What does “business entity” mean for your photography business?
Do not let the formality of the terminology scare you. In a nutshell, it is a group of people (or a person) organized for profitable or charitable reasons established as a separate entity for tax and liability purposes. Some examples of business entities are sole proprietor, general partnership, limited liability company (LLC), S corporation, and corporation.
Sole Proprietor or Limited Liability Company?
There is a lot of complex and general information online about the different ways you can classify your business. There are the two that I recommend you choose from for your business entity, given the nature of the photography business. I’ve gone ahead and compressed it down for you with definitions, pros, and cons. I’m definitely not an accountant, so you should consult an accountant if you are unsure which one fits your business the best.
|Entity Type||Definition||Pros||Cons||Who is this for?|
|Sole Proprietor||A business that is owned and operated by one person.||Simple business to create and easy to file taxes. Few regulations.||No liability protection for personal assets.
Less likely to obtain business financing
|An individual looking to keep their business structure simple and does not have to worry about the liability against personal assets. Would definitely have to purchase liability insurance in order to cover the personal and business assets.|
|Limited Liability Company (LLC)||A business entity that combines the benfits of a corporation and sole proprietor.||Easy to set up.
Provides protection for personal assets.
Has benefits of corporation without paperwork and record-keeping requirements.
|Some states have a special tax against LLCs. Have to have LLC in legal name of business.||Individual(s) looking to have the flexibility for growth in their business structure and the liability protection for their personal assets.|
One more important note, is if you are going into business with someone else, definitely go for the LLC, not a general partnership. Yourself and your assets will be much better protected. When there are two people, you automatically assume “partnership”, but since you can do more than 1 person with an LLC, you may as well opt for the entity with the better protection.
How easy is it to change my entity type down the road?
Very easy. It just takes some additional paperwork and potentially some fees. Of course every state is different, but if your business evolves and changes, you can do have the option to switch it up very easily.
Which one do you recommend?
If you have the time and don’t mind a fee and a little extra paperwork, I strongly recommend to register your business as an LLC. It’s well worth the extra protection of your assets, even if you do have liability insurance.