Imagine this: your art career is flourishing. You’re selling pieces regularly, connecting with galleries, and building a dedicated following. But with this success comes a new set of considerations. 

How should you proceed with incorporating your business – an LLC or as a sole proprietor? What are the critical legalities that you should keep in mind?

This guide will explore the world of business structures for artists, specifically focusing on sole proprietorships and Limited Liability Companies (LLCs). Explore the advantages and disadvantages of each so that you are better equipped to answer the following question: Is incorporating as an LLC the right move for my thriving art business?

We’ll explore the legalities, financial implications, and how each structure can impact your creative journey. So, grab a cup of coffee, settle in, and let’s explore the path to a secure and prosperous future for your art career!

What Are the Main Business Structures to Choose From?

Choosing the proper business structure is crucial for ensuring overall success and compliance with government norms. It impacts your taxes, protects your assets, and shapes your business’s operations. Below, we share the three most common structures for artists.

1: Sole Proprietorship

This is the simplest and most common structure, especially for artists just starting out. As a sole proprietor, there’s no legal distinction between you and your business. This translates to ease of establishment with minimal filing requirements.

All the business income flows directly into your personal tax return, and you can deduct allowable business expenses to minimize your overall tax burden. 

However, this streamlined integration has a significant drawback: your personal assets need more protection from business liabilities. If a lawsuit arises or debts go unpaid, your personal belongings, such as your car or home, could be at risk.

While this structure provides a straightforward launchpad, it might not be ideal for flourishing artists seeking stronger liability protection as their business grows.

2: LLC

An LLC offers a balance between flexibility and protection. It creates a separate legal entity from you, the owner. This crucial distinction safeguards your personal assets. If your business faces a lawsuit or encounters financial difficulties, your personal possessions like your residence or savings generally remain shielded.  

LLCs are popular for their “pass-through taxation,” meaning business profits or losses “pass-through” to the owner’s personal tax return, avoiding double taxation. This aligns perfectly with the tax structure of most artists.  

Furthermore, LLCs offer management flexibility, allowing you to choose how the business is controlled, whether by yourself or through designated managers.

While setting up and maintaining an LLC involves slightly more complexity than a sole proprietorship, the LLC’s liability protection and tax advantages make it a strong option for artists experiencing significant growth.

3: C Corporation

C corporations represent the most intricate business structure, typically reserved for large, well-established companies. They offer the most robust liability protection, shielding both your personal assets and the assets of other shareholders.  

This enhanced security comes with a cost: C corporations are subject to complex regulations and require meticulous record-keeping.

Additionally, C corporations face double taxation, meaning the corporation pays taxes on its profits, and then shareholders pay taxes again on any dividends they receive. Given the complexities and costs associated with C corporations, they are generally not recommended for most artists.

Should I form an LLC as an Artist?

Given below, is a highly detailed overview of the benefits, legalities, and intricacies of operating your business as an LLC. Give it a thorough read to make an informed decision.

The Legal Structure of an LLC

An LLC is a hybrid business structure that combines the characteristics of a sole proprietorship and a corporation.  

Here’s a breakdown of its key aspects:

Separate Legal Entity

An LLC creates a legal entity distinct from you, the owner. This distinction is crucial because it shields your personal assets (like your car or house) from business liabilities. Your personal belongings are generally protected if your business faces a lawsuit or encounters financial difficulties.

Pass-Through Taxation

LLCs are considered “pass-through” entities. This means the business itself doesn’t pay income tax. Instead, the profits or losses “pass-through” to the owner’s personal tax return and are taxed as self-employment income. This avoids double taxation, which can occur with corporations.

Management Flexibility

LLCs offer flexibility in how you manage your business. You can choose to manage it yourself or designate managers to handle operations. You can also create an Operating Agreement outlining ownership, management, and profit-sharing within the LLC (recommended but not mandatory).

Keeping Your LLC Compliant

It’s important to maintain a clear separation between your personal and business finances. This includes having separate bank accounts and credit cards for your business and for yourself.

Failing to do so could lead to “piercing the corporate veil,” a legal concept that can negate the liability protection offered by the LLC.

There are ongoing filing fees and annual reports associated with maintaining an LLC. These requirements vary by state, so it is important to check these requirements carefully for the location of your business to ensure compliance.

Pros and Cons of an LLC for Artists

Advantages

• Limited Liability Protection: This is a major benefit for artists who may have valuable equipment, artwork, or intellectual property.  An LLC shields your personal assets if your business is sued.

• Pass-Through Taxation: This avoids double taxation and simplifies tax filing for most artists.

• Business Credibility: An LLC can give your art business a more professional image, potentially attracting more clients and collaborators.

• Management Flexibility: You have control over how your business is managed.

Disadvantages

• More Complex Setup and Maintenance: Setting up and maintaining an LLC involves more complexity than a sole proprietorship. There are filing fees and annual reports to manage.

• Potential for Higher Fees: Depending on your state and chosen service provider, the fees associated with forming and maintaining an LLC can be higher than those for a sole proprietorship.

• Tax Implications for Future Growth: While pass-through taxation benefits most artists, if your business experiences significant growth and you bring in additional members, you may need to consult with a tax advisor to determine if an LLC remains the optimal structure.

The decision to form an LLC depends on your unique circumstances. So, we recommend that you weigh the advantages of liability protection and potential tax benefits against the additional complexity and costs involved. Consulting with a legal or tax professional can provide valuable guidance tailored to your specific situation.

LLC Tax Benefits for Artists

An LLC’s tax structure offers significant advantages for artists. Here, we’ll take a deeper dive into the concept of pass-through taxation and explore the deductions you can claim as an LLC owner.

By understanding pass-through taxation and the range of deductible business expenses, you can leverage the tax benefits offered by an LLC structure for your art business. 

Understanding Pass-Through Taxation

Unlike corporations, LLCs are considered “pass-through” entities. This means the business itself doesn’t pay income tax. Instead, the profits or losses “pass-through” to the owner’s personal tax return and are taxed as self-employment income.

This avoids double taxation, which occurs with corporations where the corporation pays taxes on its profits, and then shareholders pay taxes again on any dividends they receive.

Benefits of Pass-Through Taxation for Artists

Simplified Tax Filing

Since your business income and expenses “pass-through” to your personal tax return, filing can be less complex compared to a corporation.

Taxation of Profits Only

You only pay taxes on the profits your business generates. If your business experiences a loss, it can reduce your taxable income.

Example: Imagine your art business earns $20,000 in revenue this year, but after deducting your business expenses (art supplies, rent, marketing), you have a net profit of $5,000. Under pass-through taxation, you would only pay taxes on that $5,000 of profit.

Deductions and Credits Exclusive to LLCs

While LLCs don’t have unique tax deductions or credits specifically available to them, the pass-through taxation system allows artists to deduct ordinary and necessary business expenses on their personal tax returns.

This is a significant benefit, especially compared to a sole proprietorship where business and personal finances are not separate.

Common Deductible Business Expenses for Artists

Art Supplies: Paints, brushes, canvases, sculpting materials, and other supplies directly related to your art creation can be deducted.

Studio Expenses: Rent, utilities, and other costs associated with your studio space.

Marketing and Promotion: Website costs, advertising expenses, business cards, and marketing materials.

Business Travel: Travel expenses related to art shows, workshops, or client meetings.

Home Office Deduction (if applicable): A portion of your home expenses (utilities, internet) if you have a dedicated studio space in your home. Consult with a tax advisor to ensure you meet the qualifications for this deduction.

Maintaining Clear Records is Key

To effectively claim these deductions, it’s crucial to maintain clear and accurate records of your business income and expenses. Separate bank accounts and credit cards for your business will make record-keeping much easier and ensure the legitimacy of your deductions come tax time.

Do Artists Need a Registered Agent?

As your art business flourishes, you may encounter the term “registered agent.” But what exactly does this mean, and do you, as an artist, need one? Let’s break it down.

What is a Registered Agent?

A registered agent is an individual or a service company that acts as your LLC’s official point of contact within the state where your business is registered. This means they are responsible for receiving important legal documents on behalf of your LLC, such as service of process (legal notices from lawsuits or court summons), annual reports and tax notices from the state, and other official government correspondence.

Take a quick look at our guide to choose the best state for your LLC.

Why Might an Artist Need a Registered Agent?

While not mandatory in every state, having a registered agent offers several advantages for artists with LLCs. Legal documents like lawsuits or tax notices can have strict deadlines for response.

A registered agent ensures these documents are received promptly, allowing you to address them accordingly. Your registered agent’s address becomes the public record for legal documents, rather than your home address. This can offer a layer of privacy in your personal life.

Further, knowing that you have a reliable point of contact for official documents can provide peace of mind, allowing you to focus on your creative pursuits.

Legal Requirements for Registered Agents in Different States

The specific requirements for registered agents can vary by state. In some states, the registered agent must be a resident of the state where your LLC is registered. The registered agent must have a physical address within the state and be available during regular business hours to receive legal documents.

Do You Need to Hire a Registered Agent Service?

You can act as your own registered agent if you meet your state’s residency and availability requirements. However, for many artists, this might not be ideal.  

A registered agent service can ensure reliable receipt and forwarding of important documents, even if you’re traveling or busy with your art practice. Some artists prefer using a registered agent service to keep their home address out of public records. Knowing a professional service is handling these formalities can offer valuable peace of mind.

The decision of whether to hire a registered agent service depends on your circumstances and priorities.

Step-by-Step Guide to Forming an LLC as an Artist

Here’s a step-by-step guide to forming an LLC as an artist, empowering you to create a secure foundation for your business:

#1 – Choose Your Business Name

The first step is selecting a unique and memorable name for your LLC. Conduct a business name search with your state’s business division to ensure your desired name is available.

Consider including keywords that reflect your artistic style or medium in the name.

#2 – File Your Articles of Organization

The Articles of Organization is a legal document formally establishing your LLC with the state. Most states allow online filing for this document. The Articles of Organization typically require information such as your LLC name, registered agent address, and the names and addresses of the LLC’s owners (members).

Here is a complete list of documents that you will need to form an LLC.

#3 – Appoint a Registered Agent

As discussed earlier, a registered agent is an individual or service that receives legal documents on behalf of your LLC. This can be you, but many artists choose a registered agent service for convenience and privacy.  

doola is a reputable online legal service that can assist you in forming your LLC and finding a registered agent in your state. doola offers a variety of service bundles to fit your needs, from a Starter package that handles the basics of formation and registered agent services to a Total Compliance package that includes tax consultations and ongoing filing reminders.

#4 – Draft an Operating Agreement (Optional but Highly Recommended)

An Operating Agreement is an internal document that outlines the ownership, management, and profit-sharing structure of your LLC. While not mandatory in all states, having a well-defined Operating Agreement can prevent future disputes and ensure smooth operation within your LLC.  

Consider consulting with a lawyer to draft a customized Operating Agreement that reflects your specific needs. The team at doola can not only help you understand all these requirements but also offers highly comprehensive step-by-step guidance.

#5 – Obtain an Employer Identification Number (EIN)

An Employer Identification Number (EIN) is your LLC’s federal tax identification number. While not always required for single-member LLCs, obtaining an EIN offers benefits such as opening a business bank account and simplifying tax filing. You can obtain an EIN for free from the IRS website.

#6 – Open a Separate Business Bank Account

Maintaining separate bank accounts for your business and personal finances is crucial for upholding the legal distinction between your LLC and yourself.

This separation streamlines record-keeping and protects your personal assets in case of a business liability.

#7 – Comply with State and Federal Tax Requirements

As an LLC owner, you’ll be responsible for filing federal and state income taxes on your business profits.

We recommend consulting with a tax advisor or accountant familiar with LLC taxation to ensure you are meeting all filing requirements and taking advantage of any available deductions.

#8 – Maintain Ongoing Compliance

Most states require LLCs to file annual reports and pay annual fees. doola can offer helpful reminders and ensure you stay compliant with your state’s LLC regulations.

Remember, the regulations and requirements can vary by state and business-unique scenarios. Hence, we recommend working with a reputed and reliable service provider, like doola to ensure accuracy and compliance at all times. 

Confused about the best time to start an LLC? Explore this blog that helps dispel any myths.

How to Start an Art Business

Transforming artistic passion into a thriving business requires a solid foundation. Below, we share the essential steps, covering key areas, to get your art business off the ground.

Create a Business Plan

Define Your Artistic Identity

What sets your art apart? Are you a captivating sculptor, a master of bold acrylic paintings, or a creator of digital illustrations? Clearly articulate your artistic style and the emotions you evoke through your work.

Market Analysis and Defining Your Niche

Who are your ideal collectors or patrons? Research existing art markets, galleries, and online platforms. Is there a specific niche within the art world where your work can truly shine?

Marketing and Sales Strategies

How will you reach your target audience? Consider social media marketing, online art marketplaces, participating in art shows, or collaborating with local businesses. Explore creative ways to showcase your talent and connect with potential buyers.

Financial Projections

Estimate your business expenses (art supplies, marketing materials, booth fees) and potential revenue streams (art sales, commissions, workshops). Developing financial projections will help you secure funding and ensure financial sustainability.

Form a Legal Entity (Consider an LLC)

As your business grows, establishing an LLC offers significant advantages.

An LLC shields your personal belongings (car, house) from business liabilities, providing valuable peace of mind. LLC profits or losses “pass-through” to the owner’s personal tax return, avoiding double taxation.

Finally, an LLC can project a more professional image, potentially attracting clients and collaborators.

Set Core Business Practices

Maintain clear financial separation between your personal and business finances for record-keeping and tax purposes. Research any permits or licenses required to operate your art business in your local area.

This initial roadmap offers the basic information to help you turn your artistic passion into a flourishing business. Remember, the journey is an ongoing adventure. As your business scales, navigating legalities and taxes can become increasingly complex. The good news? 

doola can be your trusted partner, ensuring you stay compliant with all regulations and filing requirements. From effortless LLC formation and registered agent services to tax consultations and ongoing filing reminders – doola lets you focus on what you do best – creating captivating art – while handling all the essential business tasks that keep your venture thriving.

To know more, or to get started with doola, grab a free consultation with our experts today!

FAQs

What are the benefits of choosing an LLC as a business structure for artists?

An LLC offers artists personal asset protection, avoids double taxation, and simplifies tax filing, allowing the artists to focus on core business functions.

How can an LLC provide tax benefits for artists compared to other business structures?

By being a “pass-through” entity, LLCs avoid double taxation for artists. Business profits simply flow through to their tax return, potentially simplifying filing and reducing tax burden.

Is it necessary for artists to have a registered agent when forming an LLC?

Yes, the artists need to appoint a registered agent, when they decide to form an LLC. The registered agent (individual or entity) handles legal documents and ensures the LLC remains compliant with state regulations.

What are the key steps involved in registering an LLC for artists?

Here are the key steps: 

• Choose a unique and available business name.

• File Articles of Organization with your state.

• Appoint a registered agent to receive legal documents.

• Obtain an Employer Identification Number (EIN) for federal tax purposes.