Sole Proprietorships

A Sole Proprietorship is an unincorporated single owner business. It is not separate from the individual. If you have not set up another business type, your business venture is a sole proprietorship. This is the simplest form of business to run. Your income and expenses are led as part of your personal tax return on a Schedule C.

One disadvantage to a sole proprietorship is in regards to liability. Your personal assets are at risk for your business liabilities. If this is an issue for you (living in the land of lawsuits as we do), you may want to consider a business entity that affords you certain liability protection.

Partnerships

A partnership is similar to a sole proprietorship, but contains multiple owners. It is possible for several sole proprietors to share certain expenses, e.g., co-leasing an of ce, without establishing a partnership; however, when income and expenses are shared, a partnership exists and should be reported as such.

A partnership les a separate Form 1065 Partnership tax return, and the pro t or loss then ows through to each partner’s personal return, based on percentage of ownership. It is advisable to have a written partnership agreement that determines the percentage of ownership and pro t/loss sharing.

A partnership also faces the same dangers of personal liability as a sole proprietor. Recently, many people prefer to form an LLC instead.

Limited Liability Company (LLC)

An LLC is a newer type of business entity, allowed by state statute. LLCs are popular because they combine the bene ts of the simpler reporting requirements and the ow-through characteristics of sole proprietorships and partnerships with the limited personal liability for the debts and actions of the business (like a corporation).

A single-owner LLC reports income and expenses on a schedule C, like a sole proprietorship. Multiple member LLCs report on the Form 1065 Partnership Tax Return (unless an election for treatment as a corporation is made).

Corporations

The traditional corporation is a “C” Corporation. It is a completely separate entity from its owners. It les AND pays its own tax. You would become an employee of your corporation, and receive a W-2 for work done. Any pro ts taken from the corporation would rst be taxed to the corporation and then again to you personally as dividends. Reporting and record-keeping requirements are stricter than for other entity types. This type of entity is advisable for very large, highly profitable ventures, especially when start-up capital is required and you need to bring on investors.

S Corporations

An S Corporation avoids the double taxation of the C Corporation. It reports income and expenses similar to a C Corp, but does not pay its own tax. Instead the pro t or loss ows through to the owners’ personal returns, more like a partnership. There are requirements to pay wages to the owners (if work is being done and company is pro table), making the reporting requirements more dif cult than that of a partnership or LLC; however, there are certain tax advantages to an S corporation, especially one that is profitable.

This is a very limited overview of business entity types. We suggest you do further research or talk with a tax and/ or legal professional prior to forming a corporation or partnership. Each situation is different, and each business entity has its advantages and disadvantages. The individual business owner has the most freedom to choose from the simplest to the most complex business type, depending on their situation, profits/losses, and potential liabilities.

We would like to add a little more concerning any artistic group, and speci cally bands. Most non-signed bands do not have any type of entity formed. They are just a group of musicians who play together, make records, and hope to cover their own expenses while waiting for the Golden Ticket to drop from the sky in the form of a major label deal. This is ne, but becomes complicated by income reporting requirements. If you are sharing all income and expenses, then you essentially have a partnership and should report yourselves as such. Usually, however, one member of the band tends to take care of the nances, and the rest just want to show up and play. If this is the case, then you may either form a partnership OR that one member, as the leader, should collect and track all the income for the group, pay for the shared costs of recording, advertising, etc., and then give out 1099-Misc. forms to the other members of the group at the end of the year for their service (if there is any profit left after expenses).

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