Need Help Discerning Which Business Entity to Create!
I was delighted by your column about turning your hobby into a legitimate business. I make one-of-kind fiber pieces, and I have been doing what you prescribed. I would like to know where you can refer me to read more about the differences between C Corporation, S Corporation, or LLC. Basically, I would like to learn the different legal and financial benefits. I would appreciate such information. I have a sales exemption number. Is there a way to obtain a federal identification number? I have an accountant now to legalize my situation.
- Susan Berger
This is the perfect time in your business year to consider these options. It's mid-year and by the time you have your decisions in place, it will be tax time again--yikes. Since you are now operating your business as a sole proprietorship, let's go to considerations of various corporate choices.
There are three forms incorporation can take: C Corporation, S Corporation, and Limited Liability Corporation (LLC). I think the basic deciding factor for a small business is the way money moves through it and how it is taxed along the way. Let's make tax benefits the core of this decision process. Remember whatever corporate form you choose, you become an employee of your corporation. The money you pay yourself is not part of the profits of the corporation; it's an expense to the corporation.
The C Corporation is taxed as a separate entity and must report profits and losses on a corporate tax return, which entails a bunch of paperwork. Fortunately, you can choose the tax year that best suits your work schedule. A C Corporation pays taxes on its profits, and you would not be taxed on its profits until you withdraw the money. The problem here is the C Corporation results in double-taxation, the corporation pays taxes on the profits, and you will pay taxes on the money when you withdraw it. This double taxation is avoided with an S Corporation.
The S Corporation is a pass-through entity and doesn't pay any income taxes. You, as the shareholder, would pay the tax due on the corporation's profits on your personal tax return. On the other hand, if the corporation has a loss, that loss can be deducted from your personal tax return. An S corporation's fiscal year must end on December 31.
A Limited Liability Corporation (LLC) offers the tax advantages of a proprietorship with the liability protection of a corporation. If you choose to form an LLC, you can elect to be taxed as either a proprietorship or S corporation. For federal tax purposes, income, losses, deductions, and tax credits flow through the LLC to you and are reported on your individual income tax return.
Liability protection is an important consideration when considering incorporation. Both a C and S Corporation would provide you limited liability protection for you and normally you wouldn't be held responsible for the corporation's actions. An exception to this would be any contracts you might sign, where you personally guarantee the terms of the contract.
There are a number of legal requirements that each form of incorporation must fulfill. These pertain to the organization and operation of corporations. That would include the adoption of bylaws, keeping records, having annual meetings, keeping minutes, and filing annual reports with your state and the federal government. There is typically a fee for filing these forms.
It's easy to file for a federal identification number. And if you sell goods and collect taxes, you will need an Employer Identification Number (EIN). The (EIN) is assigned to your business by the IRS. You will use it to identify your business on all government forms; it functions for your business in the same way your Social Security number works for you. Applications for an EIN can be found on line at IRS.com and can be filed electronically, or you can request IRS Form SS and file it via the mail.
I hope this information helps you with this important business decision. However, remember I am not an accountant or an attorney. Your accountant is familiar with the financial status of your business and will be the best person to advise you. It is possible to file incorporation papers yourself, but you may also want the advice of an attorney as you work through this.
To Sign or not to Sign?
I’ve noticed that some artists sign their work and others don’t. I’m wondering about signing my work. The people who buy it from me know who made it; so is it important for me to sign my work, and is there a special way I can do this?
Of course! I'm always amazed when I see handmade work without a signature or with one that can’t be deciphered. At the most personal level, when you add your signature, you’re saying, "I made this; it’s my idea made with my expertise, and I’m proud of what I’ve done."
There are also lots of practical issues to consider. Here’s what happens to unsigned work as time passes--it’s credited to an anonymous maker. Unsigned objects create huge research problems for scholars, collectors, curators, and auctioneers who need to be able to identify objects they are considering.
Just any signature isn’t necessarily sufficient. Depending on the media, a signature may be written using appropriate media or incised into the piece. Many artists use a stamp that might be symbols and/ or initials. In all cases, it is essential that the signature is easy to read.
Next, and this is really important, you must document the marks you make. We all spend time and money on photography to document our work. I would encourage artists to collect images of their marks and a typical piece made when that mark was used and the timeframe when it was made during.
Further, it’s essential that the mark you make is on the actual piece, not on something that can be removed, such as a frame or base. It really doesn’t matter where the signature is placed; it just shouldn’t distract from the aesthetics of the object. So sign away, be proud of your work, and be sure future owners will know you made it.
About the author: Donald Clark is author or Making a Living in Crafts and was a partner in Ferrin Gallery for 25 years. In addition to writing, he is currently a consultant to artists, a personal property appraiser and a collection manager. He also continues to create his constructions that have been shown extensively and collected internationally.
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