Setting up your creative business (the right way)
Have you been thinking about making your creative business official but find yourself unsure about where to begin? Don't worry — you're not alone.
For many creatives, the idea of setting up a company for their creative business seems daunting. There are endless decisions to consider, mountains of paperwork to sort through, and financial concerns to manage. It's a lot — and it's all necessary if you want to keep your company afloat (and on the right side of the law).
I put this article together to help simplify the process of setting up your creative company. When you've finished reading, you'll understand the advantages of setting up your company as a business entity, some of the perks of doing so, and the various ways to go about incorporating your creative business.
Before we dive in, here's a quick disclaimer: I live and work in the United States. Some of the actionable information might not translate if you live in another country — but my goal is to share valuable advice to help first-time creative business owners regardless of their location.
My back story
In 2006, I decided to take my freelance work to the next level by starting 45royale — the digital design agency I ran for 14 years.
Before incorporating, I did my diligence. As part of my business plan, I chose:
- What services I would offer my clients (web, mobile, and application design and development)
- How I would set myself apart from my competition (design aesthetic, attention to detail, offer high value, etc.)
- How much I would charge for my services
- To deliver incredible customer service (something missing in the agency scene at the time)
After establishing what I'd be selling and delivering, I was ready to formalize my business.
S-Corporation vs. LLC
As a freelancer, you're likely operating as an individual or Sole Proprietor. There's nothing wrong with that at first, but once you decide to formalize your business, I recommend registering as either an S-Corporation or an LLC. There are benefits to both, but before you choose which entity you want to use, here's a breakdown of the pros and cons of each.
- You're not personally responsible for business debts and liabilities.
- The corporation doesn't pay federal taxes. Instead, business income or loss is "passed through" to shareholders that report it on their income taxes.
- It's easier to get credit as a business since S-Corps are looked at more favorably by lenders.
- Ongoing expenses and filings (aka, money and fees).
- IRS looks harder at S-Corps to make sure shareholders comply with distributions, dividends, etc.
- Shareholders must be citizens or residents of the United States.
- You're not personally responsible for business debts and liabilities (in theory).
- Easier to start up than S-Corporations with minimal fees.
- In some court cases, judges have ruled that an LLC doesn't protect your personal assets should there be business debts/liabilities.
- LLCs can't be taken public.
On a personal note, I've had companies registered as both S-Corporations and LLCs. In my experience, S-Corps are ideal for larger businesses made up of shareholders who get paid with salaries and distributions. LLCs are better for smaller organizations (1-2 people) that only need coverage from personal liability.
But I'm not a professional — your mileage may vary. Be sure to consult with your accountant before making any decisions for your business.
Advantages of formalizing your business
There are a ton of advantages to incorporating your business. I'm sure you're familiar with most of these, but in case you aren't, having a business entity allows you to write off things like:
- Travel expenses
- Food expenses
- Phone bills
- Office expenses (including home offices)
- Car expenses (payments, gas, etc.)
- Equipment (computers, licenses, etc.)
Starting a business is hard work, but having the ability to subsidize costs associated with getting things started can help offset some of your initial expenses.
How to incorporate your creative business
Ok — you're on board with creating a legal entity to wrap around your business. And the perks seem great! But how do you go about formalizing your business?
There are a couple of ways, and fair warning, you will need to spend some money upfront to incorporate. But trust me when I say it will be money well spent.
Let's say you want to form an LLC. The two most popular ways to form your company are: 1) do it yourself or 2) hire a service.
First option: The DIY approach to starting your company
1) Choose the state where you want to form your LLC. Most people choose the state they live in — or the state they plan to do business in. You can use the Small Business Administration site to find the link to your state's registration page.
2) Choose your company name. To ensure your name isn't already taken, create an account on your state's Secretary of State website and do a name search on their website.
3) Nominate a registered agent for your LLC. A registered agent is a person who sends and receives legal documents on your behalf. Most times, business owners nominate themselves — I'd recommend this unless you have a lawyer or accountant that will be a part of your LLC.
4) File Articles of Organization. This document outlines the organizational elements of your business. It will include things like the LLC's legal name, your registered agent's name and address, and who will act as manager or your LLC. Since you're just getting started, I'd recommend going with Member Management where all members of the LLC manage the company.
5) Create an operating agreement to help you maintain your organization and establish your LLC as a separate legal entity. There are a lot of sample templates out there — here's one I'd recommend checking out.
6) Get your EIN (Employment Identification Number). An EIN is like a social security card for your business and LLC. The IRS uses this number to track your taxes, but you'll also need it to open a business bank account and legally hire employees. Obtaining an EIN is pretty straightforward — head over to IRS.gov to start your application.
Second option: Hiring a service to set up your company
If the DIY route isn't for you, don't worry — there are plenty of services online that can navigate you through the process.
Some of the more popular services include:
These companies remove the paperwork, complexity, and potential fees associated with forming S-Corporations and LLCs. You'll pay more for their services ($300-500), but if you're worried about dotting i's and crossing t's, this is probably the best option for you.
Starting a company is one of the most rewarding things you can do as a creative. Don't let the paperwork and stress prevent you from putting yourself and your work out there.
Good luck — I wish you all the best as a first-time creative business owner!