Business of Photography: Forming Your Business Entity

Congratulations on your decision to start your own photography business. You are embarking upon an exciting adventure that I am sure you will not regret. Well, now that you have made the decision to go out on your own you need to set up a business. While starting a business might seem like a daunting task, it is actually relatively simple -- if you know what you need to do.

Now, a quick disclaimer, this article is for general information purposes only. While I am an attorney, I am not your attorney and nothing in this article should be or is intended to be taken as legal advice. The receipt or viewing of this information is not intended to create any attorney-client relationship.

In order to form the legal entity for your business, you will need to complete the following steps:

• identify the legal entity that is right for you;
• register your business with your state;
• prepare your organizational documents;
• obtain a tax id number;
• open a bank account.

 Legal Entity

When it comes to forming your business, there are many types of business entities to choose from and identifying the right one for you is entirely based upon financial considerations. See, the primary difference between the various legal structures has to do with your personal liability, tax liability, and corporate governance requirements (corporate governance requirements encompass the actions that your corporation must perform each year and the types of policies your corporation must implement and regularly maintain to ensure accountability and fairness in your corporate practices). Each entity type insulates your personal assets to varying degrees, limits your tax obligations to varying degrees, and requires you to perform certain corporate formalities to varying degrees. The types of legal entities available are limited liability companies (LLCs), partnerships (LPs or LLPs), corporations (S and C), and sole proprietorships. A brief summary of each type is listed below.

Limited Liability Companies

• This structure will be right for most people as it sufficiently protects your personal assets in the event your business is sued, it reduces your tax liabilities, and there are minimal corporate governance requirements. 

• Personal liability: Legal structure separate from owner. 

• Tax liability: LLC is not taxed, instead owners report their share of profits and losses on their personal tax returns. Business profits are treated as "passing through" the entity and onto the individual members so you will avoid "double taxation." Double taxation is when you are taxed on the corporate level and again on the individual level. As a little background, corporations are generally taxed on profits and then, if the corporation issues a portion of those profits to shareholders (aka dividend) then the shareholders pay taxes on the funds received. Thus, with a LLC you will avoid paying taxes as a legal entity AND as the receiver of a portion of corporate profits.

• Corporate governance requirements: Governed by an operating agreement. No requirements for annual meetings or recording of meeting minutes.

  Partnerships

• Personal liability: Partners remain personally liable for lawsuits filed against the business.

• Tax Liability: The partnership entity is not taxed. Instead, owners report their share of profits and losses on their personal tax returns.

• Corporate governance requirements: Governed by a partnership agreement. No requirements for annual meetings or recording of meeting minutes.

Corporations

• Personal Liability: Legal and tax structures are separate from owners. Personal assets are separate from business debts.

• Tax Liability: For C corporations, the corporation is taxed on corporate profits and shareholders are taxed on dividends (e.g. money received from corporate profits). For S Corporations, corporation is not taxed instead the owners report their share of profits and losses in the company on personal tax returns. 

• Corporate governance requirements: The corporation is governed by the bylaws and the articles. The corporation must hold annual meetings and record meeting minutes. 

Sole Proprietorships

• Personal Liability: Owner remains personally liable for lawsuits filed against the business. 

• Tax Liability: Owner must report profit and losses on their personal tax return. Since there is no separation between the business and the owners, you will be subject to double taxation -- tax on corporate profits + income tax. 

• Corporate governance requirements: You do not need to register your business at the state level so there are no corporate governance requirements.

It is important to note, however, that even if you choose a legal structure that protects your personal assets from business debts, you can be held personally liable for the actions of your business in certain situations. If you commit an act of gross negligence or fail to adhere to certain duties (e.g. duty of loyalty, fair dealing, etc.) you could find your personal assets up for grabs in the event of a lawsuit.

Now, the above information is only a summary of the implications of selecting a particular legal structure. It is best to consult an attorney before making your final decision.

Registering Your Business

Once you have identified the right legal structure for your business, it is time to register that with your state's secretary of state office. In order to register your business you need to file, and obtain state approval of, the Articles of Incorporation (sometimes referred to as Articles of Organization) for your business. Most states have fillable forms on their websites that you can use and generally, you can file your Articles on the state's secretary of state website. Generally, your articles must include the name of your business, date of formation, and your registered agent/office, among a few other pieces of information. As an FYI, a registered agent is basically the person/entity that will be served if someone decides to sue your company or the state wants to contact you.

The cost for registering your business with the state varies widely per state. For example, in Missouri it costs around $50 to form your organization but it costs nearly $300 to do so in the District of Columbia. However, do not register your business in a different state than you live in or plan to operate just to save $200. In order to conduct business in a state other than your business' home state (e.g. the state your business is formed in) you have to register your business with that other state's secretary of state office. In this instance your business is considered a "foreign corporation," which means that your business is formed under the laws of one state but you are authorized to do business in another state. Well, guess what you need to have in order to register as a foreign corporation? A registered agent in that state. Thus, keep things simple and simply register your business in the state where your business will operate.

Organizational Documents

Depending upon the type of legal entity that you chose, you will need to prepare certain organizational documents. Each type of organization, other than a sole proprietorship, mandates that you have a governing document. For LLCs the governing document is referred to as an operating agreement, for corporations it is referred to as the corporate bylaws and for partnerships it is referred to as the partnership agreement. The governing document outlines the rules, procedures and practices that govern the legal entity. Each state has specific laws mandating the type of information that must be in your organizational document, therefore, it is important to obtain legal guidance when preparing your governing document. Additionally, shortly after forming your entity, you will need to hold an organizational meeting electing officers and/or directors and approving your governing document(s). If you decided to form an LLC and you are the sole member/manager, this process will move relatively quickly. However, if you decided to form a corporation, it will take you a bit longer to complete these steps.

Tax ID Number

Once you have successfully registered your business with the state and prepared your organizational documents, you need to go out and obtain an employer identification number (EIN). This is basically the social security number for your business and you must have one in order to obtain a bank account for your business or hire employees, among other things.

Bank Account

Last, but certainly not least, go out and get a bank account for your business. You must have a bank account in the name of your business. In the event you are sued, it is one of the surest ways to prove that your business is separate from the owners and thus, protects you should someone attempt to come after your personal assets in a lawsuit. Do not mingle business and personal funds. Keep them separate!


Disclaimer: This article is for general information purposes only. While I am an attorney, I am not your attorney. Nothing in this article should be or is intended to be taken as legal advice. You should consult an attorney for advice regarding your individual situation. Contacting me in any capacity, including via the comments section, does not create an attorney-client relationship. The receipt or viewing of this information is not intended to create any attorney-client relationship.