lesson 1: Choosing a Business Structure
Disclaimer I am not an attorney or accountant. This lesson is intended to give you an overview of the business structures available. It is advised that you seek assistance from a qualified advisor in your area that can help you determine which option is best for you at this time.
Business Structures Welcome to Module 3 on Getting Legal! This module is going to guide you through setting up your business so that you can officially and legally operate as a business First, let s take a look at the types of entities that you can form your business under
Types of Business Entities The options for forming a for-profit business entity: Sole proprietorship Partnership Limited Partnership Limited Liability Company (LLC) Corporation (S-Corp or C-Corp) Note: These are for the U.S. only. Some countries have similar structures, but if you reside outside the U.S. you will need to research your countries requirements Keep in mind that even in the U.S., each state may have its own requirements, so it is important to get proper legal guidance
Types of Business Entities Luckily, for an individual photographer starting their first business, there are only 3 of the above structures to consider: Sole Proprietorship Limited Liability Company (LLC) S-Corp Let s take a look at each in more detail
Sole Proprietorship This is the option that many people just starting out in business will select This is the most basic structure with the simplest requirements and lowest startup costs
Forming a Sole Proprietorship Federal: You may want to file for an EIN (coming up) State: You do not have to file any papers with your state. County: You may have to file a DBA (coming up) City: You will likely have to acquire a business license or file with your town After getting squared away with your town, you can begin collecting money under your business right away At tax time, you will report your business earnings and expenses on your personal tax return
Sole Proprietorship Drawbacks 1. The person and the business are inseparable Your money as well as your liability flow directly through you Ex: If someone is injured because your strobe light falls on them, your personal assets (bank account, house, etc.) are at risk 2. The amount of taxes you may have to pay: your business income will be added to the other income, and may push you into a higher tax bracket if you are doing photography part time and have a well-paying regular job if you file jointly with your spouse that has a well-paying job, 3. Held personally accountable if the business was to take a loan and then default on it
Sole Proprietorship DBA? If your business is going to use a name other than your own, (such as John Smith Photography or Smith Photography ) you will have to register as a DBA (Doing Business As) If you want to use a name for your business that does not contain your name whatsoever, such as Superior Photography, this is sometimes referred to as a Fictitious Name In most cases, there will be a fee for filing a DBA, and this is filed at a county level You will also want to be sure that there is not another studio in your state using the same name before filing
Sole Proprietorship DBA? My 2 cents- I use my name in my business name rather than a fictitious name, as I felt it was easier to promote and become known in the area Using a name like Superior Photography doesn t really let potential clients know who they will be working with You ll be surprised after a few years how many people will recognize you as the local photographer when you mention your name It s a bit like free advertising that you won t necessarily get with a fictitious name
Sole Proprietorship EIN? AN EIN (Employer Identification Number) is a Tax ID Number separate from your social security number (more on this in Lesson 2) If you do not plan on hiring employees you will not need an EIN However, having an EIN means that you do not have to use your social security number for your business With the risk of identity theft, this is a definite benefit Some banks and lenders may require you to have an EIN to open a business account or apply for a loan
Sole Proprietorship Filing Taxes? You will have to file your business taxes yearly under your personal filing For this reason, taxes are most straightforward for Sole Proprietorships However, you will likely have to file quarterly estimated taxes When you are employed, these taxes are automatically deducted from your paycheck each week But since you are self-employed with this business this does not happen, so you will have to file quarterly (Note: See the Legal Structure Resource guide for more guidance)
LLC With an LLC, your business profits or losses will also flow through to your personal tax return But, it will offer you protection of your personal assets Ex: If someone trips on your camera bag and sues, they cannot come after your personal assets There are instances when you can be sued acts such as deliberately injuring someone fraudulently representing the business using the business as a personal account and not keeping funds separate As long as you run your business ethically and by the books, there should not be any problems
Forming an LLC Federal: You may want to file for an EIN (see below) State: You will have to file Articles of Organization (sometimes called a Certificate of Organization or Certificate of Formation) + annual report County: You will not have to file paperwork (in most cases coming up) City: You will not have to file Hint: You should check with the Secretary of State s Office for specific state paperwork - they are typically involved with LLC and Corporation formations
LLC Costs Fees, taxes, and procedures to be followed vary widely by state Some states go so far as to require you to pay for notifying your county through the newspaper of your company s formation Ex: My studio is located in Rhode Island, right near the Massachusetts border The filing fee for an LLC in RI is only $50 One state over in MA, the fee is $520 - that s quite a difference!
LLC Costs With an LLC, you must also file an Annual Report, which has a cost that can also vary greatly Ex: In Massachusetts, the report must be filed each year on the anniversary of the formation, and costs $500 to file Rhode Island requires a report be filed each year by November 1, along with just a $50 filing fee You may want to look into the costs in your state, as well as surrounding states It may make more sense to file for your business in the state over if that costs vary by a lot
LLC DBA? You will not need to file a DBA as long as your business name includes LLC or some form of it mentioned after the business name You will choose your business name when you file for your Articles of Organization Depending on your state, you may have to file a DBA if you do not want to include the LLC with your business name Ex: if you are registered as John Smith Photography, LLC and want to advertise solely as John Smith Photography, you may need to register John Smith Photography as a DBA
LLC EIN? Just as with the Sole Proprietorship, you do not need to have an EIN unless you plan on hiring employees But again, having an EIN means that you do not have to use your social security number Some banks and lenders may require you to have an EIN to open a business account or for a loan
LLC Filing Taxes? Filing taxes for LLCs is fairly simple, but you will need to attach additional form(s) to your return (Note: See the Legal Structure Resource guide for more guidance)
S Corporation You must first charter as a corporation, and then file for a Subchapter S designation S Corps separate the person from the business, limiting your personal liability However, you are not protected from an employee lawsuits that come as a result of workplace injury Passes the business profit or loss through owners personal income tax return, but must also file business tax return Must issue stock and hold annual shareholder meetings with minutes recorded and kept on record May also have more beneficial tax treatment than LLCs
Forming an S Corp Federal: You will have to file for an EIN (see below) State: You will have to file Articles of Incorporation papers + annual report County: You will not have to file paperwork (in most cases) City: You will not have to file paperwork To form an S corporation, you must first incorporate the business in your state by filing Articles of Incorporation and pay the appropriate fees As with the other structures there may be yearly fees, such as annual report and taxes
S Corp DBA? No. The name that you create your business under will be your corporate name However, if you also wanted to operate another company with a different name under your corporation, you will have to file a DBA form Ex: your S Corp business name is Awesome Images You want to add photo booth rentals to your business and call it Party Express Photos To do this, you would have to register that name as a DBA under the corporate umbrella of Awesome Images
S Corp EIN? Yes! All S-corps are required to have an Employer Identification Number Luckily, there is no fee to acquire one
S Corp Filing Taxes? You must file separately as a business, as well as file an annual report each year (Note: See the Legal Structure Resource guide for more guidance)
Homework Determine whether you will structure your business as a Sole Proprietorship, LLC, or S Corp Next, check our Legal Structure Resource Guide for resources, forms and links you will need in order to file your business This week, go ahead and get these legal documents filed so that you will be ready to bring in customers