How To Save All That Money You Aren’t Making At Art

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Introduction:
I have discovered that many people with the talent and drive to start their own business seldom have the education and tools required to satisfy the bookkeeping requirements for their venture. Therefore, I have compiled this article to help those who may be confused on some of the issues.
This essay was originally written for art businesses, as artists seldom come with business backgrounds. However, it can be adapted to many other small business structures quite easily.

1. WHAT STRUCTURE SHOULD I USE?
The first question to ask in setting up your art business nft is how you should set it up – i.e., what structure it should have. This may seem like a silly question, but it is a very important one, as it determines how you report your income and expenses. And report them you must!
There are several types of organization to choose from, and the determining factor is risk. How much risk are you willing to take? Are you willing to pay more for less risk? I will demonstrate what this means:

a. SOLE PROPRIETORSHIP
The most risky organization is the sole proprietorship. This is because if someone sues you as a sole proprietorship, they can, theoretically, take your home, your car, and all your worldly possessions in a lawsuit. There is no separation between the business and you, so any lawsuit can take everything. However, most art businesses have little lawsuit risk attached to them. I am unlikely to get sued for damages unless I steal someone else’s art. (don’t do that!) If I was installing stairs, on the other hand, I would definitely want to limit my risk. The term for this characteristic is ‘unlimited liability.’
Now, there are advantages to being a sole proprietorship. There is little to no cost in setting it up, no legal forms to fill out, no paperwork to file with the state. When you report your income and expenses, it goes on the Schedule C of your own personal tax return (1040), and isn’t taxed separately.
There are also disadvantages, such as the aforementioned unlimited liability. There is also the fact that the company has a limited life – when you pass away, so does the business. (Ask Disney if this is important). It is also more difficult to get financing from banks and therefore difficult to expand.

b. CORPORATION
If you are willing to pay a little more money on a regular basis, you can get the advantage of limited liability with a corporate setup. A corporation is a separate entity from you as a person, therefore if it is sued, only those assets owned by the company can be taken, not your personal home and possessions. This is the main advantage of having a separate corporation. It is also easier to expand, as banks are usually more willing to offer financing for this. It can have a life beyond the life of the founder, as many corporations have (i.e., Sears, Disney).

Now to the disadvantages; The main one is the cost and complication of setting up and upkeep. There are fees to setting up the corporation with the state (none for the federal government), and annual fees to keep the license in good standing every year. In my home state of Florida, it is about $75 to set up the corporation, and $150 a year to keep it going. There is also additional paperwork, as you need to file a separate tax form every year (1120 or 1120S) with the federal government. You may also need to file one for your state. And, you may have to pay taxes at a corporate rate, which is usually higher than your personal rate.

I would like to go into the differences between a C corporation and an S corporation. C is the corporations we are most familiar with – corporate monsters like Microsoft, IBM, Disney, Sears, etc. These get taxed at a corporate rate, which is currently 15% up to $50,000 in profit, and goes up from there. An S Corporation (S stands for Small) has to have less than 100 stockholders (among other requirements) but does NOT get taxed at the corporate level. Let me repeat that – no tax is paid on the corporation itself. Instead, the income gets reported on each shareholder’s tax return, and is paid at their personal rate. This is usually the better deal for small companies, as personal returns are not taxed at all for the first $7000 in income.

c. LLCs and LLPs
Many people ask me about Limited Liability Corporations and Limited Liability Partnerships. These are both fairly new entities, and as such, don’t have (as of yet) their own share of rules and laws by the IRS. I personally don’t recommend them, as they have little advantage over the S corporation, and are usually more expensive to set up. A savvy person can set up an S corporation fairly easily. A lawyer is required for LLCs and LLPs, and they like charging a good deal of money to do so – which is why they recommend them so much.

d. RECOMMENDATIONS
In my personal opinion, most artist would do best as a sole proprietorship, unless there is a significant possibility of liability (i.e., you do 3D installations that someone could trip and fall on). In that case, I would recommend S corporations as the best alternative.

2. WHAT IS INCOME?

In the common usage, Income means (literally) any money coming in – whether it be a loan from the bank, a paycheck from your job, a gift from Grandma, or a sale of a painting. However, in the accounting world, many words take on different meanings. This is one of them.

Income, for someone running a business, derives from operating the business. If it’s an art business, then sales from your art business is your main form of income.

That income can have several categories, though; You can have sales of existing art and art products, such as bookmarks, you can have commissioned sales of art, and you can have sales of excess supplies, or shipping, or display equipment. The majority of your income should come from the first two categories, though.

COMMISSIONS

For those that are unfamiliar with commissions, it is when someone contracts with you to produce a piece of art to their own needs and desires, rather than purchasing art you created before you met them.

CONSIGNMENTS

Another form of sales is consignment sales, which involves placing your artwork in someone else’s store, and only receiving money when it is sold. Sometimes this is a gallery, sometimes a gift shop, sometimes online – but the portion of income you receive is the only income you declare, not the total price. For instance, if I have a print on sale at the local gift shop for $30, and I get $20 from it when it sales (the other $10 goes to the gift shop) then I declare $20 income from the sale.

 

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