S Corp or LLC?

June 3, 2017 7:17 AM

I am not sure how to proceed on incorporation. S Corp or LLC? This is in NYC, it's just for me alone, working as a photographer, making far less than 50k a year (for now) mostly as a side job but necessary because it's in entertainment. Far more details within.

I have a main career in television, working on stage. I've been working on a show long term and have a relationship with the staff. I am "crew," not "staff." I am only there to execute the show.

Outside of that career, I do some photography on the side. I make ok money selling prints (enough to cover my expenses, plus some fun money), but never pursued a career because I have the main career. I do not report it on my taxes or really even keep track of it. It's $2-3k or less/year. I call it my "jobby."

In the past year, I kind of volunteered to the show that I could take pictures in the course of my other job. They were cool with it. The entire time I've been secretly hoping they would pay me for this.

A year later, they decided to buy the rights to everything I shot in the past year and to pay me going forward. The executive producer, with whom I am friendly, advised me that it would be a good idea to incorporate myself, "but I'm not sure whether an S Corp or an LLC would be better for you, but I think those two are what you want to look at. Anyway think about it." I took that as "you should incorporate before we do this deal."

So I spoke yesterday with my accountant, who I've been using for only a year (I formerly used my ex-wife's accountant, but wanted to switch after the divorce). She gave me some advice that seemed counter to the research I've done online, so the little trust I had in her is affecting how I view her advice.

I should also say that the "jobby" hasn't been a focus for me in the past because I never wanted to incorporate, do all the paperwork, get the IDs and accounts and bother with the records and all that. I think now I'm in a place where I can easily accomplish that and keep up with all of it, and perhaps even enjoy it.

The main career pays me very well. The filing fees for either that I have been quoted don't make me blanche, but I'd like to spend my money wisely. I'm most interested in flexibility, liability protection (rights issues, photos, famous people can all be thorny) and something that will stand me in good stead should I start to make 100k a year at this (which is a possibility, I've been asked to do bigger gigs which I've turned down because I wasn't set up properly).

Thanks in advance! I won't threadsit but I can answer any questions.

posted by New Old User to Work & Money (15 answers total)

Based on my experience, I'd say go with an LLC. Far fewer corporate paperwork requirements and you can elect to be taxed as an S-Corp if you so choose.
posted by Tiny Bungalow at 7:29 AM on June 3, 2017

What you need to give to the show in order for them to pay you is a W9. Here's a link to the form: https://www.irs.gov/pub/irs-pdf/fw9.pdf?

Box 2 is optional. You're a sole proprietor, so you can do this all under your own name. If you're paid more than $600, the show will issue you a 1099 under your name early next year.

There's no rule saying that you can't incorporate, but as a sole proprietor selling your photography services/photos, you're not going to see advantages from it, either. Other people will probably have more thorough answers for you about that, though.
posted by rue72 at 7:31 AM on June 3, 2017

Best answer: I'm curious what your accountant said. One thing I have learned when talking with my accountant is that she is best at offering tax advice which is advice that pertains particularly to filing your taxes and tax liability but that that advice might not cover the range of issues that pertain to you. So keep that in mind when talking to a tax professional. While there may be overlap and professional experience relating to other financial matters, their pencil is sharpened over tax issues. Same goes for investment advisors, real estate professionals, etc., etc..

I'm in a different line of work but it sounds like similar scope of issues and I chose to go LLC. When you are trying to choose which entity, you sort of need to look down the road and imagine your future business self. And future business self might be better off as an S-Corp. However, the benefit of the LLC is that it is fast and easy and virtually nothing changes about how you do your taxes if it is just you. It's like Sole Proprietor Premium. Also, if you need to be an S-Corp eventually, you can just change then!

Also, I recommend using a service to set up your LLC. I feel like my state makes it very easy to set up but I have a million other business things to do and reading all the paperwork and making sure I was getting everything done just seemed like an impediment to just getting the damn thing set up. Plus, the fees for setting it up are a write-off! I used incorporate.com. It worked! There was one hiccup where they kept wanting me to hire them as a registered agent which is required for an LLC but my accountant assured me that I could be my own RA and all the info from my state made it clear that there was no need for a secondary RA so I just had to tell them "no" and continue listing myself as an RA.

Good luck!
posted by amanda at 7:32 AM on June 3, 2017 [3 favorites]

Response by poster: The accountant basically had the LLC with much higher up-front cost (apparently NYC has a publishing requirement that could cost up to $1000, by all accounts) but with almost no tax implications on the back end. She had the S Corp numbers hitting me pretty hard both on the business and on my personal. I should mention that she also told me that my main career pays me enough to satisfy whatever SSI/Federal withholding requirements exist, so I would save money on the S Corp portion of those expenses.

And I agree about the accountant providing me with purely tax and business advice. I showed the contract to a lawyer and they had a few changes but were otherwise satisfied.
posted by New Old User at 7:40 AM on June 3, 2017

An LLC is a legal entity that you set up to shield yourself from liability. In terms of taxes, all the income from the LLC is passed through to the owner/s, and you pay taxes on your LLC income as part of your personal return.

An S Corp is a special filing status so that the legal entity pays its own taxes, with no pass-through to the owner/s. There's more paperwork involved.

You can set up an LLC and choose to file as an S Corp. You can also set up an LLC and 10 years later change from pass-through to S Corp.
posted by adamrice at 8:36 AM on June 3, 2017

An S corp is a pass through entity: it files a tax return (1120S), and then gives a K-1 to the owner on which the income is reported, and the owner reports that income on their 1040.

The benefit is that the profits aren't subject to self-employment tax. With an LLC taxed as a disregarded entity (ie, it doesn't exist for tax purposes), all the net income is subject to SE tax (employee and employer parts of FICA. If one is already over the SS cap, that's only 3.8% for medicare).

Although, with the S corp you do have to pay a "reasonable" salary to the owner/service provider.

Putting aside other issues (appreciated assets and such, which don't sound relevant here), that's the basic financial calculation: are the savings on SE tax larger than the compliance costs of having an S corp (payroll + associated withholding and remittances and compliance, additional income tax filings, etc).
posted by jpe at 10:20 AM on June 3, 2017

are the savings on SE tax larger than the compliance costs of having an S corp (payroll + associated withholding and remittances and compliance, additional income tax filings, etc).

This is where your accountant is coming from. The additional fees that you incur have to be less than the amount you save in self-employment taxes by setting a low but reasonable salary. At less than $50k in revenue per year it's going to be hard to figure out a reasonable salary that meets that requirement.

There are ways to limit the cost of the LLC publication requirement. Basically you pay for a registered agent in Albany and they publish the notice there, instead of in a NYC-based paper, and that satisfies the requirement. You should look into that if you decide to go the LLC route.
posted by zrail at 11:49 AM on June 3, 2017 [1 favorite]

More about the publication requirement: it sounds like it's practically optional. You can publish retroactively if you get suspended and get the suspension annulled. See this article for more details and run the idea past your attorney.

Oh, I should add: I am not an attorney or an accountant in New York or anywhere else.
posted by zrail at 11:53 AM on June 3, 2017 [1 favorite]

The first question you should ask is whether you need either. Your taxes, bookkeeping and life will be much simpler if you do neither and simply operate as a sole proprietorship.

An LLC is not a corporation. LLC stands for Limited Liability Company, not corporation. Your LLC can be taxed as a sole proprietorship, a partnership or as an S-corp. So establishing an LLC does not automatically make you a corporation. That is a separate decision.

What reason, what do you expect to gain from choosing an LLC or S-corp instead of just a sole proprietorship? Without a clear answer to that question, you shouldn't be choosing either. For a small side business it is just an unnecessary and expensive complication.
posted by JackFlash at 11:58 AM on June 3, 2017 [2 favorites]

Not a lawyer, this is not legal advice, this is my own view and not that of my employer, who deals with stuff like this.

I second Jack Flash. You're not hiring employees? Weigh whether personal liability protection is worth the fees and maintenance of an LLC. You can always get a DBA if you just want to operate under a different name. It might be worth a quick consultation with a lawyer to see if it's even worth bothering.
posted by fiercecupcake at 1:14 PM on June 3, 2017 [1 favorite]

Yep, they make good points. I would examine what protections an LLC gives you and see if that pertains to what you are doing. You could easily do this work under a contract like a regular freelancer. It sounds like in this situation your work would be work-for-hire so you wouldn't retain rights or copyrights but you would like it spelled out whether you can use images in your portfolio, etc.. Maybe go back to that friendly exec producer and ask them why they think you should incorporate? And at the same time, discuss what kind of contract the two of you should draw up. You'll need that anyway.
posted by amanda at 1:48 PM on June 3, 2017

Most people are talking about the tax implications of the choice. It sounds like you are also interested in liability protection. I'm not sure if there is any difference between S-corp and LLC but there is (or at least can be) a big difference between an LLC and just doing it as a freelancer. However, to make it work, you not only need to create the company but you also need to be very careful that you don't "pierce the corporate veil" and undo the protection you were trying to create.
This article talks about some of the pitfalls. I think it would be worth a brief consultation with a real lawyer to understand these issues now, so you can start out in a way that gives you maximum protection possible.
posted by metahawk at 5:03 PM on June 3, 2017

You can talk to a lawyer, but the liability aspect of an LLC is generally vastly oversold and vastly misunderstood.

First off, a solo freelancer with no employees faces almost zero liability -- software designers, tech writers, photographers, web designers, copy editors, etc. The biggest dispute you are ever likely to face is the payment on your last invoice. Nobody is going to sue you or take away your home.

Second, the LLC really only protects you regarding business liability, that is debts you incur in the name of your business. For example if you lease a storefront and break your lease. Or if you borrow money for you business and default on your debt. When you say "limited liability", for the most part you are talking about business debts.

But here's the thing. If you are a small business, no landlord is going to let you sign a lease in the name of your LLC. No bank is going to lend you money in the name of your LLC. They are both going to require that you sign for these debts personally and be liable for them personally. So the LLC protection is worthless.

And finally, if you are in a risky occupation in which there is exposure to lawsuit, say a moonlighting doctor, an architect, a construction contractor, then an LLC likely will not protect you from personal liability for malpractice, personal negligence or injury. For that you need insurance -- professional liability, errors and omissions, or general liability insurance.

So it comes down to why would a freelancer need an LLC. Nobody is going to sue you. And for the things most likely to be a problem, business debts, you have to personally sign for them anyway. And finally, if you really are in a risky profession, an LLC isn't enough anyway. You need insurance.

So in most cases an LLC is an unnecessary complication. You can consult a lawyer and find out if your particular occupation or business is at risk but most solo freelancers aren't. The LLC is an unnecessary complication.
posted by JackFlash at 6:01 PM on June 3, 2017 [5 favorites]

Response by poster: What reason, what do you expect to gain from choosing an LLC or S-corp instead of just a sole proprietorship?

I was told by the executive producer of the show on which I work that it would be a good idea. The people I will be photographing all have people, the network I work for is GIANT, so she basically said "everyone here has the no fucking around lawyers, you should somehow incorporate yourself to shield yourself from liability, whether as an LLC or an S Corp is up to you."

Just walked in after a long day, I'll go over the rest tomorrow and answer more. You all are great, and have given me a nice page of questions to ask.
posted by New Old User at 6:51 PM on June 3, 2017

The executive producer is not your lawyer. You should consult a lawyer, not an accountant, to find out if an LLC or S-corp is right for you if liability is you concern. An LLC or S-corp may or may not provide the protection you need. You may need professional insurance instead or in addition.
posted by JackFlash at 7:43 PM on June 3, 2017 [1 favorite]