Once you start making a lot of money, you might want to consider becoming incorporated. If you want to go through all the hassle of trying to get the forms, fill them out correctly, and research all the legal jargon yourself, you will save money for attorney fees. My advice is, suck it up and pay the legal fees. Find someone who specializes in this field to incorporate you. This will help insure that there are few or no mistakes. You don’t want to put your company at risk.
If you decide to become incorporated and use a lawyer, the fees can range from $90.00-500.00 per hour, so choose wisely. The total cost for us to incorporate was $900, but that was three years ago.
Get recommendations from others who have done this, or go to your local Chamber of Commerce and ask for recommendations. Before you go to a lawyer, you will need to research the business name you have chosen to see if it has already been taken. To do this, find your local library and ask them if they have databases that allow you to search business names that are already in use. They should be able to guide you through the research process. It takes about 10 minutes, and there are five databases that I know of that search the U.S. and Canada for fictitious business names, Dunn and Bradstreet being one of these searchable databases. Another option to become incorporate is to file on the internet. I recently did this with my latest company. Check out these websites to help you.(A quick note, this route is a lot less expensive than a lawyer and you get the same service, but choose wisely.)
http://www.thedelawarecompany.com/_WhyDelaware
https://www.delawareinc.com/order/index.cfm
http://www.incorporatetime.com/Fee.htm
You may also want to think about filing in Delaware. Why? This can produce a safety net for your company against lawsuits. You will need to check out what is best for you. Check with your local Government office to ensure you won’t have to file two times, once in your state and once in Delaware, if you do decide to go this route. Delaware has a long established set of laws that protects Delawre companies from frivolus law suits and lets them focus on doing business rather than fighting expensive legal battles of this type.
Being incorporated has its advantages and disadvantages. That’s why you may only want to become incorporated once you are making a substantial income, or if you have legal reasons to do so. Being incorporated insures that the name of your company is yours, and no one else has the legal right to use it in your state. However, incorporating will also cost you additional tax money. But there are tax shelter advantages to becoming incorporated as well. You will need to consult a good accountant who can best advise you of what would be beneficial for you as well as the ramifications of your final decision.
If you are going to incorporate, your lawyer should be able to advise you as to which kind of corporation would be best for you if you decide to go this route. Make sure you ask him/her about an “S” corporation or an L.L.C. If he/she thinks an “S” corporation or an L.L.C. would be beneficial for you, you will have to go to an accountant who specializes in entertainment taxes. If you are wondering what the difference between a corporation, an “S” corp or an L.L.C. are, you can research that on the web. Unless you are a huge company, I would not suggest going the incorporated route, I think an “S” corp or an L.L.C. are the best option for a small company. Here are the differences between an “S” corp and an L.L.C.
This is a general explanation. To get a more detailed explanation please check the Internet, your local Library, the IRS or the BBB.
An “S” corporation grants a special tax label, which must be applied for and granted by the IRS (an EIN number is part of the process). This allows the income of an “S” corp. to be taxed differently.
In a corporation, money is double taxed. It’s taxed when it comes in the door and then again when it’s paid as income. An “S” corporation avoids double taxation, meaning that the money is only taxed one time and it allows certain deductions to be passed through the “S” corporation and onto the individual tax returns of the owners.
An L.L.C. (limited liability corporation) provides protection from personal liability. Additionally, an LLC provides certain tax benefits, pretty much the same as an “S” corp. However, with an L.L.C., you can have as many “members” (owners) as you want.
It is very important to use attorneys and accountants who specialize in entertainment and tax law. You don’t want to pay an attorney or an accountant to go through school to learn the laws pertaining to your field before they even touch your files unless you can afford it. (But even if you can afford to pay for their schooling, do you really want to?)
A disadvantage of being incorporated is that you WILL need an accountant (unless you are a whiz at tax laws – and a bit of advice, a good accountant can get money back from the government for you even if you haven’t paid a single dime in taxes that year. How? Well, I am not an accountant, but I recently saw that happen with a friend and I thought their accountant was shifty. So for their protection, I went to a friend of mine who is a CPA who does corporate taxes and he said it is a fact. I am going to my friend’s accountant next year! ).
Why will you need an accountant? Because there are different forms you must fill out on a quarterly basis. If you do become incorporated, you can no longer have your business finances and your personal finances in one account. You will need a separate business checking and savings account.
Additionally, you can no longer take deductions for your business against your personal taxes. Those deductions will now be put only against any business income the company has. Any money that comes in for your business is the businesses, not yours. Anything withdrawn other than salary (which is preset) must be documented and of course must be legitimate. The good part is that the company can own everything and then you are at a real tax advantage. For the details of how to do that, you Will need a great tax attorney or accountant who can wade you through those waters.
If insuring that your name is not used by anyone else is your main motivation, incorporating may not be the best thing for you. The same result can be achieved by trade marking your name, which currently costs $350.00 if you file it yourself. (The least expensive lawyer I found when researching this part for the book, was $500.00 to file the trademark application for someone.) Back to what you must do once you set up a business. Expenses for the company paid for out of your pocket must be put in an itemized expense report, and backed by receipts (save those receipts, even for small $1.00 items!), in order for you to get reimbursed.
If you are not incorporated, it would still be advisable to open a separate business checking and savings account. It’s more professional. Try to find a credit union that accepts business accounts. They are much much cheaper. A business account from a regular chain bank will cost you so much per month, usually $10.00-20.00, plus so much per check and so much more per check after you’ve written x-amount of checks.
There are many credit unions that charge one flat fee and that’s it. The least expensive I have seen is $4.00 per month with no per-check fees or hidden costs. Additionally, credit unions typically have higher interest rates for both checking and savings accounts, not to mention that credit unions generally use their money to help the community, so you would be a philanthropist to boot! At any rate, get the most from your money while it sits in the bank.
As far as accounting goes, you need to document everything so your accountant can write it off your corporate taxes at the end of the year, or quarterly if you must file that way. (Let me say it again – Save those receipts! My mom taught me that when I was 13.) Take care to chart the mileage on your car. Document the day, time, and mileage start/end, where you went, and why. This is often an overlooked deduction that can be quite substantial.
Log every CD you give away, and how much each CD cost you (wholesale, not retail), postage, meals that have to do with business, office supplies, travel expenses, clothes (deductible only if you only use them for business), hair-care products and make-up (if you must wear it), manicures (only while you are on tour), fees for weight loss is now a legal deduction, phone calls, etc. It is best to get a separate phone line for your business. It will be clear-cut for accounting purposes, but also the IRS will like it better. Tell the phone company you want an extra regular line, or they will charge you up the wazoo for a business line. It’s better to over-document than to under-document. Your accountant can not write off what is not documented. A good accountant who is familiar with entertainment taxes will be able to easily ascertain which of your expenses are deductible and which are not. At the end of the year, they will tell you, if you ask, what you should continue to document. The rest you will have to learn in business courses, by word of mouth, and through experience.
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