5 ways to structure your creative business
From sole proprietorships to S Corps and LLCs, explore which business structure that might make sense for your creative enterprise.
If you're running a creative business, you've probably had a couple of conversations about whether you're going to create an LLC, incorporate, or otherwise make things official. Formalizing your business can impact your legal liability, tax situation, and even business operating decisions, plus, it's a lot of paperwork. So, it's a good idea to stay informed.
To help you think through what's right for you, we've put together some info on common business structures creators use in the U.S. It's just a slice of the whole pie — business formation rules are complex, and vary state by state; consult with legal and financial professionals to make sure you've got the full picture for your particular scenario.
Let's start off with some Q&A.
Do creators really need to choose a formal business structure?
If you're bringing in money from your work (even if it's not netting out as profit just yet), you're probably technically a sole proprietorship already. At minimum, you should know what that implies for you and your business, and whether sole proprietorship suits your needs. While you may not need to do anything further, it's a good idea to get informed and make a deliberate decision.
Why would I choose a formal business structure?
Some creators like how official it feels to choose a formal business structure, or find it lends credibility to their work and business. But even if that's not top of mind for you, you still might want to think about:
Taxes. Different types of businesses mean different tax structures, and varying degrees of tax burden.
Ownership. If you want to co-run your business with other people, picking the right business structure can help you share both the wealth and responsibility.
Risk and liability. Certain business types (e.g., sole proprietorships) treat you and your business as a single entity, which means your personal assets can be at risk if something goes awry. If you don't want to be left holding the bag, you can pick a business structure with more protection.
Projects. Sometimes, you want to separate out income or responsibility for a particular venture (like a book or film), and the right business structure can help you do that.
Fundraising. For creators seeking grants, bank loans, or equity financing, having the right kind of registered business can sometimes make this easier.
What kind of business structures do most creators opt for?
Many creators start out as sole proprietorships or partnerships by default. LLCs and S Corps take a little more lifting, but are common choices. Others might go for traditional C Corps (corporations), B Corps (benefit corporations), nonprofits, or cooperative businesses. Let's take a look at some of the most common options.
A snapshot of business structures for creators
|Type of business||Sole Proprietorship||Partnership||LLC||Corporation||S Corp|
|Ownership||Just you||You and another person (or people)||You, or you and others||You (and shareholders and/or a board)||You (and shareholders and/or a board)|
|Taxes||Profits and losses reported on your personal tax return with a Form 1040, Schedule C.||No entity level federal taxes. Files annual Form 1065. Profits and losses reported on your personal tax return with a Form 1040, Schedule E.||Flexible. Many LLCs will be taxed like partnerships or S Corps, but you have the option to check the box and be taxed as a corporation, if desired.||Higher. You’ll pay corporate taxes and then personal income taxes on dividends, a scenario that’s called “double taxation.”||Profits and losses are passed through the corporation and reported on your personal return, with a Form 1040, Schedule E.|
|Liability||High. Your personal and business assets are on the line for your business liabilities.||Very high. Your assets are on the line for your business, your partners, and you unless your partnership is an LLP, where any liabilities are limited to their investment.||Relatively low. LLCs generally are low risk. Owners are protected from being personally liable for any wrongdoing that the employees or co-owners of the LLC commit during the operation of the business.||Low. Corporations are considered their own entities.||Low. Corporations are considered their own entities.|
|Expenses||Very low. While some regions may require you to register for a business license, you’re automatically a sole proprietor when you start doing business as a creator.||Similarly low to sole proprietorships, though you may need to register in your state or pay a lawyer to draw up a partnership agreement.||Medium. You’ll need to spend a few hundred dollars to register your company as an LLC, and you may have to pay annual fees, including filing state income tax returns.||Higher. You’ll need to pay to incorporate your company, and you may incur annual fees, including state income and franchise tax returns.||Higher. You’ll need to pay to incorporate your company, and may incur annual fees, including state income tax returns.|
|Structural complexity||Low. A sole proprietorship has a single owner (you!) and requires little, if any, paperwork.||Medium. While there’s not a ton of required paperwork with most partnerships, you’ll probably want to draw up a partnership agreement and come up with an ownership structure that makes sense for you and your partners.||Medium. LLCs are structured similarly to partnerships — as complex or simple as you like — but if someone leaves the LLC, you may need to dissolve it and start a new one.||High. Corporations have numerous requirements, like boards, by-laws, shareholder agreements, and more.||High. Corporations have numerous requirements, like boards, by-laws, shareholder agreements, and more. S Corps also have location-based and company-size requirements and constraints on who can be a shareholder.|
The deeper dive
What's a sole proprietorship?
If you're running a creative business solo and haven't done any paperwork to "make it official," that typically means you're the sole proprietor of a sole proprietorship. In short, you're the only owner of an unincorporated business.
Sole proprietorships are a common first step for creators because they're extremely easy to spin up — for the most part, you just start doing the work, but you may need to pay some fees or get a business license in certain localities. Even though you're the only owner, you can work with independent contractors for support, and even part- or full-time employees if you register for an employer ID number (EIN). A sole proprietorship also means no requirements around shareholders, partners, or boards of directors (stuff you'll find around incorporated business) so you can run the show how you like.
As for taxes, business taxes go on your personal return, taxed as personal income. It's a relatively uncomplicated situation here, which some creators prefer.
Where things start to get a little tricky is that this business structure means you (the sole proprietor) and the business are basically one and the same when it comes to liability. You personally take on the liability, including your business's debt. So, for instance, if the business goes south financially, you could wind up taking a serious hit. The profits are yours, but so are the risks, and your assets are on the line if the business gets into trouble. Going one step further, you can be held legally responsible if the business breaks the law, too.
What's a partnership?
If you don't want to go it alone, a partnership might seem like a natural next step. Like sole proprietorships, general partnerships are often a default mode if you don't spin up any paperwork — just for a group of folks running a business together, rather than someone flying solo. (A quick aside: There are a few types of partnerships out there. Limited partnerships, or LPs, which we won't get into here, are often used with partner-investors rather than a squad of operators, and require legal registration and a bit more heavy lifting. Limited liability partnerships, or LLPs, are yet another flavor we'll touch on in a minute.)
While a partnership may make sense in some scenarios, it can also be risky to the partners when it comes to liability. Again like sole proprietorships, you and the business are considered one and the same. But things start to get a little more complicated, because the same applies to your partner(s). This means you're liable for each other and the business, so a big financial mishap or business misstep on your partner's part can become yours. LLCs, which we'll discuss a bit later, and the aforementioned LLPs, or limited liability partnerships, are popular alternatives that generally present a little less personal risk. With LLPs, for example, liability is limited forall of the partners when it comes to business debts — though that doesn't extend to claims for certain intentional or criminal acts, such as fraud.
In partnerships, co-owners have percentage-based ownership in the business rather than shares, which you'll find in incorporated businesses. But even if you've got the largest percentage, you may not really rule the roost; rules vary state by state, and your ownership percentage might not mean as much as you think. For example, a partner is often treated as a full owner (absent an agreement to the contrary) and may be able to sell their portion of the business to whomever they want. That means they can sell to someone you wouldn't be down to partner with or sign contracts without you (potentially cool when you're aligned, and not so cool if you're not). If you opt to go the partnership route, a Partnership Agreement (basically a contract that outlines the business structure and partners' roles) is essential.
What's an LLC?
An LLC, or limited liability company, is the preferred structure for a lot of creators who want to level things up from a sole proprietorship or partnership while reducing their personal liability — all without taking on enormous tax burdens.
To set up an LLC, you'll have to file some paperwork at the state level and pay fees which can cost a few hundred dollars. You'll also be responsible for annual reporting, taxes, adhering to corporate formalities, and additional fees, which vary region to region.
If you're down to do that work, a big plus to LLCs is their flexibility. You can have an LLC by yourself or with partners, also known as members. But be very thoughtful about those members: if somebody wants out, you may have to dissolve the LLC and start a new one. Your tax situation is also flexible; more on that in a minute.
Another advantage of LLCs is liability protection. LLCs generally protect your personal assets, separating them from the company's and leaving you largely shielded should the company go bankrupt or face other liabilities, such as damages resulting from a lawsuit. But "limited liability" is just that: If the you-know-what hits the financial fan, the limits on liability don't always hold if a member has ignored corporate formalities or engaged in wrongdoing. Be sure to consult with legal and financial professionals to learn how to responsibly handle an LLC.
Back to taxes: LLCs give you options. Your LLC can be taxed as a sole proprietorship (or a partnership, if you're multiple owners), and qualifying LLCs can opt to be taxed as an S Corp. For both scenarios, profits and losses go on your personal return. Depending on your particular business, LLCs can also be taxed as C Corps and nonprofits which will have different tax implications. You know the drill: talk to a financial or legal professional for tailored guidance here.
What's a corporation?
As the U.S. Small Business Administration describes it, a corporation is a legal entity that's separate from its owners. Unlike a sole proprietorship or partnership where you and your assets are on the line, a corporation is liable for its own trouble, financial and beyond.
With corporations, owners hold shares, rather than a percentage of the company, and there are specific rules and regulations you'll need to be aware of as you shape and plan the business. Following local and federal guidelines on reporting, record keeping, fee payments, and shareholder requirements, to name just a few, are essential to keeping things above board. If you go the corporate route, work with a professional in business or corporate law to make sure you know what's expected of you and to get your setup right, from your articles of incorporation to all the forms and fees.
One thing to note: Traditional corporations, or C Corps, incur what's called "double taxation." When the corporation makes money, it pays corporate taxes on profits. Fair enough! When the company distributes after-tax profits to shareholders in the form of dividends, the shareholders are taxed as well, on their personal returns. For a small creative business, taking a double tax hit may not be the greatest thing that's ever happened to your wallet.
What's an S Corp?
S Corps are a type of corporation that many creators building somewhat larger or more complex businesses lean toward. S Corps — sometimes known as Subchapter S Corporations or Small Business Corporations — can be a way to reduce your personal risk and liability like an LLC, while tapping into a more favorable tax scenario than a traditional C Corp.
S Corps are generally considered more tax friendly for small businesses and early businesses than C Corps because you're taxed at the shareholder level, rather than the entity level. Effectively, profits and losses are "passed through" the corporation right on over to the shareholders, without incurring federal corporate taxes. In turn, shareholders (that's probably you and your co-owners, plus any investors or employees who have shares of your company) pay taxes on the dividends on their personal returns. The corporation still has to file a tax return, though, so be sure to talk to a tax professional to cover all your bases.
If an S Corp sounds appealing to you, your creative business will have to check a few key boxes. First, you'll have to go through the regular old incorporation process. Check out the resources below for more on that. To qualify as an S Corps, your business also needs to be U.S.-based, have only one class of stock, and have less than 100 employees, among some other requirements. If your business fits the bill, you'll fill out IRS form 2553 to get the S Corp process rolling.
The bottom line
Being informed about different business entities and business structures can help you make smart decisions about your creative business and get your tax, finance, and operational ducks in a row. Partner with finance and legal experts who understand your work as an independent creator, check out the resources below, and you're well on your way.
Resources, forms, and further reading
P.S. This article is intended as knowledge-sharing, not financial or legal advice. Always consult with a financial and/or legal professional to determine what's best for your business.