LLCs and Sole Proprietorships for Photographers
Updated: Feb 19, 2020
You became a photographer because you are passionate about photography, not because you love the tax code. But, by now you’ve figured out that part of owning your own photography business is understanding tax and legal issues that you didn’t have to deal with before. They don’t teach this stuff in school. Well, technically they do if you get a degree in Accounting like I did, but for most business owners—not just photographers—this stuff is like a foreign language. So, let me as a CPA translate these terms as they relate to photographers. By the time you’ve read this, you will understand exactly what an LLC is and what it means to be taxed as a Sole Proprietorship. We’ll cover the legal and tax definitions and talk about a way you can lose the benefits of being an LLC without even knowing it.
First things first, what is an LLC? LLC stands for Limited Liability Company, and it’s a type of business entity that can allow the owners to limit their personal liability. LLCs are set up in an individual state and most people will want to form their LLC in the state where they primarily live and work. For the legal implications of LLCs and why they can be a good idea, check out Rachel Brenke’s excellent work over at TheLawTog here. One thing you’ll notice right off is that the way Rachel as a lawyer uses some terms is different from the way they are used by CPAs. I know, I said I would make things less confusing and now I just told you that you need to understand both a legal and a tax meaning for the same term. Stick with me! I promise it will all make sense. LLCs can be great for limiting your personal liability (remember, it’s in their name: Limited Liability Company). The idea here is that if something goes wrong in your business, there is a separation between your LLC and you so it makes it harder for people to go after your personal assets for something your LLC did. Nothing is foolproof, but pretty much every lawyer I’ve talked to about this would rather have an LLC in place than not. So, when Rachel talks about being an LLC versus just being a Sole Proprietorship, she’s meaning in the legal sense of forming an LLC and running your business that way versus just setting up shop without forming the LLC. That makes sense, since she’s primarily talking about the legal aspects.
Now that you’ve got the legal side down (LLCs can protect your personal assets if done right), let’s talk about from a tax perspective. When we talk tax, there is both Federal and State tax to consider. For Federal (aka IRS) tax purposes, an LLC with a single owner defaults to being treated as a Sole Proprietorship for tax purposes and files a Schedule C. So, I might say that you’re a Sole Proprietorship (meaning you file that Schedule C) while you’re an LLC for legal purposes. But, what really throws people is that they understand that being a Sole Proprietorship can be a bad idea for legal liability purposes, so they don’t like me calling them a Sole Proprietorship for tax purposes, but for taxes, it’s not a bad thing. You can be a Sole Proprietorship (not an LLC) or an “LLC taxed as a Sole Proprietorship” and either way you’ll be treated the same way for Federal income tax purposes, but be worlds apart for legal purposes. Quick review: Sole Proprietorship = file a Schedule C and LLC taxed as a Sole Proprietorship also = file a Schedule C for Federal taxes.
When it comes to state taxes, things can be pretty different for Sole Proprietorships that aren’t LLCs versus ones that are. California, for example, charges a yearly fee just to be an LLC in their state. Other states, like Missouri, don’t charge this. More states have a fee than don’t though, so there will likely be a fee of usually a few hundred dollars a year to be an LLC. There is also usually an annual form that you have to file with the state in addition to your tax return to keep them from dissolving your LLC.
So, you understand that LLCs can protect your personal assets, that Sole Proprietorships and LLCs that are taxed as Sole Proprietorships are the same for Federal tax purposes, and that many states charge an annual fee to be an LLC. Let’s talk about one way we see people mess up their LLCs with bad bookkeeping.
You’ve gone through all the trouble of setting up your LLC and filing the form and paying the fee each year to keep it active, so you should be good to go. But, the whole idea of an LLC is not that it just magically protects you from liability—that liability protection is based on the idea that the LLC is a separate entity from you personally. That’s why it can limit your personal liability. But, what if you run your LLC totally intermingled with your personal life? Some months you put your Netflix subscription on your business credit card or pay your studio rent with a check out of your personal bank account. In that case, you could be doing something that’s called “piercing the corporate veil” or in other words, you’re intermingling so much that the LLC is no longer acting like a separate entity and you can lose any protection the LLC might have otherwise given you. Of course your lawyer will try to fight this claim, but it’s a real risk. Bad bookkeeping will absolutely cost you hundreds if not thousands of dollars a year in missed deductions on your tax return (we see this over and over) and it might also negate the liability protection of being an LLC. The single biggest thing you can do for your business is to have a separate bank account and credit card account for your business that you only use for your business. Need money to buy groceries this month? Write yourself a check from the business, put it into your personal account, and buy the groceries with that instead of just using the business credit card. It’s a little more work, but it's crucial. We only do bookkeeping for photographers who have separate accounts for their business and agree to not co-mingle business and personal expenses—it’s a really big deal.
If you’re ready to stop doing the bookkeeping for your photography business so you can focus on doing what you love, book a free 15 minute call here.