Pro Photo Business Forum

So you’ve hired a logo designer, bought a .com – what’s next? While I don’t recommend those things being your first call to action in starting your “business” – determining what business designation you choose is a very important first step. There’s no magic answer here. Everyone’s situation and where they operate their business can impact the choice they make. Ultimately, it is a balancing act of the tax and legal benefits against your cost of maintaining and incorporating your business.

Sole Proprietor – DBA (Doing Business As) – most photography businesses are established as sole proprietors. In fact I’m still operating as a DBA (but not for much longer). It’s cheap and easy. A trip to the courthouse to file your DBA will cost you no more than a tank of gas. Take a copy to the bank, and they’ll set up your business account. In some states – you have to have a license that must be renewed yearly, so always inquire. You attached a Schedule C to your annual 1040 tax return to report income, and you do this using your social security number as your business identifier – as it’s not necessary to get an EIN. The obvious disadvantage of a sole proprietorship is that you have personal liability for all debts and obligations of the business. With a sole proprietor there is no distinction between you and your business.

LLC (Limited Liability Company) is not a corporation because it does not issue shares, the laws vary state to state if there needs to be more than one owner, and some states do not have the LLC as an option. An LLC, like an S-Corp – sets up a different identity between you and the business. In the event that the business is sued or goes under – your personal assets are not at stake. An LLC however, does not need it’s own tax return. Income is still stated via your personal return under Schedule C. The cost of maintaining an LLC varies state to state, but using Texas as an example – you have to maintain a registered agent or else you will default with the state. A registered agent, simply acts as an intermediary between the LLC and the State. You have to pay the registered agent a fee for this service and maintain it yearly. In addition to that, as a LLC you become liable for Franchise or State Taxes.

An S corporation or S-Corp, for US federal tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. Unlike a regular C corporation, an S corporation generally pays no corporate income taxes on its profits. The most important distinction between and LLC and and S-Corp, is after you pay yourself a wage, the profit left over will be deemed a distribution. This distribution will be subject to income tax – but not subject to the extra 9% self-employment tax. While there are tax savings there, let’s not forget that the cost of maintaining an S-corp will result in higher CPA fees, as well as the additional state taxation of the corporation. Generally, you should be earning enough profit to justify the additional cost – but that is not a requirement. You can have an S-Corp that dosen’t make any money. But it’s just not practical.

Mistakes are costly, and can take quite a long time to correct. So always rely on professional legal and accounting advice before making your decision on forum advice. This serves only as a quick explanation so you are somewhat versed in business entities when you meet with your professional advisor.

As my photography business increases and because I’ve set up several brands – my need to incorporate into an LLC has never been greater. Later next month I will be transferring my DBA into and LLC. I’ll use this blog as an educational journey to show you the steps I made to get me there.

Next time- Numbers: Sales Tax ID, EIN, NAICS – What they are and how to get them.

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Houston Wedding and Portrait photographer, Michaelle Janet has transitioned from corporate accounting to working artist and business owner. She is here to help members of PPBF with their accounting questions, but always advises to check with a trusted accounting professional in your area as laws vary in every state.

Most on this forum have been in business for many years, but I will start this series of articles as if you were starting from scratch. I’m sure there are newcomers here that are wondering if it is too much of a hassle to become business owner versus staying a hobbyist. This series is for you.

Unfortunately, because photography is seen as a hobby by the masses – often times many that start having paid customers continue treating it as a hobby without worrying about any legalities or industry ethics. Continuing to operate under the table for too long is a mistake that hurts the profession and how the general public views our craft.

Before heading into why you should legitimize your business for legal purposes – let’s start by discussing how it hurts  fellow photographers. Operating your business by not collecting or paying state sales and use tax, as well as not reporting the extra income to the IRS hurts other photographers by driving the perceived value of the profession down. A hobbyist that charges will most likely charge a low amount for his talent because his overhead is next to nothing. Whereas an established photographer – regardless of full-time or part-time status, will have fixed overhead costs that must be factored into their pricing. While it may seem capitalistic to undercut your competition in the beginning, in the long run – the low prices that the hobbyist charges will be harder to sustain.

So when exactly do you stop being a hobbyist and start being a photographer in business? Around the time that you stop keeping your artwork to yourself and begin sharing it online; in an effort to look for opportunities to have people want your photography for themselves. You don’t even have to be getting paid yet; and yes you can still be part-time. The IRS calls a hobby a “not-for-profit activity.” They point to 8 things that show you are in business:

• Do you carry out the activity in a business like manner
• How much time and effort do you devote to the activity
• Do you have expertise in the activity
• Are the losses due to circumstances beyond your control
• Have you tried to increase the profitability of the activity by changing your methods of operation
• Do you depend on income from the activity for your livelihood
• Have you made a profit on similar activities in the past
• Does the activity involve considerable work that could not be considered “pleasurable”

One quick justification that new photographers tell themselves is that they are part-time only, so it is not a “real” business. It could not be further from the truth. Just because your office hours are unique does not mean you are not earning revenue or paying out expenses. Gross income, as defined by the IRS includes “money received from whatever source derived”. Not just what’s on your W-2.

Another reason that people do not formalize their business – in our industry or in others, is because they feel like their operation is so small they would never be caught being a cash business. This of course is not true. If you are flagged for an audit, the IRS will research your bank accounts and ask you to explain all the cash and check deposits over the course of the year.

There are immediate tax benefits to being a business owner. Only businesses can deduct losses from their income. If the IRS decides you are a hobbyist it will take away the business losses. Of course, this does not mean you can use this business as a tax shelter either. If you show a business loss year after year, this will raise suspicions with the IRS.

Let’s keep this conversation going. Comment about when you knew it was time to “be in business” and stop calling yourself a hobbyist.

Next time: The toughest first question: Sole Proprietor, LLC, or S Corp?

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Houston Wedding and Portrait photographer, Michaelle Janet has transitioned from corporate accounting to working artist and business owner. She is here to help members of PPBF with their accounting questions, but always advises to check with a trusted accounting professional in your area as laws vary in every state.