Business Structures That Work For Creative Entrepreneurs

The reference to the bohemian lifestyle of the stereotypical “starving artist” is one that is seen throughout history as romanticized. One of the first literary mentions of the poverty-stricken lifestyle of creative writers, painters, actors, and musicians is from Henri Murger, in “Scènes de la Vie de Bohème,” which was the script basis for the famous Puccini opera, “La bohème”.

Artists historically may have opted for a minimalist or scant lifestyle, but contemporary creative entrepreneurs are passionate about striking a friendly balance between artful expression and solvency. Finding the right legal structure for the product or service is a critical aspect that helps them to them reach financial goals while enabling them to earn a living doing exactly what they love.

 Business Structures That Work For Creative Entrepreneurs

How Many Americans Are Gainfully Employed in Art Related Occupations?

Per Artrepreneur, an online community for creative experts, visual artists are “more than three times as likely than the general U.S. workforce to be entrepreneurs.” In the category of visual or performance artists, 34 percent of Americans are self-employed, compared to other niche sectors, where only 10 percent of the general population is self-employed. Few artists establish a legal corporate structure that protects them from liability, including bankruptcy and the liquidation of assets (including residential properties or vehicles).

When you consider that creative artists and entrepreneurs may have pending patent designs and other work of substantial commercial value, many of them are taking an unreasonable risk. They are also missing out on other financial gains from qualified tax deductions.

The National Endowment for the Arts indicated that in 2013, there were 2.1 million workers who declared ‘artist’ as a primary occupation. An additional 271,000 Americans engaged in part-time work, holding a second job in an artistic field, which accounted for 12 percent of all artist jobs.

The Risks Involved with Sole Proprietorship

Many creative entrepreneurs start with a part-time business that grows into a full-time income. As such, many of these entrepreneurs retain the same sole proprietorship structure that was in place when they first began. They can pay income tax and contribute to social security, and enjoy many of the tax benefits of writing off home-based business expenses.

However, the sole proprietorship fails to provide additional benefits for workers, including the security of workers’ compensation insurance. This is a problem if manual labor, equipment, or other hazards are part of the production of the good or service being delivered. The occupational injury risk may be high, leaving many creative entrepreneurs financially vulnerable.

The other significant vulnerability – and one that many creative artists do not consider – is the lack of protection for personal aspects under a sole proprietorship. If your business is doing well and you have purchased a home, that property can be seized during a civil suit. States like Texas have a Homestead Act, which provides some protection for the primary residential property if the artist is sued, but it does not eliminate asset seizure for liability judgements.

Incorporation for the Artful

When you suggest to a creative entrepreneur or artist to further investigate the options of incorporation, some may discount the size of their business, which they feel would not warrant the legal protection. However, in many cases, artists are aware of the additional benefits and advantages available through an incorporated business model, but they may hesitate at the administrative cost of incorporation.

Artists can lack confidence in their business (90 percent of start-ups fail, per CB Insights). On the surface, it can seem cost-prohibitive for smaller business owners to consider incorporation, when they are inherently unsure of the real dollar benefit of operating as an S-Corp, C-Corp, or LLC.

There are three types of incorporation options that suit entrepreneurs:

1. C-corporation

If multiple shareholders, partners, and investors are required for the business to grow, a C-corporation offers an alternative that does not limit the number of foreign or domestic shareholders. In a C-Corp structure, the business is taxed as a separate entity – distinct from the owners or partners and shareholders.

2. S-corporation

Different from regular corporations, the S-Corp is not a separate tax entity. An S-corporation does not pay taxes on net income, and all profits and losses are passed directly to the business owner. A business may be granted the S-corporation status if it has only one type of stock issuance and less than 75 American shareholders.

3. Limited Liability Company

A hybrid business structure allows some of the benefits of a sole proprietorship, combined with some of the essential protections of an incorporated business. An LLC is unincorporated, however, and offers flexibility for single owner enterprises. Non-profits can also be registered as a Professional Limited Liability Company (PLLC).

A business entity formation lawyer is the first step for entrepreneurs to realize legitimacy and scalability to help them expand on commercially valuable creative talent and monetize it successfully. Legal professionals can assist workers within the performance, visual, written, or musical arts to protect themselves (and their property) with articles of incorporation.

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