STEP 1: CHOOSE A BUSINESS NAME
Every photography business has a name, even if it’s as simple
as “Jim Harmer Photography” (that’s how I started out). Just pick something.
If you pick your own name, you’re free and clear. Don’t worry about the rest of this. If there’s already someone with a business
named “Jim Harmer Photography”, they just have to deal with it because I always
have the rights to my own name. There
was a court case where someone with the last name McDonald opened a restaurant
named McDonald’s, but not THAT McDonald’s.
He won. The court ruled that you
always have the right to your own name.
If you choose anything other than your own name, you have to
take a couple extra steps. These are the
steps I had to follow when I made “Improve Photography” after graduating from
the simple “Jim Harmer Photography.” As
an example, let’s say I select something corny like “Still Frames of the Mind
Photography.” Cute.
I need to make sure that someone else does not have trademark
rights over that name. I can find out in
two ways. The first step is to check
USPTO.gov and perform a TESS trademark search.
It works like a normal search engine.
Just choose “basic word mark search” and then type in the proposed name
of your business and hit “search.” When I do that, I see that the lame name
I’ve chosen brings back no results.
That’s a good thing!
But that doesn’t mean I can use the name. I also need to see if any other businesses
are named something confusingly similar.
For example, what if there is a “Still Frames of the Mind
VIDEOgraphy”? That could confuse
customers about which business they are hiring.
So I’ll do a few searches with similar names to make sure.
If you find someone with the same name or a confusingly
similar name, it’s really best to just not use the name and avoid problems down
the road. You may be able to still use
the name if you are geographically separated, do a different type of business,
etc. But it’s best to just move on and
choose something different.
If there are no matches in TESS, then we need to use
Google. Do the same thing, searching for
other businesses with the same name. If
there are, it’s really best to just avoid it.
Just because they haven’t REGISTERED their trademark doesn’t mean they
don’t HAVE a trademark. Trademarks are
earned through use not registration.
Registration simply adds another layer of protection.
STEP 2: LLC VS SOLE PROPRIETORSHIP
Time to protect your assets. This is where things can get complicated if
you let them, but it really shouldn’t.
We need to decide if you want to separate your business from your
personal assets. The benefit of doing so
is that it will protect your house, cars, and personal bank account from some
lawsuits.
The truth is that most photographers don’t need to go
through the work of creating an LLC. The
risk of a photographer being sued is actually quite low, and the dollar amounts
of such suits would usually keep it in small claims court anyway. However, if you’re in a special situation, an
LLC is certainly a good idea.
An LLC is the most popular form of separate entity
that separates personal and business responsibilities and assets. A sole proprietorship simply means a person
who does business. If you don’t register
an LLC, you’re automatically a sole proprietorship.
Which law suits would it protect you from? Let’s hit on a few examples.
- You have a contract with a client to shoot their wedding, but you’re in a car accident on the way there and miss the ceremony. The client can’t get your personal assets.
- You’re shooting a wedding and a light stand tips over on a guest and does her harm. Your LLC won’t protect you at all because the guest did not contract with your business. The guest is just a person YOU harmed. Your LLC is useless.
- You are having a bad day and do a terrible job taking wedding photos. The couple can’t sue you personally only the business with whom they signed the contract. The contract was breached.
- You don’t collect sales tax for your photography jobs and the state sales tax commission audits you. Your LLC does nothing. The IRS will get your personal assets without skipping a beat.
- A same-sex couple calls you and you feel your religious beliefs prohibit you from adding to the celebration of their wedding by photographing it. They are mad and say if you don’t photograph their wedding, they’ll sue. Your LLC will do nothing to stop a human rights suit, but it could deter some other suits. (Side note: I’m NOT advocating one side or the other on this issue. It’s just an example of something that photographers have been sued over lately.)
So
as you can see, having an LLC is an excellent way to protect you from SOME but
not ALL law suits.In
general, get an LLC if you:
- Own a home and have significant equity, or have other major assets that you don’t want to risk (cars, boats, bank accounts)
- Will participate in higher-dollar photography endeavors (doing shoots that earn over $4,000)
- Will photograph celebrities (celebrities are law suit MAGNETS!)
- Do commercial photography (some businesses are very litigious)
- Have a low tolerance for risk (Like I do. I like the security of an LLC.)
You
probably don’t need an LLC if you:
- Don’t have much money in your personal account and don’t have significant assets
- Will photograph part time
- Expect to earn under $80k in your photography business
- Won’t participate in higher-risk shoots worth more money or for higher-risk clients
For many of you, the “no LLC” option is the simplest
and probably the best. You can always
switch to an LLC later if your business grows.
If you don’t want to make an LLC, you still need to do some work. You need to register a DBA with your
secretary of state. A DBA just means
“Doing Business As.” It usually only
costs $25 and is a simple one-page form where you say that “Jim Harmer” is
doing business as “Jim Harmer Photography” or “Improve Photography” or whatever
business name I chose. It’s dead
simple. Just google the name of your state
and “secretary of state” there will be a
simple form you fill out and mail with a $25 check and you’re set.
If you decide you want an LLC, then you have a tiny
bit more complexity, but it’s not too bad.
Google the name of your state and “secretary of state” and you’ll find a
simple form for registering an LLC. It
usually costs about $100. It’s really
quite simple. The only “insider trick”
you should know about is that on the line that asks for the purpose of your
business, just write “To earn money.”
The reason is that if you’re ever sued, you want it to be crystal clear
that you don’t ONLY do portraits, for example.
If you write something too narrow, the plaintiff may argue that your
business is just a pass-through account and that you were engaging in other
business endeavors. If the purpose of
the company is simply “To earn money” then you can do whatever you want with
the company.
File the form and your $100 with the secretary of
state and you’ll be on your way. In
Idaho, this is a simple 2-week turnaround.
The only thing you’ll need to do long-term is once a
year you’ll have to fill out a little card they email you about saying that
you’re still in business. It takes about
5 seconds per year.
Also, I should add that the LLC is hardly the only
option for asset protection. There are
many others, but for 99% of you reading this, the LLC will be the right
choice. If your business is bringing in
loads of money, you’ll definitely want to talk with an accountant.
STEP 3: GET AN EIN
Not
everyone needs an EIN. It’s really just
for a specific set of issues in dealing with the IRS, but I find that it’s
tough to do a lot of business endeavors without one. When you get insurance, sign up with a credit
card payment processor, or set up a bank account, they’ll want an EIN.
It
takes about 5 minutes. Just go here and
fill out the simple form and you’ll get your EIN. It’s free.
Save it somewhere you can find it.
You’ll need it pretty regularly.
STEP 4: SEPARATE YOUR
FINANCES
Whether
you choose to set up an LLC or not, you need to separate your personal finances
from your business finances. If you are
going to set up an LLC, then this is also necessary to get your protection as a
separate entity, but even as a sole proprietor this is a necessary step to keep
your books in order for the IRS.
Go
to a bank and set up a bank account for your business. You’ll need your LLC documents and EIN if you
went that route. If you’re a sole
proprietorship then just the DBA will be all you need.
Absolutely
every single penny your business earns needs to be put in the business bank
account. Every single penny you spend on
business items needs to come from that same bank account. Never, ever, ever use your business account
to buy a personal item. Ever. Ever!
If
you mess up the above rule, your LLC is COMPLETELY USELESS! If you set up a separate LLC and business
bank account, but just use the business card any time you’re out of money in
your personal account, your LLC is destroyed.
Anyone who sues you can “pierce the corporate veil” and get your
personal assets. If you are a sole
proprietorship and you violate the rule above, then you’ve set yourself up for
a NIGHTMARE of an audit when you try to show the IRS your books. Everything is much easier if you keep these
two things separate.
Wondering
what you can justifiably make a business expense? Anything that you buy that has a substantial
business purpose and is ordinary and necessary in your field. Photography workshops, buying new camera
gear, purchasing props, and paying models are all examples of good business
expenses. But there are others that can
really help out as well.
A
business expense means you’ll get to deduct the purchase from your taxes. So if I earn $40,000 in my photography
business and my tax rate is 25%, and I have $10,000 in expenses, then the 25%
tax rate is only applied to the $30,000 in net profit. So basically, whenever you buy something on
the business account rather than your personal account, you’re getting it at a
25% off sale. That’s fantastic if you
would have bought the item anyway, but it never makes sense to buy something
just because it’ll be a tax deduction.
Now
you need to decide how much money your business will pay you.
If
you are an LLC, it’s really best to set a consistent monthly salary and not
change it. For example, you may put $500
of your personal money in the bank account to get it started. Then you do some work and earn about $1,000
per month. You may choose to set your
salary to whatever you want as long as the business has that much to pay
you. At the beginning, it may be as tiny
as $100 per month. Don’t worry, you can
always change it later. Just keep it
consistent each month. If you get to
December and see that you’ve only taken a tiny amount out of the business and
you have a lot of retained earnings (money left in a business account), you can
give yourself a special yearly distribution to your personal account. You pay yourself by simply writing yourself a
check from the business account to your personal account each month.
If
you are a sole proprietorship, then you can really take money out whenever you
please. The business IS you, so you
don’t have to be as careful. But when
you want to use the money in the business, write a check from the business
account to your personal account. Then
buy whatever you want out of your personal account. That way it’s still clear what is a business
expense and what is a personal expense.
You’ll need that for tax accounting.
The
last step here is to meticulously track every single mile you drive as a
photographer. Going to the mountains to
take pictures? Write off the miles! Driving to a coffee shop to meet up with a
potential client? Write it off. Driving to one of my free photography
workshops? Write it off! Just keep a simple ledger that says where you
started, where you went, how many miles, and why you went there. Then, at the end of each quarter, write
yourself a check from the business to your personal account for the cost of the
miles (56.5 cents per mile). Buy your
gas, car, and all car maintenance with your personal account and then we do
these reimbursements. I’ve never seen a
car that actually costs 56.5 cents per mile to operate, so you actually MAKE
money when you go on a photography road trip.
Not
keeping track of my miles very well has cost me several thousands of dollars
over the last few years. Don’t make the
same mistake.
STEP 5: REGISTER TO PAY
STATE SALES TAX
This
is the #1 most-skipped step by photographers, and it’s the one that comes with
the biggest penalties if you mess this one up.
Fines for failure to pay sales tax can be HUGE, and photographers are
great targets for the state sales tax commission because photographers rarely
understand how sales tax works. Every
photographer needs to do this step–even if you are just a sole proprietorship.
Most
people know that products are subject to sales tax, but services are not. That’s a general rule, but it has a host of
exceptions. Photography is almost always
one of them. You may think you are
providing a service by taking pictures for someone, but most sales tax
commissions say you’re selling a product.
This
gets extremely tricky! Each state deals
with the sales tax question differently.
For example, some states may allow you to itemize your services so you
collect sales tax for the print sales but not for the act of going to do some
of the shooting, etc. It’s a
state-by-state issue. Your best bet is
to talk directly to your state sales tax commission and just ask. They are usually cautious about giving legal
advice, but they’ll usually show you what to do.
My
suggestion: If you aren’t sure what to collect sales tax on, just collect sales
tax on everything you do. I’ve never met
a sales tax commission who got upset about being overpaid.
To
pay sales tax, you have to first register with the state. Google your state sales tax commission and
there will be directions on how to get a Sales Tax ID and how the process works
in your state. It’s really not hard.
Some
states don’t have any sales tax, but most states charge about 6%. So you’ll need to update your pricing page
with a little asterisk and a note that says “All sales subject to state sales
tax.” Then when you get payment from the
client, add 6% to the price.
At
the end of each quarter (usually), you’ll see how much sales tax you collected
and you’ll pay it to your state sales tax commission.
STEP 6: TAXES, TAXES TAXES!
When
you work a day job, your employer withholds tax for you and pays it on your
behalf. Now that you’re self-employed
(even part-time), you have to do this for yourself with the income your
business earns. This is true whether you
are an LLC or a sole proprietorship.
Each
quarter, you need to total the amount of money you’ve earned and pay quarterly
taxes to both your state and the federal government separately. Just to make it tricky, the government
doesn’t do this on the typical ends-of-quarter.
You’ll pay on April 15, June 15, September 15, and January 15 of each
year. Here’s what you do: total the
amount of money you earned since the last payment. Take about 25% of that amount (or whatever
the tax rate is–differs for everyone) and pay it to the IRS. You’ll also withhold for your state. Usually this is about 5 to 8%. Go to the IRS website and print out a
voucher. It’s just a little half-sheet
of paper that you mail along with your check at the end of each quarter.
All
taxes except sales tax are paid through your personal account NOT the business
account. An LLC is a pass-through
entity, so you pay the tax personally. A
sole-proprietorship is just YOU doing business, so pay your taxes from your
personal account. Eventually this can
become difficult to manage your personal finances to have enough in there to
pay the quarterlies. You can set up your
company so, in addition to your monthly distribution (salary), you also get a
quarterly distribution from the business to your personal account that just so
happens to be the exact amount of tax you owe.
If
you pay the correct amount in quarterly taxes throughout the year, you won’t
have any additional tax bill at the end of the year. But if you get your quarterlies wrong, you
could end up with a whopper of a tax bill!
It’s better to over-pay and get money back than to under-pay and end up
with a big bill.
If
your business is on track to earn about $80,000 in the course of a year, you
absolutely positively need to go see a CPA immediately! It’s very likely that you’ll want to change
your corporate tax election to be an S-corp.
You stay an LLC for liability reasons and your business name is still
the same, but for tax purposes you are treated as an S-corp. This can save you a STARTLING amount of money
on taxes because you’ll avoid self-employment tax, but it also means more fees
to your financial advisor and more complexity.
Only do this if you’re earning around the $80,000 mark. Some CPAs will want to talk everyone into
doing this so they can rack up more fees.
I
made the mistake of trying to save money by not hiring a CPA until it was too
late. I lost about $13,000 in taxes
between two years that I could have saved if I’d made the switch to an s-corp
sooner. But I saved a whopping $200 by
not getting a CPA! Ug.
STEP 7: INSURANCE
You
don’t need insurance to be a legitimate business, and I’m not aware of any
states that require photographers to hold insurance. However, it can be a smart business decision
depending on your situation.
There
are two different types of insurance that most photographers should consider:
liability insurance and equipment insurance.
Just visit any insurance broker and they can walk you through both of
them.
My
general take on equipment insurance is not to get it, IF you are in a financial
position to buy new gear if yours gets broken or stolen. For example, if someone broke into my home
today and stole my computer, Drobos, laptops, and cameras, it would really
stink. It’d cost a lot of money. But I’m in a very comfortable financial position
and could just go out and buy replacements tomorrow.
However,
if I were just starting out my business and the same thing happened–I’d be up a
creek. I wouldn’t have the money to
replace the equipment necessary for my business, so I’d have to close my
doors. My business would be done
with. So get insurance if this is your
situation!
The
reason I don’t recommend equipment insurance if you have the money to replace
your gear is because it’ll save you money.
The insurance companies are smart.
They figure out the chances of you losing your gear and the cost of
replacement, and then they add some margin in there for them to make
money. By not buying the insurance, you
take on the risk yourself so you can keep the margin. But if you aren’t in a good financial
position, then get the insurance.
Liability
insurance is probably not necessary for most photographers. It covers a lot of the errors and omissions
that could come up in the situations we described above. However, you have to think about what the
real risk is. If you have an LLC and you
mess up someone’s wedding photos and get sued, the only amount they can sue you
for is the amount your business has. For
most photographers, that’s only a few thousand in equipment and retained
earnings. The risk is very low, so don’t
pay hundreds of dollars a year to transfer that risk to an insurance company.
However,
if you have far more substantial income and assets in your business, then
business insurance would be an extremely smart move.
STEP 8: EVERYTHING GOES IN
WRITING!
Never,
ever accept a shoot without having a written contract between you and the
client. Also, get a substantial initial
payment before you agree to book the shoot.
Noticed how I called it an “initial payment” and not a “deposit” or
“downpayment?” That’s very significant.
In
most states, if a client contracts with a photographer to do a shoot and pays a
deposit, and then the client later cancels the shoot for any reason, they are
entitled to get the deposit back. But if
you write in your contract that it is an “initial payment” and specifically say
that the payment is to reserve the time slot in your schedule and that you will
turn down other clients who try to book the same time slot, then you can keep
the money if the wedding gets called off or if the client cancels the
shoot. I love it when shoots are
canceled because I get free money :-)
You’ll
also need model releases for when you photograph someone and want to use their
images to advertise your business, or to sell their images to a company.
The
good news is that I’ll take care of all the contracts you’ll need. I’ve already written them for you and I’ll
sell them to you for just $15. Yep, just
$15 :-) Download them here. I spent dozens of hours writing them (I’m an
attorney), but I make them really inexpensive because I want every photographer
to have access to good contracts. If you
were to come to me as a legal client, I’d charge you $250 PER CONTRACT, and the
$15 bundle I’m selling has several contracts in it. You’re welcome.
There
is NOTHING you can do in setting up a photography business that will protect
you better than having a simple contract with every single client!!! If you ever have any issue with your
photography business, I guarantee the first thing out of your lawyer’s mouth
will be “Please tell me you had a contract!”
It’s such a simple thing to do, and will provide you a lot of peace by
knowing you’re doing things right.
MAINTAINING AN LLC
Just
setting up your LLC is only part of the battle.
If you don’t maintain your LLC, it will be worth nothing. The most important thing you can do is to
keep your personal and business finances separate, but we’ve already discussed
that.
The
next steps are for more advanced users.
First, you’ll want to keep corporate minutes. Once or twice a year, sit down with your
spouse and a Google Doc and just have a meeting about the business. Write down your plans for the next year,
review your financial position, etc.
Some states allow you to file those minutes with the state, but at least
take the minutes and keep them. It makes
it look more like a legitimate business.
Next,
you’ll probably want to file Articles of Organization. This is the large document that explains
exactly what’s going on in your business.
This is VITAL if you have a business partner, but still important even
if you don’t because it makes the business look more legitimate. You can find cheap and easy forms for doing
this on any of the inexpensive legal forms websites.
Last,
you have to be clear that your business is an LLC and not a sole proprietorship
or you’ll be subject to something called “undisclosed principal
liability.” Undisclosed principal
liability is where a client does not know that he or she is working with a
company, but thinks it is a sole proprietorship and since the company didn’t
tell the client it was a company, the client can sue the individual business
owner personally.
Here’s
an example of when you’d see that. You
are at a community event and someone comes up to you and starts chatting about
their daughter’s wedding. You say you’re
a photographer and agree to the price and date.
You shoot the wedding and they aren’t happy. They sue you personally. You say “Wait! I’m an LLC!
You can’t sue me personally! You
can only sue Stolen Moments In Time Photography LLC!” Since there was never a point in your
interaction that you said you were Stolen Moments of Time Photography LLC, they
can still sue you personally.
The
easiest way to solve undisclosed principal liability issues is to GET A GOOD
CONTRACT! By simply stating it in the
contract, you’re set! Also, put on your
business cards and on the footer of your website the full legal name with the
LLC. You don’t have to put LLC in your
logo if you don’t want to (it looks ugly).
Just make sure that everyone will see that at some point before they
sign the contract, or that they could find that out with reasonable effort.
CONCLUSION
We’ve
been through a lot of information, but if you just go step-by-step you can have
this done in just a few hours. It really
isn’t hard.
While
all of the things in this article are important to do, NOTHING is as important
as simply having a good contract between you and the client. 99% of law suits would never happen if the
photographer and the client had a clear contract, and you have no excuse
because I wrote all 7 of the most common photography contracts for you and am
selling them for just $15.
Your
business is set up with all of the legal details perfectly in place. Now it’s time to shoot some pictures!
http://improvephotography.com/35114/how-to-set-up-a-photography-business-legally/
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