Dear Lacey, at what point is it beneficial for a performer to incorporate and are there any good reasons NOT to incorporate?
Generally speaking, if you receive any form of non-employee 1099 income (meaning not an official paycheck) then it’s advisable to incorporate. There are numerous benefits including limiting personal liability in the event of a lawsuit by shielding your personal assets. Another key benefit, especially for porn performers, is the ability to protect your personal social security number from unknown producers or various companies.
Understandably, most Individuals choose not to incorporate because they either don’t want to be bothered with the paperwork or they think it would be too difficult and expensive to set-up and manage a company. The key here is to choose the most efficient business structure to fit your needs. Honestly, it’s not nearly as complicated as you may think. A single-member LLC (Limited Liability Company) is generally a good first choice to consider for your basic porn performer, stripper, escort or even Cam-Girl. It’s quick, easy and inexpensive. Another good option would be an S-Corporation, but this is geared more towards very high earners or even production companies.
Let’s quickly start with the basics:
The classification of a 1099 Independent Contractor, D/B/A (Doing Business As) or a Sole-Proprietor are considered the same. This would generally include anyone who doesn’t have an official IRS Tax ID# and therefore gets paid through Form 1099 at the end of the year under their personal social security number. The “worker” and “the business” are considered the same entity with no separation.
Other than the initial set-up paperwork and associated fees, which we’ll discuss later, there really aren’t any major disadvantages to incorporating. I guess if you’re a cam-girl making like $10K for the entire year then you could probably skip it. But, most porn performers and strippers would definitely benefit from the asset protection since they work closely with the public where there are potential lawsuits possible.
There are a wide variety of business structures. For the purpose of this article I’m going to quickly throw almost all of them out. Most just don’t apply within the scope of this article. So, here we go:
C-Corporation (C-Corp.) – We’re talking the issuance of stocks & bonds, shareholder meetings with recorded minutes, corporate tax returns, a board of directors and this little thing known as double taxation which means the profits are taxed at the corporate level and then again at the individual level. Yes, the same exact money is taxed twice. The legal protections and tax shelters are huge, but they do come with a price. Obviously, they’re also the most difficult to set-up and maintain. For the scope of this article, a C-Corporation isn’t even an option worth considering.
Partnerships or Multiple Member LLC’s – Both serve a vital purpose, but not in this discussion. Personally, I’m just not the biggest fan of either structure.
From an accounting standpoint, if a group of two or more individuals want to open up a business together then it would generally be advisable to just go with an S-Corporation for the added liability protection and larger tax benefits. (See S-Corp. below).
S-Corporation (S-Corp.) – This business structure consists of opening a regular C-Corporation (see C-Corp. above) and then filing for “Sub-Chapter S” classification with the IRS. There are numerous benefits from a tax standpoint, especially avoiding double taxation on profits. Filing for Sub-Chapter S classification also eliminates many of the more complicated legal requirements of a C-Corp. while offering large tax advantages.
For small to medium business with employees, higher earnings or a need for a high level of liability protection then I would highly recommend an S-Corporation. I’m a huge fan. The start-up and ongoing costs associated can be substantial. You would probably need an on going regular tax advisor, CPA or Accountant to handle the various accounting requirements. But, it’s substantially easier to operate than a regular C-Corporation and provides more tax benefits.
Single Member LLC (Limited Liability Company) –
The easiest and most cost-effective business structure for many adult performers, sex workers, strippers or even cam-girls would be a single-member LLC. It’s extremely cheap and pretty easy to set-up. Your income and business expenses are reported on Schedule C of your tax return exactly the same way as any Form 1099 income is required to be reported. There are no separate tax returns to file and it offers minimal maintenance.
There are a few simple steps in setting it up, but it’s pretty easy overall and shouldn’t be that expensive whether you set it up yourself or hire someone to do so.
This brings us to sites like LegalZoom(dot)com or other “quick & easy” websites where you answer a simple questionnaire and then pay the required fees. All required forms are then prepared and filed for you (except any local forms that may be required.) It’s unbelievably easy and inexpensive. In CA, you’re looking at somewhere around $250 and you’re done. The $250 includes the website attorney fees to prepare everything and all required state fees due.
Obviously, you can also call a local attorney or tax accountant for pricing as well. If it’s between a site like LegalZoom(dot)com and a local attorney/tax accountant for the same price, I would go with the local professional. Just my opinion.
I have to admit my main problem with these “quick & easy” business start-up websites are the absurd amount of extra services they try to get you to buy.
For example, LegalZoom(dot)com charges like an $80 fee to obtain a new Tax ID# from the IRS. For future reference, getting a new Tax ID# from the IRS not only takes all of 5 minutes, but it’s 100% FREE. Yes, FREE.
The on going accounting aspects of running an LLC aren’t all that different from being an individual 1099 Independent Contractor. The major difference is that you’re required to have a completely separate business checking account. There is no co-mingling of funds here. Your personal money and all money associated with your business will now be completely separate: (you should really do this whether you incorporate or not):
-ALL income checks will be deposited into your business checking account.
-ALL business expenses will be paid directly from your business checking account.
(Remember to ALWAYS keep business expenses separate from personal expenses in the event of an IRS audit. It also keeps overall record-keeping so much easier. The IRS gets *seriously* pissed when business and personal expenses are combined or paid out of the same bank account.)
-In order to “pay yourself” or “take money out of your business” for your personal use requires you to simply transfer money from your business account to your personal account. In an LLC, this is known as a DRAW. No payroll taxes are taken out.
-Your payroll taxes, which are normally taken out of a standard paycheck, will now be paid when making your quarterly estimated tax payments to the IRS.
(In most cases, if you receive any type of 1099 income you are required to make these quarterly estimated tax payments. There are rules and limits that apply. It would require a whole separate article to explain the intricacies of estimated tax payments, so we’ll just leave it alone for now. This article is long enough already. Sorry.)
Hopefully, this gives you at least a starting point for your own research. Good Luck.
*Make sure to keep sending your questions to me or Mike. We’ve received some really good ones so far*
Whatever you do, don’t ever let anyone charge you for a new Tax ID# from the IRS. It’s FUCKING FREE!!!! 🙂