We see it time and time again in social media groups. Misinformation told that if you haven't made more than $XXX then you're a hobbyist and shouldn't worry about any of the business legalities.
Being a legal business is more than just the revenue you're bringing in.
First, whether you're making money or not, if you're putting yourself out there is when the government wants to know and wants their piece of the pie . This includes the setting up of your entity (LLC or Corp), filing of a trade name (DBA, if applicable), business license and permits (the government giving you permission to do a specific activity in a specific area).
Imagine this, you advertise for a model call. You formulate a wonderful vision and plan. While having your model do a specific pose, she gets injured. There is a potential for liability there. She could potentially pursue you for medical costs, loss of income (if she is unable to work), damages, etc.
Not only is this a real possibility, but if you have not taken the steps to put protective division between your personal and business assets - she can touch them all when an issue happens. Whereas, if you've taken the steps to set up a legal business entity separate from yourself (NOT a DBA, fictitious name, assumed name), the damages pursuit may only be limited to the assets within the business.
You surely don't want your personal assets, including your income earning potential, to be touched when an issue happens. Because it is not IF an issue happens in business, it is when. More information on this below.
Second, for tax reporting purposes, you are not simply classified as a hobbyist because you're under a certain threshold. In general, people have hobbies for recreation, not to make a profit. Businesses, on the other hand, usually operate at either a profit or a loss.
Here is a quick factor list (meaning, you don't need all of them to determine your classification) for review:
- Do you intend to be profitable?
- Does your time and effort reflect an attempt to be profitable?
- Do you have enough knowledge of photography to turn it into a business?
- Do you expect to make a profit in the future?
- Have you made a profit doing a same or similar activity in the past?
- Are your losses part of normal business setup or circumstances you can't control?
This may feel overwhelming so let's center on this. If you made profit in three of the last five years, or are intending to make a profit- the IRS considers your activity for-profit and a business.
If this is you, you have to meet the local government jurisdiction requirements + IRS requirements for businesses NOW!
That is what TheLawTog is here for. We are more than photography contracts ;-) Read on!
What is actually LEGALLY required?
Technically, there may be nothing legally required to set up your business. If you are taking money from clients, whether you're profiting or not - you are in business. In fact, you're by default what is called a sole proprietor. This is a "business entity status" that is not separate from yourself. I put the words business entity status in quotes because technically it is not an entity separate from yourself. This means that if there's a legal issue your personal assets (not just physical, but also income earning potential by YOU) is on the line, not just business assets. TheLawTog doesn't recommend sole proprietorships and often finds most photographers are best served by a limited liability company (LLC), however a corporation entity may be best served.
Legal things that may be required by your local jurisdiction (state, county, city):
- sales tax permit - if you sell specific goods and are taxed by the state - this is not money coming out your pocket, you are simply the middle man to relay the monies to the governing body.
- license/permit - your specific jurisdiction may require a license (permission to do business activities) and/or a permit (permission to do specific business activities at certain time/location).
- file your federal and state income taxes yearly
- keep track of funds you spend to contractors (1099s)
Good to have for legal protections:
- Limited Liability Company or Corporation setup (state level) - separates personal and business assets
- EIN (Employer Identification Number) (at the IRS) - acts as a social security number for entity. Required for corporations (or LLC's who elect to be taxed as corporations)
- Liability insurance policy
- Contracts - lawyer-drafted photography contracts
- Set up separate business and personal accounts - Do not commingle funds, especially if you're an LLC or corp
- Use payment processors intended for business, not personal
More resources for entity considerations:
Why NOT to DIY LLC set-up yourself
- the state doesn’t provide the requisite operating agreement (a legal doc needed even as a single member LLC - important to help preserve your liability shield if you end up with an issue)
- the state (and especially the SBA) ca not advise on best structure. Frankly, LLC may not be the best suited entity for you.
- you may not may not fulfill all legal requirements and render the LLC filing worthless (i.e. some states require operating agreement filed, some just in your principal place of business, formal published notice etc)
If you post in groups on the interwebs, you’ll get comments that say- I did it myself i never had an issue- that’s the point. You won’t know until it’s too late. Can’t get limited liability protection AFTER the fact. It’s like waiting until AFTER a car accident to call for insurance. Don’t. I have stood there in court where a client was personally held liable simply because they relied on a CPA to guide them to legal protection through LLC filings and it was rendered useless (read: judgment on the photographer personally).
Why not to use LegalZoom
- they do nothing more than DIY - in fact, they're charging you to do what you could do on your own, which we already covered above
- if they mess up (and they do a lot) you won’t find out until too late (many clients come to us and have to pay for legal zoom fixes)
In fact, you are almost better off taking our legal course BizRevamp and DIY - since we provide templates for the operating documents needed PLUS you'll be well equipped with knowledge on all legal matters of your photography business.
Why CPA shouldn’t be filing your LLC - or any other entity filings
Unless they’re also a lawyer or overseen by one - here’s the pitfalls you WILL run into if you hire a CPA to do formal business filings for you:
- not legally licensed to advise on liability structure
- unable to draft and execute proper operating agreement and/or by laws needed
- it’s unauthorized practice of law in many states- even if it is “just filling out forms” (hint: biz entity set up or trademark filings have way more involved than filling in a blank)
- no legal licensing or knowledge about proper federal and state trademark searches (including applying legal analysis of protectability of mark, zone of expansion, dilution, etc).
Here are issues clients have recently paid me to clean up by relying on a CPA:
- legal claim against client ended up connecting to personal assets because CPA said they didn’t make enough to reap benefits of LLC (hint: only tax benefits. They would’ve have limited liability). So we had to untangle that then go pay to file. ((Extra $5700 to clean up))
- CPA filed a LLC for a client without proper trademarks knowledge - client had to pay to rebrand, change name, lost marketing value to consumers AND potentially would’ve had to pay profits to the existing trademark holder but we were able to avoid this. ((Extra $3050 to clean up))
These are just some real world examples. I say this NOT just as a lawyer - but as a biz owner and mom who would rather be strategic and grow my biz than have to play clean up.
What are my tax implications on becoming an LLC?
Technically, even if you have not taken any steps to set up your business - you are still on the hook for taxes with the governing bodies (state and federal). We've already covered the hobbyist status above, but consider that even if you are in portfolio building and not "profiting" you still have to report all income. So, what are the implications for LLC? Besides initial filings and potential yearly fees, LLCs are taxed at the federal level the same as sole proprietors - thus, generally not invoking in additional taxes.
Other protections to consider
- Copyright registration for photograph protection
- Trademark registration for brand ownership
So, what now?
Take your business and life seriously. Get a solid relationship with a lawyer NOW for FULL advisement. I actually have my entire legal assessment checklist for free on my website. You don’t have to use me - just get it and use as a guide. You’re going to spend more time, money and energy AWAY from your biz WHEN an issue happens.
Here are resource options:
- find a local business attorney (preferably one with photography industry AND intellectual property experience) - you can contact our law firm here
- enroll in our online legal biz course to learn about business entity, taxes, insurance, retirement, contracts, copyright and more
- join our free facebook community (note: this is for discussion only and will not have legal advisement)
- sign up to download The Professional Photographer's Legal Roadmap™ here