In the world of creative entrepreneurship, passion and drive often take center stage — but one crucial part of launching and sustaining a successful creative venture is understanding legal implications and choosing the right type of business entity. This decision not only impacts your taxes and personal liability, but also the growth potential and overall structure of your company. At Creative Genius Law, we understand the importance of making the right choice from the get-go, and we are here to guide you through this process.
You’ve got a wide range of options, including sole proprietorships, Limited Liability Companies (LLCs), and corporations, so it’s essential to evaluate the possibilities and determine which one best aligns with your business goals, vision, and long-term strategy. Let’s look at the different types of business entities, so you can make an informed decision that will help you protect your personal assets and build a lasting legacy.
What Is a Sole Proprietorship?
A sole proprietorship is a simple business structure that is often the first starting place for creative entrepreneurs. With a sole proprietorship, you are the creator, and you’ve started doing paid work for other people. You haven’t set up a formal legal entity, like an LLC or a corporation (which we’ll talk about in a minute), but you are conducting business as yourself, the individual.
Many entrepreneurs start as sole proprietors, which is fine, but the goal is to graduate from that type of business structure into something more formal. There are big risks involved with being a sole proprietor — if you don’t have a separate legal entity set up, your personal assets are at stake every time you conduct business. There is no separation between your personal assets and your business assets.
So if a situation goes sideways, and there is fallout from a collaborator or client and you end up in a lawsuit, those court proceedings might impact your personal assets. So ultimately, it’s a good idea to consider setting up a legal business entity to protect your personal assets and your legacy. So then you have a choice: Which type of legal structure should you establish for your creative business?
Let’s look at Limited Liability Corporations (LLCs) first.
What Is an LLC?
Many entrepreneurs love LLCs, because they are incredibly easy to set up. If you’re a one-person business, it’s the simplest way to establish a legal business structure. In most states, there aren’t a lot of regulations or requirements around LLCs, so there’s less paperwork for you to complete. LLCs are also highly flexible, which is another reason business owners tend to gravitate toward them. I’m not going to go into a lot of detail about taxation because I’m not a tax attorney. However, I will say this this–with an LLC, you get what’s called pass-through taxation. Your taxes are paid once, as the owner of the business. You don’t pay corporate-level tax.
You also have the opportunity to decide how you will be taxed, as a business. Many of you may have heard about S-Corps, which are not actually a business type. An S-Corp is a tax election. You can have an LLC and decide whether you want to be taxed either as a corporation or as a sole proprietor. There are benefits and disadvantages to both of these approaches, and you’ll want to talk to your accountant or financial advisor for this type of tax advice.
LLCs also give you lots of flexibility around business ownership. If you have a business partner, there are many ways to structure that relationship with your business partner within the operating agreement, which is a contract between you and that partner. You can also choose how your business is structured and managed, and how payments get distributed to members.
Genius Note: Members is the legal term for owners of an LLC.
Let’s switch gears and talk about corporations.
What Is a Corporation?
While LLCs are highly flexible, corporations are not. Each state has different statutes that govern corporate activity, and those rules are typically a lot more restrictive. There are many requirements and legal frameworks for setting up and maintaining a corporation. We talked about how LLCs are flexible in terms of how they can be managed, how they are owned, and how payments are distributed to the owners. Corporations are much more rigid because there is an older body of law that governs how they need to be run.
So for instance, with your LLC, you may have a lot of flexibility with how members or owners transition out of the company — but with corporations, your state’s statutes will dictate how you can dispose of shareholders or your board of directors. That rigidity may or may not be a bad thing, depending on what your goals are. Requirements and restrictions also come with predictability. You’ll know exactly how to run your company if you set it up as a corporation because there is a tight body of law around it.
On the tax side, corporations are typically taxed in two ways: a corporate-level tax, and a tax for you as a shareholder of the corporation. As an owner of a corporation, you are considered a shareholder, so you pay tax on what you bring in from the company — but there’s also corporate-level tax. Each of those taxes will be at a different rate.
You might be reading this and thinking, “Well, it sounds like an LLC would be a better fit for me, because LLCs are only taxed once.” But an LLC might not be the right fit, depending on where you live and where you have your business set up. For instance, in the state of Washington, there may be a point where a corporation actually provides a better tax advantage because of the self-employment tax you might owe as an LLC. Also, with an LLC, you pay the same tax rate on all your income from the company — which may mean a higher tax bill, depending on your revenue and business structure.
So how do business structures play out in real life? Let’s ask Blue Ivy’s mother.
Schoolin’ Life: Doing Business Like Bey
Beyoncé has multiple business entities. All of her trademarks are held by BGK (Beyoncé Giselle Knowles) Trademark Holdings, LLC, and then she has a different company that manages lending her out as talent. She has other companies as well, but those are two of the big ones.
When you start to create more intellectual property in your business, there’s an advantage to having a separate entity that owns that IP. There is a separation between your day-to-day business of being the talent, and the business of providing a product or service. If there’s an issue that arises in the service side of your business, it won’t spill over and impact the intellectual property that’s held by your other company.
Beyoncé runs her business this way, as do Rihanna and many other celebrities that own a lot of intellectual property. As they scaled their business, their structures expanded to support that growth.
How to Choose the Right Business Structure
The main goal of establishing any business structure is minimizing your risk, which lays the foundation for building your legacy. Choosing the right legal structure also allows you to make more strategic long-term decisions around what you want to do with each of your entities. Your business structure will ultimately match the vision for your company, and it will evolve over time.
To ensure you’re making the right decision about the type of business entity you choose, we highly recommend working with a trusted advisor who can help you assess where your business is now, and where it’s headed in the near future.
Here’s why. Let’s say you’re a business owner, and you intend to raise a lot of outside capital for your business and bring in investors at high dollar amounts across multiple states. In this instance, a corporation is going to be your best option. Investors prefer a corporate structure because they like predictability. On the other hand, if you don’t plan on bringing in investors, another option might be a better fit. If you are creating new intellectual properties, entering new industries, or combining a mix of services and products, you may actually end up with multiple business entities. The goal is to set up a business structure that can grow and expand with you.
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