The Creatives Guide to Business
The Creatives Guide to Business
Without the gifts of creative people, we wouldn’t have the innovations we have today. Yet many artists either don’t consider themselves business savvy or find the idea of running their own business too daunting and intimidating. As a result, creatives often sell themselves short; literally and figuratively.
This article, the first in our series “Business for Creatives” highlights the significance of choosing and establishing a suitable business entity. It explains some of the advantages of operating as a creative through a business entity and provides an introduction to some of the common entity types.
Forming a business entity serves a few major purposes:
1. It Protects You.
Corporations and limited liability companies (LLCs) are separate from their owners. Actions taken on behalf of these businesses do not expose their owners to personal liability. In other words, your personal assets (like cars, savings, and even art supplies) are protected if something goes wrong in the business.
2. It Saves You Money.
It may seem counterintuitive that the IRS will help you save money, but it's true. Proper business expenses (like equipment, tools, business travel, and studio space) are deductible from your income, therefore decreasing how much you may have to pay in taxes.
3. It Makes You Limitless.
A business can continue to exist and thrive long after the owner passes on or sells it to someone else. Who doesn’t want to leave a legacy?
4. It Legitimizes You.
A recognizable and reputable professional image increases consumer confidence and makes it easier for customers to find you.
Now that we know some great reasons for starting a business, what kind of business should you start? Read on to learn about some of the common entity types.
Limited Liability Companies
A limited liability company (or “LLC”) stands out as a business structure offering a unique combination of flexibility, protection, and advantageous taxation. LLCs often make sense for entrepreneurs and creative professionals because it blends the benefits of corporations while allowing for a more adaptable and informal management style. It’s a great entity for business owners who value collaborative decision-making and agile operations.
Similar to a for-profit, LLCs shield the owners' personal assets from business liabilities, providing a crucial layer of security in case of disputes or debts. Moreover, the “pass-through” taxation ensures that profits and losses flow through to individual tax returns. This simplifies taxation and often results in tax savings, whether or not the company is profitable.
Plus, setting up and maintaining an LLC is a relatively straightforward process, involving minimal paperwork and compliance requirements. Establishing an LLC can be easily accomplished through most states’ business websites (in Florida, for example, there are forms easily found and filed online at www.sunbiz.org. While all businesses must file Annual Reports every year, the costs are relatively low, and when compared to the potential tax savings, are generally a no-brainer.
For-Profit Corporations
While corporations are like LLCs in that they offer liability protection and some tax benefits, they are far more complex, with greater compliance requirements that are often unnecessary for small business owners.
For example, corporations typically have a structured hierarchy with shareholders, directors, and officers, and require a formalized decision-making process (unlike the flexible management of an LLC). As a result, most business decisions require input from multiple individuals, causing delays.
Another significant difference is taxation. Corporations face “double taxation.” That’s right – paying taxes twice. First, company profits are taxed at the corporate level (in other words, paid by the company), and then dividends distributed to shareholders (the owners) are taxed again on individual tax returns.
That said, corporations can issue stock, which makes it easier to secure outside funding (via institutional loans or private investors), and are generally unaffected by changes in ownership. These two factors ensure continuity and stability, making it the right choice for owners with long-term visions and who are seeking substantial growth potential.
Tax-Exempt Not-for-Profit Corporations
Don’t be fooled by the name “not for profit” (or “nonprofit”). The truth is some of the world’s largest businesses are not-for-profit corporations. The Red Cross, Harvard University, the Vatican. All of these are nonprofits. As are many of our cultural and artistic institutions, like the MET Museum and Grammy Foundation.
A nonprofit is an organization formed for purposes other than generating profit. While nonprofits can and often do earn (sometimes significant) revenue, the primary focus is serving the public good or advancing a specific cause. Furthermore, to receive the “tax exempt” 501(c)(3) IRS designation, nonprofits must operate exclusively for exempt purposes, such as charitable, religious, educational, scientific, or artistic.
Like LLCs and Corporations, nonprofits have a variety of pros and cons. On the plus side, nonprofits recognized by the IRS enjoy tax-exempt status, thereby retaining more resources for their mission-driven activities. They also attract donors who can receive tax deductions for their contributions, potentially leading to increased funding. As an intangible benefit, nonprofits garner a sense of credibility, fostering trust among stakeholders due to their mission-driven focus.
On the flip side, managing a nonprofit (like any other corporation) does involve compliance with regulations; requiring transparency, proper record-keeping, and adherence to governance standards. How and when individuals can be compensated, the rules related to revenue-generating activities, and the challenges associated with fundraising all require precise understanding and/or wise counsel. Despite these complexities, forming a nonprofit is often worthwhile if the core of a business’s work is mission-driven.
Sometimes creatives feel that operating as a business will detract from their craft. But fear not! When you know your creativity is protected, it can give you the space and freedom to create without worry. Forming a business entity is a relatively low-cost, low-fuss step in becoming a creative professional and badass business owner.
Jessica Shraybman, Founder & Managing Partner