Episode 29: LLC vs. Sole Proprietorship for Creatives

  📍 Welcome to CreativeMind Smart Money, the podcast where creativity and business smarts collide. I’m your host, Samantha Eck, bookkeeper, business coach, and your go to guide for building the creative business of your dreams. Whether it’s mastering your money, streamlining your systems, or growing your business, I’m here to share insights that empower you to thrive.

Plus, I’ll be bringing in industry experts to dive into all aspects of entrepreneurship, so you can turn your passion into profit without losing your creative spark. Let’s get started.

  Good morning and welcome back to another episode of Creative Minds Smart Money. I am so excited again about today’s topic as today we’re going to talk about Should you be an LLC or should you be a sole proprietor and the benefits and drawbacks of both? So let’s dive right into it and talk about the difference why it matters and everything in between So sole providers and an LLC are completely different business structures And you really need to think about what is the best fit for your creative business.

A lot of legal stuff can really feel overwhelming, but this decision impacts your taxes, your personal liability, and your credibility. I am not a lawyer, so you should definitely speak with a lawyer when getting all of this set up. But I can at least advise you on like, I guess the structure, it’s just that you need to talk to someone who is a lawyer.

will actually help you set up that structure. And this is just based on like, if you need it or if you don’t need it. So by the end of this episode, you’re going to have the clarity to confidently choose the right structure for your business. And let’s start by talking about what the difference is. So as a sole proprietor, you’re going to want There’s usually no paperwork fees or formalities.

It’s just you running your business. If you wanted to run your business under a proposed name, so for example, you are running your business as Samantha and you want to run your business as Firestorm Finance, you would need to get a business card. doing business as or a DBA because a lot of states require that if you aren’t doing a business under a DBA, use your name.

So for example, one of my clients, she uses her name as her business name. She’s a sole proprietor. It works. But if you’re ever wanting to branch out and say, use your business as, or like change the name of your business, then it has to either be a DBA or you can do a limited liability company. An LLC usually requires a state registration and a fee, but it also provides legal protection and other perks.

So, when you have an LLC, it’s Essentially what I like to call the separation of church and state. You are officially separating your business from your personal. Both an LLC and a sole prop, especially if you’re a single member, will end up going on the schedule C of your business. There are a difference the more you go up.

So if you’re two people in an LLC, that’s usually a partnership. It is no longer just a single member LLC. A single member LLC is still considered a disregarded entity. The difference there, again, is just making sure that you are protecting yourself legally. But that is the key difference. And then as an LLC, you also have the option to elect to be an S Corp.

Which is, Something that is really, really interesting and S corp is when you get or are retaining enough of your net income. I usually like to tell my clients at least 60 to 70 percent that’s when you want to become an S corp because if you become an S corp, you go on your company’s payroll. And your taxes are automatically deducted.

You can get like a 401k, you can have the benefits through the payroll. It definitely helps. But an S corp is something that is like a future thing and not something that you want to start out structuring your business as. I will say this right now, I have seen too many people start out as S corps and end up, hurting themselves in the long run because they transition into an S corp and then They have to pay themselves a fair wage and they can’t afford to.

So the best place to start is either as a sole proprietor or an LLC. And you want to think of these key, obviously these key considerations. If you’re a single member LLC, there’s not going to be a huge impact to your taxes because you’re still going to have all of your, stuff on a schedule C, same as if you’re a sole proprietor.

But you want to think about the liability. And I always tell my clients this because this is so important. If you are a business owner, your risk of being Take into court is a lot higher than if you were working for someone at just a corporate job. So as a business owner, the one of the things you want to think about is if in the event that worst case scenario you were to get sued by someone.

If you are a sole proprietor, all of your personal assets are also liable. This means if you own a house, however many cars you own, whatever you own, they’re all now liable. Whereas if you separate and become an LLC, you are protecting those. The only things that are liable are whatever is owned by the LLC.

So whoever is coming after you in court cannot go after your house. They cannot go after your car. They can only go over after whatever your business Is worth or whatever assets your business has which is so important and like really Well done. Now, having an LLC doesn’t necessarily give you a professional image.

It can list you in a lot of places, but it doesn’t necessarily give you any sort of professionality or like credibility. It doesn’t make you official, sure, but the main draw here is the liability. Now, we want to go over the pros and cons of each just so that you can understand and fully make a well thought out decision.

So for the sole proprietor, the pros are that there is a really simple setup. There’s no really big fees or forms, especially if you are only having, your name is your business. So if you’re not doing a DBA, it’s really easy. It’s low cost and straightforward tax free. filing, especially because your income is reported on your personal taxes.

The cons are that there, again, is no liability protection. So your personal assets are at risk if your business is sued. And then there is limited credibility compared to an LLC. Now, I will admit that While a lot of similar business owners like us creatives are not going to think you’re more credible by having an LLC if you were Ever looking to work with bigger companies, maybe you are a user generated content producer Maybe you do content creation something like that You know you want to work with Disney having an LLC is gonna back you up with that like hey, I’m like legit This is like legit I’m serious about my business.

Most people say that when you are serious about your business, you will get an LLC and that’s because you are wanting to separate church and state and protect your personal assets from your business assets. So that is the con there. So again, the The pros about the sole proprietor, it’s best for new businesses that want to just test the water.

Maybe you’re not sure if this is something you really want to do. It’s really good for like low risk, small scale operations. When you get bigger, you want to start thinking about an LLC. So what are the pros and cons of an LLC? Obviously, one of the pros is that it separates your business and personal assets that shield you from lawsuits.

So this is when you really want to separate the two of them. So if you’re a sole prop and you’re still mixing, it’s, you know, inadvisable, but it happens. That’s okay. When you become an LLC, you have to separate. Because if you have personal things going on, you are still putting your personal assets at risk.

So separate the two entirely. Obviously, again, clients and vendors could see you as more official. You’re taking your business more seriously. I think that there is a rare state in which people see that nowadays. And then you have the tax flexibility so you can choose to be taxed, as if you’re a single member LLC You’re still going to be taxed like a sole proprietor where income is on your personal taxes If you’re working with someone else you can be taxed as a partnership or you can elect to be taxed as an S corp There are higher costs when becoming an LLC Which is one of the cons Registration fees can be anywhere from 50 to 500 and possible annual fees as well as certain states require you to have a registered agent, which is where your paperwork will get sent to someone.

I learned this from my own business lawyer, but you can be your own registered agent and get your legal documents sent to you directly. If that’s something you want, you can also hire someone to be a registered agent for you. There are more paperwork when you are in LLC, especially things like, the new BOI report that came out.

So, it’s an information only report. It’s super simple. It takes five minutes to do, but There’s a lot more things to do when you are in LLC. So it’s best for businesses wanting to take on more clients, risks, or higher value projects, especially with someone who is like, for example, me working in the financial space.

If you’re a coach, that’s something you’re going to want to look into because, the risk of being sued is there. And then obviously entrepreneurs wanting to protect their personal assets and have a professional edge. I would always sit down with a lawyer to help determine, which is best for you and talk through all of this.

This is just my advice from the bookkeeper’s perspective, but I also think that a lawyer is very important. A lot of people will go to things like Zen Legal or, it’s not Zen Legal, LegalZoom, Zen Business. There’s a whole bunch of them, Taylor Brands. There’s a whole bunch of like those small ones. While they are cheaper to set you up, they don’t give you the proper care.

You need to go to a business lawyer and I will advocate for that every single time. A business lawyer is so much better than just going to one of those smaller businesses. Now the questions you need to ask yourself to help you decide which to go with are, are you exposed to potential lawsuits or high risk projects?

So if you’re someone who’s a website, realistically, if you’re a service provider, an LLC is going to protect you because if you get sued for saying, someone says, I asked you to do this and you didn’t, now you took my money and you don’t want to refund them or something like that. It is so crucial to have that protection.

So you want to ask yourself. What is your risk level and then obviously financial and separation? Do you want to keep your business and personal separate? So if you don’t obviously, you can stick with the sole prop again It is inadvisable, especially in the eyes of your bookkeeper You want to keep them separate even if you are a sole prop But an llc will help you to make that more of a permanent thing And then your long term vision.

Are you wanting to stay really small? Sole proprietorship is fine. If you’re planning to scale and make your business a little bit bigger, an LLC really does offer that flexibility because you can eventually, like I said, transition into that S corp stage. And then obviously again is your budget. If your funds are really tight, starting off as a sole proprietor isn’t a bad place.

You want to start your business. You can always upgrade to an LLC later and protect your business later on when you’re making money, but that’s also an option. So again, there are certain benefits when you choose the proper structure. They help you to protect your personal assets. They give you that certain credibility to certain clients and they help you with clarity.

They help you align your business goals with the structure so that it supports your growth. If that’s something that you are, Really not sure on again, sitting down with a business lawyer can be so helpful to help you determine which one is the absolute right fit. These are just considerations that you should think about.

And then once you’re like, okay, I think I want to go with an LLC. That’s when you would call that business lawyer and say, this is what my plan is for my business. I think I want to be an LLC. And they’d be like, an LLC is perfect for you. Again, with tax considerations, your sole proprietorship, your business income is filed on your personal tax return, so there is no separate tax return.

That does make it a little bit cheaper, it’s on the Schedule C, and obviously your income is subject to self employment tax on all profits. With the LLC, you can stick with the, the single member LLC or sole prop taxation, which still goes on your, Your personal taxes or you can opt for that S corp taxation Which is when you get to that point where you’re retaining that 60 to 70 percent I will never ever ever advise for you to go for an S corp before you get to that 60 to 70 percent Do not talk to me about becoming an S corp before you are making a profit.

It is not a good move An S Corp does save you on self employment taxes, but it does come with additional payroll and administrative requirements. So as always, you want to consult with a tax professional or a lawyer to best understand the best tax setup for your business. Honestly, I think a CPA is great to advise you on how to become an S Corp, but then, speaking with a lawyer will help you transition into that S Corp.

So if you have someone who’s a tax professional, that’s going to be very helpful. Again, this is just from my perspective. As to how we do this, I will, I, I do talk to my clients about when I think it’s time to transition to an S Corp. I say, hey, you’re making enough money. I think you could save some taxes.

Talk to your CPA or tax preparer or talk to a business lawyer about how you can start your transition into an S Corp. But I will never actually do that. help you transition into that because I think you need to talk to them to make sure that they are like, yes, we’re ready.

📍 As we close out this episode, I want to remind you of your options.

A sole proprietor is simple and cost effective for starting out. However, an LLC also offers you legal protection, professionalism, and flexibility as your business grows. You want to choose one that aligns with not only your goals, but your budget and your long term vision as a business. If you’re still unsure or you need guidance, please feel free to reach out.

I’d love to help you figure it out based on your numbers alone, and then we can hopefully get you in touch with a lawyer or a CPA so that they can help you transition into whatever LLC or S corp you want to be. Just remember that your business deserves a very strong foundation, so make a decision that supports your goals and your future success.

If you found this episode helpful, please Leave it a review, share it with a friend who you think might need it, and as always, come back next week for more. Otherwise, I wish you all the best, keep staying creative, and farewell fellow travelers.