One of the first things you need to do when thinking about starting a business, is to decide what type of entity you want your business to be. Most people who are in the arts, tend to do freelance work first and then naturally fall into the ’sole proprietor’ business structure. I was one of these people. I spent the first three years in business for myself thinking that a sole proprietor was really the only appropriate business structure for a small business such as mine. Every year around tax time, I’d get hit with a HUGE tax bill that would nearly wipe me out. The self-employment tax alone was killing me! Then added on top of that were the social security tax and income tax on all of my business earnings….Yikes!!!

I eventually did some more research. I found some interesting answers when I dug a little deeper. I found a great little book in the Robert Kiyosaki line (written by one of his tax experts - Diane Kennedy, CPA) called Loopholes of the Rich: How the Rich Legally Make More Money & Pay Less Tax. Here, I learned about corporations - and which corporate structure suited my small business. I formed a Sub-Chapter S corporation. I have saved myself and my business literally thousands of dollars in taxes.

If you are a sole proprietor, I highly recommend you look into incorporating your business. There are several key things that will help you. The following 2 points are well worth making the change all by themselves:

1. Protection from Personal Liability:
You will be protected from personal liability when you form a corporation. If anything happens (you get sued by a client, you can’t pay your bills, etc.) creditors may seek payment out of the assets in your corporation, but they can’t seek it out of your pocket as one of the shareholders. This prevents your home or personal property from being taken away….this is not true of sole proprietors where what’s yours is completely liable.

2. Self-Employment Tax Savings
Whatever your corporation makes in terms of profits are not subject to Social Security, Medicare, Workers Compensation and other taxes - which when combined total approximately 15.3% in taxes. As a sole proprietor, you have to pay all of these taxes (ie: self-employment taxes”) on all of the income earned by your business. With a corporation, only the salaries of employees are subject to these taxes. So let’s say as a sole proprietor, you earn $60,000 from your business. You pay 15.3% tax on that $60,000 ($9,180 to Uncle Sam). If, however, you are the owner of a corporation and you pay yourself a $40,000/year salary, and make $20,000 as corporate profits, the 15.3% tax would only be paid on your salary ($40,000 - only $6,120). This would save you over $3,000 per year! [Keep in mind that you do have to pay yourself a reasonable salary, or the IRS can assign up to all of the corporate profits as salary].

Of course individual situations differ, so be sure to consult your accountant or lawyer to discuss the specific circumstances for your business and to maximize your tax benefits. But, by all means do the research and save yourself money by incorporating your business!