Choosing a legal structure for your photography business can have a lasting impact. Preparing from a profitable and sustainable business means making these tricky decisions early in your career as a photographer and small business owner.
Knowing your numbers and understanding your personal situation makes it easier to choose the legal structure that’s right for you. And can be a good idea switch from a sole proprietorship to an LLC as your business grows.
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Who am I to give out legal advice
First off, let me clarify who I am and my position. I’m a wedding photographer and I am not a lawyer or legal professional. Nothing I’m saying here constitutes tax or legal advice. Always consult a professional adviser that can give you specific information tailored to your needs.
There are many more qualified writers and experts out there who have written extensively on this topic. I still think it’s useful to hear a fellow small business owner’s perspective. I’ve been where you are not too long ago!
I’m going to take you through the 6 main legal structures for tax purposes. We’re going to talk about how they relate to wedding photography businesses.
Other things to bear in mind: if you are used to being ‘married filing jointly’, seek to have employees, or have other sources of income, the legal structure discussion becomes complicated quickly.
In contrast to paying taxes through an employer, you may be liable for quarterly tax returns once you start making any significant income. The topic is not addressed as much as it should be. Do do your research and be prepared to part with the cash you’d squirreled away in savings pretty regularly.
In the United States, there are six main business types. Let’s dive into each structure as they relate to your wedding photography business.
A sole proprietorship is the most common structure to start a business. Any independent contractor is a sole proprietor by default. Yes, even if they do not have the licenses or permits mandated by the city. That means if you make money while you are not on an employer’s payroll, you are a sole proprietor.
A sole proprietorship is an unincorporated business owned and run by one individual. For tax purposes, the owner and the business are the same. The owner is entitled to all profits and is responsible for all debts, losses and liabilities. Sole proprietors use their social security number for tax identification purposes.
Because of the lack of distinction between the owner and the business, if you were to get sued, there is no protection of your assets. Sole proprietorships come with unlimited personal liability.
In theory, the house you own and all your possessions could be taken away in the event of a lawsuit or bankruptcy. Is that likely? Not at all. But knowing the ‘worst case scenarios’, is an important part of the decision-making process.
Unusually for business, no formal action needs to be taken to become a sole proprietor. It’s the default option.
Because you and your business are one and the same, the business itself is not taxed separately. The sole proprietorship income is your income. This makes tax time the easiest of all options. Generally speaking, it also offers the lowest tax rate of any business structure.
What to be aware of with sole proprietorships…
But wait a minute, if you’re a sole proprietor, can you employ second photographers to work with you on wedding days? Yes you can take on an independent contractor such as a second shooter. However, the law frequently changes with regard to the classification of independent contractors as employees in California.
The well-publicized AB 5 ruling came into effect in July 2020. So you must familiarize yourself with that fun stuff if you’re a California taxpayer. The law in this area is pretty fast-moving.
The business type I chose for myself is a Sole Proprietorship. As I do not have separate assets such as a car or a house, this seemed like a good choice when I started my business.
To future-proof my business going forward, I will likely change to the LLC structure. Why? If I hit certain financial goals, I’ll be on track to bring in more income and am working on owning some assets!
However, when you are not earning much, do not have valuable assets, and have an incredibly simple one-person business structure, a sole proprietorship suits most new wedding photographers fine. If you plan to take on business debt, a sole proprietorship (or general partnership) will probably not be a wise idea.
Running your business with another person? You may want to consider a general partnership. This has similarities to a sole proprietorship in terms of liability and taxes. Similar to a sole proprietorship, a general partnership is also a pass-through tax entity.
Each partner is responsible for filing their own self-employment. Profits and liabilities are split based on percentages. Partners are each personally liable for all business debts and each partner has ‘agency authority’.
When you hear the term ‘partnership’ in business, this refers to ‘general partners’. There are different types of partnerships: limited partnerships and limited liability partnerships (but these are uncommon in our field.)
As well as the usual Form 1040 with Schedule E, the partners must also complete a Form 1065. Be sure to draft a partnership agreement with the key information such as:
- The purpose of the partnership,
- Date of creation,
- Contributions of each partner,
- Share of profits and losses,
- Powers and responsibilities of each partner,
- Dispute resolution procedures,
- How to handle a partner’s exit
Limited Liability Company (LLC)
An LLC is a popular choice for more established photographers. It can also be smart for beginners who want to future-proof their business and ensure separation of assets from the outset. This is especially wise if you own property or other high-value assets.
An LLC can consist of a single individual, a partnership, multiple individuals, or a corporation. The limited liability and flexible tax options mean it is an attractive choice for wedding photographers and other small business owners.
You’ll benefit from a more streamlined bookkeeping process, though there will be more to take care of compared to a sole proprietorship. To form an LLC, you’ll need to file Articles of Organization with your state. These days you can do this online pretty easily. Or you can complete it usually by mail or in person.
What to be aware of with an LLC
The downside to an LLC (certainly in California!) is the significant investment you’ll need to put into the yearly fee. The filing fee though is nominal. To keep your LLC going, it’s $800 a year in CA currently. This is due within the first quarter or operations, regardless of whether you’re making a profit. So look at the point at which the yearly fees become offset by the tax loopholes.
In other states, an LLC is much more affordable. In some, there is no annual charge for keeping an LLC going (but may be a heftier upfront fee).
If you set up your LLC efficiently, it’s possible to reap more tax benefits by paying yourself through company payroll, avoiding self-employment taxes. As with a sole proprietorship or partnership, an LLC is not a separate tax entity from its owners. It’s likewise technically a ‘pass-through entity’.
However, the flexibility offered by an LLC means its member(s) can choose to be taxed as a corporation. They might choose this because federal income tax rates for corporations start at a lower rate than those for individuals. The income-splitting strategy of corporations means LLC members can come out ahead when the business is taxed as a separate entity.
Generally speaking, the owners of an LLC are not personally liable for LLC debts.
An S Corp (or ‘S subchapter’) is a corporation that elects to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.
The idea behind the S Corp structure is to avoid double taxation on the corporate income. S Corporations pay tax on specific built-in gains and passive income at the corporate level. You’ll get the benefit of no double taxing, yet, it protects all your personal assets. There are however a great deal of regulations that govern S corporations.
An S Corp is considered by many to be a good idea once you start earning above a certain fairly high threshold. I’ve heard of financially savvy wedding photographers going this route before, but the more common route is to form an LLC.
There are regulations that govern S Corporations; these are not the case with LLCs. Some of these include ownership restrictions, corporate meetings such as board and shareholder meetings, strict allocation rules concerning profits and losses, and the tax treatment of business losses and debts.
A C Corp is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity. Though it’s the most common form of corporation, it’s not normal practice for a wedding photography business.
These types of companies are typically large, hold annual meetings and have a board of directors, voted on by shareholders. It’s expensive to start, with double taxation, lots of regulation and no possibility of shareholders (i.e you) deducting losses on your personal tax return. Absolutely not necessary nor a smart choice for wedding photographers.
Huge disclaimer here once again. I know you’re sick of hearing it by now. But! I’m not a CPA or financial adviser. Even if I were, it’s absolutely necessary to consult with a CPA in your state. Every person’s financial situation is unique. Apologies, I’m unable to answer any personal questions that you may have after reading this post.
I don’t know about you guys, but I find this topic fascinating. That’s why I chose to invest my time into learning more about a subject that was totally new to me until I moved to the US and started my business! I love learning about every aspect of business – it’s really what drives and excites me as a small business owner.
That just about wraps it up! Interested in starting a wedding photography business? You won’t want to miss this….
Want to find out more about setting up your business and making it legal and tax-compliant? In the book I go into much more detail about topics like
- Setting up your DBA and when you would need one
- Getting your seller’s permit
- Business licenses and what you need to know
- Liability insurance and why you need it
- Contracts and legally protecting your business
- Bookkeeping and banking
- Starting a website, understanding SEO, using a CRM… and much more!!
Be sure to check out the new ebook, ‘How to start a wedding photography business‘!
Further reading from the experts
Should my photography business be an LLC? (The Law Tog)
Choose a business structure (The SBA)
A guide to choosing the best legal structure (Business News Daily)