To Incorporate or Not?

[PierceVoice]

Rob,

What is your opinion on the benefits of incorporating into an LLC/S-Corp verus going for a Sole Proprietorship?

When and how does one make these changes, and what are the benefits and disadvantages of a one-man (or woman) band becoming their own company?

Any recommended articles or books would be greatly appreciated also.

Thanksmuch!

Chadd

[robscig]

I love being asked this question because I get to answer a question with a question which is "why not incorporate?" As a lawyer, like other professionals, I am not allowed to form a corporation to shield myself from personal liability from being sued by a client.

As a business owner, no matter what type of business it is, voice over included, the law allows you to file a pretty simple set of papers and you are protected from being sued personally for anything that can ever happen, and that includes contractual obligations you enter into to buy and lease goods or services. It is a very cheap insurance policy to protect you from being sued. Under most circumstances, even with a lawyer involved, it shouldn't cost you more than $1000 to file everything, which is completely tax deductible. The only down side, which really isn't one, is taxes in that it takes a little more to file them. But, I'll trade that extra effort for protection I get from it any day.

Why anyone would choose to operate as a sole proprietor versus under the protection of a corporate structure is a mystery to me. Of course, if you are not doing enough vo business to justify the expense of setting up the Corp then I can understand that.

I also hear a lot of voice talent tell me "what can I get sued for?" and "This is really a liability proof business." I don't understand how people can say this. Is voice over NOT a business?? So why can't a vo business get sued just like any other business? Anytime money changes hands, there is a chance of a lawsuit.

Here are some of the areas we, as voice talent can get in trouble with the law: Copyright infringement, product endorsements, celebrity impersonator voices, ANY contract issue a client; collection actions against you for goods or services you bought, but can't pay for for any number of reasons, including, but not limited to YOUR DEATH! How would your ESTATE like paying for that new whisper room you just bought, but didn't fully pay for yet?

Anyone can sue you for ANYTHING in this country, and often do. For the folks that say: "I can't be sued" and walk into my law office with a Summons and Complaint, they have no choice but to pay me my $250.00 per hour fee (which is cheap), for me to defend them in Court so they don't get a judgment rendered against them. To take this all the way to a jury verdict, it could easily cost upwards to $30,000 in legal fees.

For those that have a corporation formed, all we have to do is fold it and start a new one and the only way the other party can get anything from you is if they "pierce the corporate veil" which is very tough to do.

Here is a TRUE story, about 2 of my clients that proved to me, forever, the value of a corporation.
One is the owner of a roofing company, one a sheet rock company. The roofing company was an S Corp, the sheet rock company, a sole proprietor. Both of them bought the required worker's compensation coverage under State law, for about $1,000 for a year of coverage, which they paid up front. After the policies were over, the insurance companies came in to do an "audit" of the policy, which they were allowed to do under the terms of the policy.

The insurance company billed them each approximately $40,000 in extra premium because they claimed that a couple of sub contractors that had done work for the company's were in fact employees. So, they were billed retroactively and told to pay in 30 days, or THEY WOULD CANCEL THEIR CURRENT COVERAGE! These contractors came to me to defend them. Well, the contractor who had the corporation, we simply stipulated to a judgment because he smartly had NO assests in the corporation's name. That gave the insurance company a worthless piece of paper, and then we started a new corp with a similar name to the first. Total bill for everything, including forming the new corp, $2,500.00.

For the sole proprietor, he was married, owned a house and other assets, so, for him, we had to work out a payment plan with the ins co. I was able to get them to knock of $15 grand from their bill, so total cost to him, with legal fees, $30,000.00, including the cost of setting up a new corp so he does not have to face this nightmare again!

The way I look at it, I would MUCH, MUCH rather have you pay me $1,000 for me to help protect yourself BEFORE something bad happens rather than pay me $30,000 in legal fees for litigation. I don't like litigating any more than you do!

As far as which entity to use, LLC vs. S Corp, I personally prefer the S Corp because I personally believe that it is harder to "pierce the Corporate veil" because there are no formal record requirements for llcs like with corporations, meaning you don't have to have meetings and minutes of the meetings, etc, nor do you have to have some of the other formal required paperwork filings like with s corps, like a "minute book." But LLC's are certainly better than a sole prop. under most circumstances.

Also, LLC's are NOT required to have a separate Employee Identification Number like a Corporation is, meaning you can use your soc sec number for the LLC, but I would NOT recommend this! Definitely get a separate EIN for the LLC, just as you would a Corp as this just adds fuel to the fire to "pierce the veil"

As far as having a 1 man shop, or a shop with 10,000 employees, it doesn't really matter legally about having a corp structure versus a sole proprietorship. With a sole prop. you are flying without a parachute.

As far as making the switch, it is as simple as filing the paperwork with the proper secretary of state's office. It's really that simple. Different states have different filing fees and offer different protections, so it is wise to shop around and speak to a lawyer directly to figure out the exact best entity and venue for filing.

I don't really know of any books or publications about LLC's/Corps, but there is plenty of info on the Net.

I'm sorry this is such a wordy answer, but I hope I did answer your question, and sorry I have to put this in, but I have to: PLEASE do not rely on any of the information in this post as specific legal advice, and please do consult a lawyer directly for specifics about your particular circumstances for your particular location. Nor is this intended to form an attorney/client relationship.

[PierceVoice]

Worry not about a detailed answer. This is a complicated decision for many & the more info, the better. MAJOR thanks for your perspective!!


PLEASE do not rely on any of the information in this post as specific legal advice, and please do consult a lawyer directly for specifics about your particular circumstances for your particular location. Nor is this intended to form an attorney/client relationship.

I guess this means we still have more talking to do before you'll help clear up this whole Me v. God issue about not having the ability to fly at will.

Your contribution is extremely appreciated, Rob.

c

[jsgilbert]

Wow, finally someone worth listening to on here. Thanks Rob.

If I might chime in that Anthony J. Mancuso of Nolo Press has several good publications and the Nolo Press web site has a wealth of information for assisting people with some of these types of legal matters. Also, for those of you going the do-it-yourself route for incorporation, make absolutely sure that you file the additional paperwork needed for subchapter S. If your corp isn't recognized as a subchapter S, it could mean some additional hassles and expenses.

[robscig]

Worry not about a detailed answer. This is a complicated decision for many & the more info, the better. MAJOR thanks for your perspective!!



I guess this means we still have more talking to do before you'll help clear up this whole Me v. God issue about not having the ability to fly at will.

Your contribution is extremely appreciated, Rob.

c
:-) While the info I gave out is applicable to most situations, I would ALWAYS talk to my client's first and find out their particular circumstances, ie, financially, to decide which entity is best, and in which state to file, for their particular needs. That is impossible to do on a forum like this, thus the disclaimer.

Rob S.

[robscig]

Worry not about a detailed answer. This is a complicated decision for many & the more info, the better. MAJOR thanks for your perspective!!



I guess this means we still have more talking to do before you'll help clear up this whole Me v. God issue about not having the ability to fly at will.

Your contribution is extremely appreciated, Rob.

c
One other thing I can add: This is the general advice I give to voice over artists who are just starting out*: If you are not making money in this business, stay a sole proprietor. (Meaning if expenses meet or exceed revenue). As soon as you start making money, start a corporation. As soon as you start making money, you have something to lose. Second, if you use any type of fancy company name or a stage name for your business, incorporate. If you use a name other than your own, most places require that you register the name as a "trade name". This is to avoid people using aka's to defraud consumers. Penalties for this can be harsh, sometimes up to treble damages!! So, if you have to register your trade name anyway, you might as well incorporate instead.

*(For those of you who don't know me, I also teach voice over and produce demos, as well as offer legal and business consults for vo artists. Check my website at: allinonevoice.com - Home (http://www.allinonevoice.com)).

Rob S.

[Lynn Benson]

This is very helpful for me. I am not ready to fly yet, however this gives me answers to some questions. Thanks.

[robscig]

One other thing I can add: This is the general advice I give to voice over artists who are just starting out*: If you are not making money in this business, stay a sole proprietor. (Meaning if expenses meet or exceed revenue). As soon as you start making money, start a corporation. As soon as you start making money, you have something to lose. Second, if you use any type of fancy company name or a stage name for your business, incorporate. If you use a name other than your own, most places require that you register the name as a "trade name". This is to avoid people using aka's to defraud consumers. Penalties for this can be harsh, sometimes up to treble damages!! So, if you have to register your trade name anyway, you might as well incorporate instead.

*(For those of you who don't know me, I also teach voice over and produce demos, as well as offer legal and business consults for vo artists. Check my website at: allinonevoice.com - Home (http://www.allinonevoice.com)).

Rob S.
PS: Also, I forgot to mention, if someone has substantial assets, especially those people who have retired or starting in vo as a second carreer, then I also recommend that group of people to incorporate right away.

[robscig]

Wow, finally someone worth listening to on here. Thanks Rob.

If I might chime in that Anthony J. Mancuso of Nolo Press has several good publications and the Nolo Press web site has a wealth of information for assisting people with some of these types of legal matters. Also, for those of you going the do-it-yourself route for incorporation, make absolutely sure that you file the additional paperwork needed for subchapter S. If your corp isn't recognized as a subchapter S, it could mean some additional hassles and expenses.
Thank you for pointing out about nolo press. I agree they have a good series of books with info, and that these books are geared for the do it yourselfer.

However, I need to put my 2 cents (maybe 4) in on this one. Lincoln said: “He who represents himself has a FOOL for a client.”

I could NEVER understand why anyone would CHOOSE to represent themselves in ANYTHING! This ESPECIALLY goes for forming a corporation. One has everything to lose by doing that, and the only thing you are gaining is saving a few bucks in lawyer’s fees. A lawyer like me is not going to charge very much for a basic small corporation (between $500 - $1500). And these fees are 100% tax deductible. Not all attorney’s fees are, but these are because they are being used to set up a business. So, think about this, these fees are dollar for dollar deductible from fees received from a voice over gig. That equates to a 15.3% discount right off the bat, which is the current amount of self employment tax.

Like the post points out, if the S election is not made properly with the IRS, then it could cost you substantial tax money because that means the corporation would be a C corp and have to file a separate tax return and taxes would not be paid on your individual return. This is just one of the formal requirements necessary to form a valid corporation. So, let’s analyze this for a second.

If you file the paperwork yourself and it is wrong, what is going to happen, and when are you going to find that out? The answer is, if it is wrong, best case scenario is it will cost you some money when the IRS sends you a tax notice, or worst case scenario is the corporation will be ruled INVALID by a JUDGE in COURT during a law suit and you will end up PERSONALLY paying a judgment rendered against you (because the other side would be allowed to “pierce the corporate” veil if you didn’t follow the proper rules.) Both bad things. So, if you filed the papers yourself, guess what? You’re out of luck because the “BUCK STOPS HERE”, and you end up PAYING.



On the other hand, if a professional filed the papers for you and messed them up, you can go after that professional to get your money back. The “BUCK STOPS THERE.” (Make sure that your lawyer who files has malpractice insurance. Some lawyers don’t carry it, believe it or not. But those lawyers that do real estate are usually required by lending institutions and title companies to carry it in most places.)

Here is a secret about law and the practice of law to keep in mind about ANY area of the law. Law is about “spreading” the risk and shifting the liability. That is the concept behind purchasing INSURANCE. You NEVER want to be the one where the “buck stops”. In that instance, all you’re defense lawyer can do is pick up the phone and ask the other attorney how much you need to write the check for to settle the case. Ask any good civil litigation defense attorney (I used to work for an insurance defense firm), the first thing they do when they get a complaint in. The answer is that they look for “another pocket to pick” ie, people they can point the finger at and drag them into the case to help share in contributing to settlement of the case.

In my opinion, filing a corporation yourself is diametrically opposed to deciding to incorporate in the first place. It doesn’t really give you any piece of mind because if you are not 100% sure the corp will withstand judicial scrutiny (and how would you know until you get sued), then what good is it really? On the other hand, if someone else formed it for you and it does not withstand judicial scrutiny, then what does it matter, because you are still protected anyway.

Moral of the story, I even hired an outside attorney who shares space in my law office to form the last 2 companies that I started. The one thing the LAW degree has taught me is to avoid Mr. Lincoln’s trap! But, maybe I’m just paranoid.

[jsgilbert]

This might have been my first post in history where I didn't stress the importance of hiring a professional to assist you in these types of matters. I suggest Nolo Press as a source of information, becuase I believe an informed client is a good client. I don't honestly think that for the small amount of dollar savings it does pay to handle your own legal affairs.

The note about Subchapter S status was more of a warning as to what can happen if you elect to handle matters yourself and forget one small paper to file.

I have an agent who handles many of my business dealings, but I'm still very aware of trends in hiring, Union rates, non-union rates and so forth. Again, to be as good a client as I can and not to ace out my agent of a relatively small commission.

I know someone who is an excellent contractor and he said that the number one "issue" he has is going into home repair situations and having to explain why redoing some homewoners work is going to cost so much more than it would have taken if the homeowner had hired a professional in the first place. In this particular case, knowing about home remodeling can help you in asking the right questions, understanding your options and seeking out quality help. Doing the work yourself after watching a tv show or reading a book is no replacement for the work done by competent craftsman who have learned and honed their skills via tried and true methods.

[robscig]

This might have been my first post in history where I didn't stress the importance of hiring a professional to assist you in these types of matters. I suggest Nolo Press as a source of information, becuase I believe an informed client is a good client. I don't honestly think that for the small amount of dollar savings it does pay to handle your own legal affairs.

The note about Subchapter S status was more of a warning as to what can happen if you elect to handle matters yourself and forget one small paper to file.

I have an agent who handles many of my business dealings, but I'm still very aware of trends in hiring, Union rates, non-union rates and so forth. Again, to be as good a client as I can and not to ace out my agent of a relatively small commission.

I know someone who is an excellent contractor and he said that the number one "issue" he has is going into home repair situations and having to explain why redoing some homewoners work is going to cost so much more than it would have taken if the homeowner had hired a professional in the first place. In this particular case, knowing about home remodeling can help you in asking the right questions, understanding your options and seeking out quality help. Doing the work yourself after watching a tv show or reading a book is no replacement for the work done by competent craftsman who have learned and honed their skills via tried and true methods.
:-) I didn't mean to suggest your post was meant to cut out the professional's, I just thought it was a good opportunity to make that point because it does happen quite a lot, as I'm sure you are aware. So, THANKS for giving me that opportunity to get that off my chest. I completely agree that an informed client is a good client.

[Julie Williams]

JS-- I understand! I've had to redo so many demos from people who blindly went into a studio and blindly asked for a voiceover demo. They ended up with expensive, nice sounding CDs that were totally unusable as VO demos! They had to start over with me, and my fee was less than what they paid for the high quality piece of junk! One studio even "copyrighted" (or put a copyright symbol on) their "DEMO!"

Rob- Awesome thread. I've never considered becoming incorporated because I dont' see any way to get sued. If a client isn't satisfied, I refund. Short of someone falling in my studio (and no clients ever come in to my studio) what's the risk?
Does becoming a Subchapter S corporation require quarterly corporate minutes being filed? And a Prez, VP, Sec, etc. being "elected?"

[robscig]

JS-- I understand! I've had to redo so many demos from people who blindly went into a studio and blindly asked for a voiceover demo. They ended up with expensive, nice sounding CDs that were totally unusable as VO demos! They had to start over with me, and my fee was less than what they paid for the high quality piece of junk! One studio even "copyrighted" (or put a copyright symbol on) their "DEMO!"

Rob- Awesome thread. I've never considered becoming incorporated because I dont' see any way to get sued. If a client isn't satisfied, I refund. Short of someone falling in my studio (and no clients ever come in to my studio) what's the risk?
Does becoming a Subchapter S corporation require quarterly corporate minutes being filed? And a Prez, VP, Sec, etc. being "elected?"
If you are producing demos for people, that is even MORE of a reason to be incorporated than just recording dry vocals for producers because you are at greater risk of being sued, although, admitedly both are slight risks, it can happen, and the point of being incorporated is to protect yourself from personal liability if it does. What if one of your students gets sued by someone whose music you used on it, even if it is licensed, because the person who wrote the song claims the license arrangement is not valid? That student is OF COURSE going to drag you into that lawsuit, and the cost to sort it out is going to be born by you personally. If you have a corporation, you can simply fold it as long as there are no assets in it.

What if you fall on hard times and can't pay for your annual licensing fees for your music libraries, etc, etc, etc. If you enter these contracts (and any others) in the name of the corp, you will not be stuck paying these bills if, god forbid, something happens where you need to fold up shop.

In general, you have to have an annual "meeting" of shareholders with minutes (which can just be you), and in most states, you need a President and a Secretary of the corporation. All other offices can be held by the same 2 people. Those officers, however, do NOT have to be shareholders of the co and you as owner can be the sole shareholder, so you call all of the shots. Depending on the State of Incorp, the report of the corp is filed either annually or biannually, with whatever fee is due to continue the corp registration. The minutes of your meetings are kept in your corporate book that holds all of the documentation of the corporation.

[Tom Bastek]

What if you are wanted to sign a contract where they make you give a "personal guarantee?"

Thanks Rob, Good info!

Tom

[robscig]

What if you are wanted to sign a contract where they make you give a "personal guarantee?"

Thanks Rob, Good info!

Tom
AH, well if you do that, you are entering the contract personally, so your corporate status mean nothing. Obviously think very carefully before signing any guarantees.

[Tom Bastek]

See Rob,
That is my issue. I have a corporation set up for my other business, Gourmet Popcorn. There is not one thing that I can do, without the personal guarantee. If I want to rent a storefront? Personal guarantee. Credit card? Personal guarantee. I am sure it is just a matter of time before I will be unable to get liability insurance without one as well. Although I see the reasons for setting up a corp for my voice biz, (ie. liability, etc) I just hate the fact that people have a go around. Why is the man always holding me down?

T.

[robscig]

For contracts that you enter into as a consumer where you are buying things, people want to make sure they are paid, because they know what I said, the corp can just fold and leave them stiffed. But, when you are the one whose services are being utilized, your corp still provides you the protections you seek, and you can be the one that asks for the personal guarantee to make sure you don't get stiffed.

[Tom Bastek]

Right on! Then I can stick it to the man! LOL

Thanks for your help Rob! (I knew that prepaid legal would help! What? This isn't prepaid legal? Hello? I once again lose money on pre-paid legal) :-)

Tom

[bobbin beam]

Robert,
Excellent information here. Thank you. In your experience, what is the average income threshold of businesses that incorporate? One CPA told me it's around 100K/year.
Your thoughts?

[jsgilbert]

Perhaps Rob will straighten me out, but as I see it, Incorporation doesn't require minimum income and could even benefit a business that posts losses. It supports you in that your personal property isn't at risk (unless it is held by the corporation) and also can support you when the person doing the sueing is merely using the "cost of mounting a defense" as an excuse to get a quick settlement. Given that the creatioon and dissolution of a corporation and the creation of another corporation can often be done for a lot less than defending yourself in a legal matter, it just becomes a way of protecting yourself regardless of income position.

Now, since I'm not an attorney, let's see how much of that I screwed up.

[robscig]

Both Bobbin and JS are right. JS, you are correct that setting up a corporation will protect your personal assets LEGALLY in case of being sued, but Bobbin is also right that the amount of income will determine what type of Corporate structure is best for TAX/ACCOUNTING purposes. For instance, if your co is making in the $100K range, you are probably better off doing a C Corporation, rather than an S Corp or an LLC because you gain some tax advantages, especially when it comes to the Social Security/Self employment tax. Any of the entities will protect your personal assets LEGALLY, and it doesn't matter how much money the company makes.

[bobbin beam]

Thank you for the clarification, Rob. Very helpful!

[WayneLHenderson]

Thank you Rob, and all who replied to his post. I need to get this done for myself sooner rather than later.

Wayne