Why would an entertainer want to “incorporate?” Man when I was first starting to earn a decent living as a performer, this topic caused me more confusion than just about any other as far as business organizations go…
Everybody kept telling me that I needed to “incorporate.” What the heck did that mean?! Well it turns out it really isn’t that big of a deal.
So what is a corporation?
It is what’s called a “legal fiction” which means basically it is a fake person that is set up in such a way as to be recognized by the law to have essentially the same rights as a living breathing person like you and me. The idea was to create an entity for business that could live longer than a natural person and become greater than the sum of its parts.
There are several different kinds of corporations, i.e. public, private, closely held, C corps, S corps, Professional Corps, etc. They all have different characteristics but at their core they are pretty much the same thing. A discussion about each kind of corporation is beyond the scope of this article and probably would not be of much interest to you anyway.
So why would an entertainer want to “incorporate?”
Remember, we started this little joy ride by considering two things, Liability and Taxes. Here is how the corporate form compares in those two critical areas.
First let’s look at Taxes…
Corporations pay taxes (at least they are suppose to in theory). Corporations typically pay at a lesser rate than do individuals with a supposed average tax rate of 15%. Sounds a lot better than that 30% self-employment tax doesn’t it?! Well, not so fast. Corporations are also subject to double taxation.
What does that mean?
When the corporation earns money, that income is subject to be taxed. You can get lots of corporate deductions by spending down the amount of money the corporation makes so that there isn’t a big profit at the end of the year which will lessen the corporation’s tax burden. However, when the Corporation earns money that it pays to you as a salary or cash distribution, you are personally liable for the tax on the money that the corporation gives to you. So at the end of the year you will have to claim these monies as income personally.
Double taxation is just another way of saying that you (the corporation) pays the tax when the money is earned and then you(the person) pay some more taxes when the money is distributed from the Corporation to you personally.
This is a way oversimplification of the idea, but I think you get the idea. You are still going to pay taxes.
If you do decide to incorporate, you are going to need an accountant to help you with the taxes. Depending on what kind of corporation you form, you are going to have to complete different forms when you file your taxes. You could calculate your own taxes, but I wouldn’t recommend it. Accountants live for this stuff and they are much better at it than you are (unless you are an accountant!). Oh and if you do use an accountant you are going to have to pay fees for their services.
Don’t forget to consider these accounting fees into the equation when considering whether it really is worth it to incorporate.
As we look at corporations in the area of taxes I hope you will take away that you are still going to have to pay taxes and paying taxes is going to get a whole lot more complicated. Because your taxes are going to get more complicated, you are going to have to pay more money or spend more time taking care of your taxes. From my experience (and I have been both a sole proprietor and a small closely held corporation) I didn’t really see that big of an advantage in the tax arena by incorporating.
Let’s move on to the issue of Liability…
As a lawyer it drives me nuts when I hear, “If I incorporate I can’t be sued personally and all my personal assets are safe!” WRONG!!!!
Just because you incorporate, does not mean you are given a license to be stupid!
Think about this for a minute…Let’s say you are a face painter at a festival and you decide to poke a really annoying kid’s eye out (don’t fuss at me, admit it. We have all thought about it!) Do you really think a Court is going to say, “Well yes Mr(s). Plaintiff we agree that the face painter is completely liable for your child’s injury, but there is nothing we can give you because that smarty pants incorporated their business so all their personal assets are beyond our reach.”
Or how about this one…Let’s say you are a magician and you can’t wait to use this fancy new fire effect in your show. You follow the instructions and do the best you can, but somehow you get a little too close to the stage curtains which ignite and burn down the building where you are performing. Do you think a Court is going to say, “Well gee we sure are sorry Mr(s). Plaintiff, that magician sure was a bone head and it was really stupid for them to be performing with fire in that building, but we can’t give you any of his personal monies because he is a corporation.
First off, anybody can sue you for anything. Being a corporation does not stop someone from filing a lawsuit against you. If you are sued, it is going to cost a pretty hefty amount of money to hire a lawyer to defend you. I know :0)
Second, you will always be personally responsible and held liable for your own negligent acts regardless of whether you are a corporation, sole proprietor, or any other business entity. So being incorporated isn’t going to help there.
Being a corporation might protect your personal assets from the negligent acts of an employee who does something stupid that you had no part in. Notice I said “might” because there are some exceptions to this statement as well. If you don’t have employees, well, being a corporation isn’t going to be that big of a help in terms of Liability.
Your personal assets are protected by being incorporated when it comes to debt. If the corporation borrows money and then cannot pay that money back, the corporation will be liable for the debt, not you personally.
Here is the kicker, most lenders are pretty smart too and they hire lawyers to help make sure that some slick person like yourself can’t just default on a debt and get away scot free. Now and days these crafty lenders are going to make you personally guarantee any loan they give your shiny new corporation. That means if you go default on the debt they can go after all your shiny personal assets as well.
Overall, in case you can’t tell, I’m not a big fan of the corporation for entertainers.
Unless you have a well established, pretty big operation earning at least $100,000 a year and you have several employees and/or need a line of credit to handle cash flow issues, you just are not going to gain that much by incorporating.
Plus, if you do incorporate, you are going to take on a lot more responsibilities. You are going to have to comply with your state’s laws concerning corporate governance. You are going to have to have at least one annual shareholders’ meeting where you keep minutes. You are going to have to file annual reports with the state. Oh and for each one of these things you are going to have to pay a fee. All these fees add up.
While I wouldn’t recommend you incorporate, if you want to, it is not a difficult process. You could do it yourself, but I wouldn’t recommend it. Hire a lawyer to do it for you. Yes, that is going to cost some money too. It will be money well spent, if you decide that is what you want to do.
I know this is all almost too much excitement to bear, but hang on to your hats… Next article at Kids Entertainer Hub we enter the exciting world of LLCs!