When starting a new art or creative business (or any other business for that matter) you will be faced with choosing a form of organization for your enterprise. In fact you may have already made that choice whether you are aware of it or not.
Basically there are three kinds of forms of organization – sole proprietorship, partnership and a corporation. Each one has its advantages and disadvantages depending on your needs for financing, partners and the level of risk you are willing to take.
- One owner
- Easy to start and easy to dissolve (just say you are in business and make a sale).
- A business return is required for Federal and State Income Taxes.
- Income is reported on your individual tax return.
- Your business liability extends to you personally (unless you apply for a Limited Liability status).
- You cannot sell stock to raise money.
- Typically you may not be required to register your company (i.e. your Secretary of State).
- May have succession issues if owner dies.
- Used if you have more than one owner.
- Somewhat difficult to form and dissolve
- Requires a partnership agreement.
- The partnership must file a separate return of Federal and State income taxes.
- The partnership does not pay taxes, the tax liabilities flow through to the individual partners.
- Can be used as a way to raise additional capital or attract other resources such as personnel.
- You sell interest in the partnership not shares.
- Typically you may not be required to register the partnership
- Business liability flows through to the partners (unless the partners are limited partners)
- May have succession issues if a partner dies.
- Used if you require multiple owners who do not want to accept any business risk other than their investment.
- Requires articles of incorporation, registration with your Secretary of State , and annual meetings/minutes/reports.
- Not easy to dissolve.
- The corporation is required to file income tax forms and pays income tax.
- Income is distributed via dividends where shareholder pays tax at an individual level (double taxation).
- Easy form to raise additional capital by issuing additional shares (this does not mean it is easy to raise capital).
- Ability for shareholders to transfer or sell shares.
- Shareholder liability limited to amount invested in the corporation.
Sub Chaper S Corporation
A federal income tax election where income is apportioned to individual shareholders as is done in a partnership.
Limited Liability Companies or Partnerships
By registering with your secretary of state and paying a fee you can limit the liability of a sole proprietorship or partnership to their assets much in the same manner as a corporation. I urge you to look into this option is you have or will have the potential of liabilities.
Disclaimer and resources for further study
As with most articles on this subject I must warn you that I am not giving legal advice. When you are setting up your company it is important that you understand the basics and seek the advice from your lawyer or accountant. Your form of organization may need to change as your business requirement evolve. It is important that you set up your business right the first time in a manner that meets your requirments and resources – be sure to talk to competent legal and accounting professional.
Here is a great resource which has been developed by the Colorado Small Business Development Center (SBDC) which explains in more detail the various choices you have when setting up your creative enterprise: Legal Structure and Registration. I also urge you to check out your own state’s SBDC resources to determine how your state handles the different forms of organization here: SBDC Locator.