# Are you Incorporated, or a personal business?



## Dracarys (Jan 21, 2014)

Just wondering how many of you are actually incorporated or are registered as a personal business. I looked into incorporating, and it seems to have some good pro's such as protecting yourself from a companies potential mistakes.

I'm registered as a personal business and would like to make the change to incorporated, hopefully someone can chime in.

Thank you!


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## Dracarys (Jan 22, 2014)

Thoughts?


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## Daryl (Jan 22, 2014)

There are pluses and minuses. It sort of depends on how much you earn whether or not it will be beneficial for you. I suppose the biggest thing is that if you get sued and the business gets bankrupted, you don't lose your house, if you have incorporated. 8) 

However, accountancy fees are likely to be much higher, you may end up with more expensive banking, and you have to be careful about how much you pay yourself in dividends, as opposed to income, if you ever want to get a personal loan or mortgage for a bigger house.

I suggest that you talk to an accountant who deals with all this sort of thing and get them to talk you through it all. Many accountants will give you a free consultation, so it shouldn't cost you anything. Just your time.

D


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## AC986 (Jan 22, 2014)

Dividends can be beneficial in terms of taxation dependent on earnings in the UK but like Daryl says when getting a loan it can go against you. Same can be said for self employed if people keep their earnings artificially low.


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## marclawsonmusic (Jan 22, 2014)

Hi Casalena,

In the US, you can form a "C" or an "S" corporation. A "C" corp is a true independent entity, while an "S" corp is still affiliated with you as an individual.

I had an "S" corp for many years (in my IT business, not as a composer - however, it was still a work-for-hire type business), but eventually closed it because the tax / paperwork burden was much greater than the tax savings I was trying to achieve.

If you are mainly concerned with protecting yourself, an LLC might be a good way to go (or whatever the equivalent is in Canada). By definition, this kind of legal entity limits your liability in case of a problem. Or, you can purchase a "general liability" or "umbrella liability" insurance policy for very cheap. This provides a cash benefit in case you are ever sued.

Daryl's suggestion to speak to an accountant is a golden one.

Best,
Marc


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## cadalac (Jan 23, 2014)

In Canada we unfortunately don't have LLCs, just personal businesses and corporations (with variations on each).


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## Dracarys (Sep 13, 2014)

I will definitely talk to a lawyer/accountant if things begin to pick up. I'm sole proprietorship for now.

Does anyone else want to chime in here? I can't imagine being sued as a sole proprietorship, I'm just writing music, that's all I'm responsible for, it's like when I do subcontract work with my other job, I'm not running their business. As long as I book keep and do my taxes, how can I be held responsible for a companies mistakes? All I can really do is run my business into the ground from bankruptcy, which I don't see feasable given that I have a computer and a keyboard, or not hold up my end of a contract. I can understand if I set up a LP or LLP, then more people are involved.


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## wst3 (Sep 13, 2014)

I'll chime in, but I'm in the USA...

The advice to consult with a tax attorney or accountant is invaluable. Here the differences between sole proprietorship, S Corporation, and LLC can be arcane, and even confusing at times, but they have real effects.

My considerations are liability, taxes, record keeping, and fees for the lawyers and accountants.

For a long time I ran a studio design and maintenance business. I maintained a sole proprietorship because it minimized my costs, and my biggest liability was errors and omissions, and I had insurance for that. I also had plain old liability insurance, but the risks were minimal.

Just about the time the bottom fell out of that market I was working on changing to a corporation because income was increasing, and there was a tax incentive. It never happened.

As a composer I think (here, me) that the sole proprietor model works better, but that could change.

I will say that working with an accountant makes life SO much easier. Of course you need to be bringing in sufficient income to justify it, but at tax time it always seems like a great investment!


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## chibear (Sep 13, 2014)

Not exactly a 'modern' answer to your question but some experience from a parallel industry:

Back in the late 80's Revenue Canada reclassified orchestra musicians as employees of their symphony orchestras. Free lance work was considered self-employed. At that time a few decided to incorporate as they had large self-employed incomes outside the orchestra so could make a case for orchestras being but one of their clients.

Those that incorporated were able to legally (?) employ different family members for 'services' rendered, etc. and in the end saved a few dollars on their taxes, BUT the paperwork attached to being incorporated is apparently horrendous compared to running a self-employed business so most eventually opted out.


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## kclements (Dec 11, 2014)

I find this idea of incorporating an interesting one. I'm still doing a ton of research, as I just started thinking about things this way. But I do see some potential benefits. 

Cheers.
kc


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## jeffc (Dec 11, 2014)

I would say besides the personal liability protection, it's kind of hard to see the benefits in the US. I'm an S-Corp and it makes your whole situation much more complicated than as a sole-proprietership. I used to think there were tax saving benefits to incorporating, but in my experience that has not been the case. Other than declaring a low salary and taking the rest as a distribution (where you would pay a bit less tax) it all works out the same as a sole prop. And the administration and accounting costs are much more complicated. So, I would seriously consider if it's really 'necessary' to do, before you do it. It became necessary here to do it, because many film/tv contracts are written as such to pay a 'loan out' corporation, so being a sole-proprietership kind of raises some red flags. But until that becomes an issue, I wouldn't rush into it.


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## EthanStoller (Dec 11, 2014)

Here's a link to an audio recording of a good discussion on the topic: http://www.chicago-music.org/category/musicians-at-work-forums-archive (http://www.chicago-music.org/category/m ... ms-archive)

Scroll down to the "Setting up your Music business" topic from October 19, 2009.
It's over 90 minutes long!

My accountant, Lisa Malina can be heard on this panel (thank goodness for a competent accountant!) She specializes in musician clients and has a lot of good advice.

Hope this helps.


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## kclements (Dec 11, 2014)

Excellent. Thanks for the replies. I will definitely check out that audio discussion.

My thoughts about going LLC over Sole Proprietorship is not only tax savings for my wife and I, but also for the ability to raise some start-up capital. Not a lot, but just enough to get me through the next 6-12 months while I wait for my royalties to build.

Also, as I know very little about running a business, I figured a partner in that area would be a good thing. I can't afford to hire, but if I can find a business partner that can offer skills I don't have for taking a percentage of future royalties, it might be a good deal for me. 

Again, I am looking at keeping it very close to the vest and not going wild with "investors". Just a trusted person or two that can help me navigate this start-up period. 

Thanks for the thoughts. I think for sure a S-Corp is too much for me. But I like the LLC idea more and more. 

cheers
kc


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## marclawsonmusic (Dec 11, 2014)

jeffc is right. Having an S-Corp requires a *lot *more paperwork.

I am back to being a sole proprietor and it is much easier. I file quarterly (estimated) taxes and just keep track of business expenses throughout the year. I pay an accountant to sort everything out in April, so my taxes are more costly, but I think it is worth it.

There is actually significant benefit to having an S-Corp if you contribute a large amount of money towards retirement. In that scenario, the S-Corp can match your individual contribution, so you get more bang for your buck and can also write off a lot more.

But, I never made enough money to really take advantage of that.

[NOTE - my facts are about 4-5 years out of date. I closed up my S-Corp a while ago.]


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## Mike Greene (Dec 11, 2014)

In the U.S., incorporating will cost you a grand or so to set up, then you pay $800 a year to keep it. (Maybe that's just California, though. Other states might charge different annual fees?)

I think an LLC (Limited Liability Company) is cheaper to set up than a corporation, but will also cost you $800/year to keep. However, unlike a corporation, if you make more than ~$300,000 (I can't remember the exact cutoff amount,) then the $800 annual fee changes to something like $2,500. With a corporation, it's always $800. (At least I think that's what my accountant told me.)

The tax benefits are pretty minimal and they're like Jeff described. Your income needs to be high enough that juggling the numbers is worth it. In a nutshell, the difference is whether the capital gains rate is lower than what you're now paying normally _overall_. I say "overall" because even though your tax rate might be 35%, that's not what you're paying _overall_, since the first few thousand weren't taxed at all, and then then next few thousand were taxed at 6%, etc. So your _effective_ rate might be more like 20%. Oh wait, I forgot to include self-employment tax . . . yeah, like others have said, you really should have an accountant see if this worthwhile. :mrgreen: 

Liability protection was a big factor to me in the beginning, but I kinda wonder if it really matters. The theory, of course, is that if a corporation gets sued (rather than you personally) and is held liable for half a million dollars, then you don't lose your house, because they can only collect from the corporation. (Not you personally.) But (forgive my immodesty), I've already done enough shows that my corporation is going to be collecting more than half a million in future royalties anyway, so I didn't really "protect myself" from anything. They're still gonna collect all of it.

In terms of liability protection, I almost think that I should have _two_ corporations. One for TV show composing, which is where all the future ASCAP royalties will come from, so I'd never want to dissolve this corporation. And since composing for TV shows is far less likely to ever be sued for big bucks, I don't need to worry too much here.

Then the second corporation is just for when I compose for commercials. This is where huge lawsuits are much more of a possibility. (Inadvertently ripping off a tune in a TV show will cost you tens of thousands. But making that same mistake in a commercial will cost you _hundreds_ of thousands or more.) And since there are practically no royalties in commercials, then dissolving this corporation if I ever get sued for a million dollars is no big loss to me.


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## Mike Greene (Dec 11, 2014)

A couple people have mentioned Errors and Omissions insurance. When I looked into that, it was ridiculously expensive, plus they wanted me to submit every song/cue to be checked before they'd allow it. (Charging me a fee for each one as well.) It was crazy.

Are you guys really getting umbrella policies that you're sure would cover copyright infringement? If so, please let me know where. 8)


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## kclements (Dec 11, 2014)

Thanks again for the info. 

I'm still doing research, but as far as I can tell, here in Michigan, establishing an LLC is $50 with a $15 annual fee after that - S-Corp is $60 with a $25 annual fee after that. Now that doesn't include Federal, I know, but a lot less than $800.

I will seek professional help before making any decisions, but this is all such great info. Thanks for sharing. At this point, I have very little royalty income. There are some other things that come into play that make me interested in going this route. At this point, just collecting facts.

Thanks again - keep the conversation going.

kc


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## reddognoyz (Dec 11, 2014)

I have an LLC for my audio post company, I have a partner in that business, and an s-corp for my music company, was my original company, which I use for royalties. I run all my new music business through the LLC, which carries an E&O policy.


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## reddognoyz (Dec 11, 2014)

my sc-orp is incorporated in Delaware btw


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## gsilbers (Dec 11, 2014)

Mike Greene @ Thu Dec 11 said:


> A couple people have mentioned Errors and Omissions insurance. When I looked into that, it was ridiculously expensive, plus they wanted me to submit every song/cue to be checked before they'd allow it. (Charging me a fee for each one as well.) It was crazy.
> 
> Are you guys really getting umbrella policies that you're sure would cover copyright infringement? If so, please let me know where. 8)



by the way... now that you mention it, isn't there "umbrella" insurance that will cover anything outside other regular policies? would that work for this type of things?


I opened an LLC in CA and it costs too much to renew and maintain for little savings benefit and the whole point was to make sure nothing happened to me if I got sued... and like you said , it seems those type of lawsuits don't happen much and if they happen its on specifics, right? and for a lot more money that it will matter only if a worthwhile thing or mid to high agencies/clients are involved. good to know about TV commercials.


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## rgames (Dec 11, 2014)

I concur with the comments so far - it's too complicated to give a straightforward answer.

However, one thing I've always wondered about is just how much liability exposure you lose from incorporating or using an LLC. It's a "Limited" liability corporation, not a "Zero" liability corporation.

If incorporating were truly a way to absolve yourself of liability then you could just set up a corporation and break the law. Since that's obviously not going to happen, there must still be some instances where you have personal liability, so whether you have liability must come down to how the legal argument is made.

My suspicion is that if you're going against a decent lawyer, your personal liability is not so limited.

rgames


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## Dewdman42 (Feb 25, 2020)

Complicated topic. When I looked into this in the USA a few years back for a small one man business and considered all the options I ended up with an LLC. An LLC is not that expensive to get or maintain. That being said it provides limited protection. But it is still some protection. It mainly also provides privacy. Nobody can really connect you to the business. If someone trips and falls on the front lawn of your home they might get a lawyer and the lawyer will do some searching to find out if you have any assets they can pursue in a lawsuit. But your LLC won’t show up on that list. The members of the LLC are sealed inside the LLC docs. So if your LLC has any intrinsic value this separates you personally. The only way anyone can get that info is if the LLC business itself does something wrong and it can be shown to a judge that the LLC needs to be cracked open to see who the members are. Then they will find out you’re connected and all your personal assets would become at risk in that case. But they have to get the LLC cracked open just to find out so a suing lawyer can’t even find out what you own or who you are without some legitimate claims of wrong doing by the LLC.

there are no tax advantages to an LLC at all.

corporations are generally more trouble then they are worth and you could be subject to double taxation as well so they are generally not suitable for a small business. The main point is that the members are insulatedq entirely from having their personal assets at any risk, but corporate officers can still go to jail if they break the law in a corporation.

this is USA, no idea about Canada. Consult a cpa to find out. Generally there are no secret tricks to get out of taxes. It’s really more about protecting your personal assets so that the business entity can do whatever it does and hopefully you can think things like your personal home seperate and at less risk of being taken from you if something bad happens with your business.

for a small service oriented company that has few assets and basically charges by the hour, there is very little benefit other then perhaps creating some sense of privacy but if everyone knows that you are the composer using the LLC called “music r us”, then you won’t have any privacy anyway


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## JohnG (Feb 25, 2020)

Many imagine that they could be sued for a lot of money, but as far as I understand it, any actual award will be based on the actual damages, unless there is a record of behaviour that shows deliberate intention to infringe.

So if the damages are based on what the composer lost whose work you've infringed, there is some ceiling, no? Even if it's two, or even ten times damages, most of the time those actual damages are pretty slender if you write for relatively obscure tv shows or something else that is both inconspicuous and not that high-paying. If you accidentally infringe for 15 seconds of a cue in a show that's on a 2 in the morning, the damages -- the lost revenue to the person whose work you infringed -- might not be enough to bother paying a lawyer and pursuing it. A bit of BMI / ASCAP and whatever slice of the per-episode fee that short bit paid probably wouldn't amount to the law firm's retainer fee.

But...

As @Mike Greene noted above, where you can get in a jam is if something is conspicuous, like a new advertising campaign for United Airlines or Amazon, or the main theme of a hit TV show. Or a huge monster pop hit song. In that case it might be that the damages could mount up (like, millions, in the case of a major hit song), presenting a tempting target for people to hire lawyers and pursue it.

So what do you do? I also have heard that personal insurance against infringement is ludicrously expensive and cumbersome to implement, and that a corporation provides pretty limited protection. Also, the tax benefits seem hard to pin down, at least to me.

Ergo: don't infringe.


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## Daryl (Feb 25, 2020)

JohnG said:


> Ergo: don't infringe.


The problem with that is that it could easily be inadvertent. I speak from experience...!


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## jonathanparham (Feb 25, 2020)

I guess it's filing time so this thread is reviving and I just filed about two weeks ago. I have a Corp Subchapter S. One thing I've noticed over the past decade is certain production companies and studios, if you want to loan out gear and expenses (not creative fees), will only deal with corps and LLCs. No sole props are considered. When I formed mine in NYC in the late 90s, I was concerned with liability. IMO it made me nervous to be on creative teams and tech crews and hear jokes about 'suing' one another or 'you're fired.' Also personally knowing artists on indie gigs suing clients for wages and fees made me concerned as well. I remember walking into a library to look at tax forms and 20 years ago an LLC was a combo of forms you had to collect - like a partnership and another filing form and as an indie artist, it seemed daunting and not as straight forward. Of course, this has changed and most production companies in my world are LLCs. As everyone has said in the thread above getting some accounting and tax preparing advice will help as YMMV.


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## marclawsonmusic (Feb 26, 2020)

JohnG said:


> So if the damages are based on what the composer lost whose work you've infringed, there is some ceiling, no?



This is valid of course, but I think some people forget that litigation itself is a massive expense that can sometimes outweigh any damages. If you are sued and need to lawyer up, that's thousands of dollars just to get started.



Dewdman42 said:


> there are no tax advantages to an LLC at all.



Depends on which operating model you choose for running the LLC. You can actually run an LLC as a Corporation or Sole Proprietorship or Partnership or...


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