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LLC, Corp, Sole Prop


orionflood

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Now I know that most people likely work as a freelancer and get 1040's etc, but has anyone created a business and marketed yourself as a business, or does that make no sense once one has joined the union? To me it would make sense to go as a business, so that if something were to happen and one defaulted on their loans for that new Zaxcom recorder they just bought then all the bank can go after is your other gear and not your house or car.

The other thing is creating a network, does it make any financial sense to have a business and hire other mixers (employees) to do gigs you cannot do and your employees use your gear. This would mean you would take the rental home, but the sound mixer would take the dayrate or w/e.

If you do own a business, which do you think works the best, from my perspective the LLC looks the most appealing since you have pass through taxes, and your personal assets are protected from seizure in the event of bankrupcy or whatever. Thanks guys and Senator Mike.

Tim

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" has anyone created a business and marketed yourself as a business "

just about all of "us", even union members. our equipment rental us a business, and many union members incorporate, sign union agreements, and try to get "Loan Out" status, though that has become harder to achieve

and there are plenty of tax and other business reasons to do so...

" does it make any financial sense to have a business and hire other mixers (employees) to do gigs you cannot do and your employees use your gear. "

like agencies, agents, crewing companies and rental businesses, but I'd guess this is not a very good business model for us

Edited by studiomprd
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Not to say there aren't other good reasons for an LLC or corporation to insulate yourself from others' bankruptcies or liability.

LEF

Banks are a bit craftier than that. They will absolutely want a personal guarantee from a small new corporation or LLC and you will be on the hook anyway.

Best,

Larry F

Lectro

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Looking forward to this thread!!

I do not have LLC nor am I incorporated.

My new accountant says I need to stay off the Sched C (non-employee compensation 1099) and ensure my rental goes into "rents" on 1099 to get me on a non-business Schedule.

Many here are incorporated, and I know many who aren't.

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in my opinion, there is not enough reason to justify an individual forming a corporation for the business that sound mixers usually do (billing for service and equipment rental). Even if/when the corporate tax rate is lowered to what it used to be and what it is in most other parts of the world, any money you take out is taxed at your personal rate. So, with the assumption that you would be the sole owner of the corporation, any money the corporation makes should be taken out by you each year anyway (otherwise you pay taxes twice: first at the corporate rate, then again at your personal rate).

Also, the idea of legal liability limitations that a 1-employee corporation has from its sole owner is flimsy at best.

Even if a business license is obtained with the idea of deferring sales tax (not paying sales tax at the time of purchase), you also have to collect sales tax from your rental customers and pay it to the state department of revenue, either monthly or quarterly (a real pain for a 1-person operation).

Disclaimers:

1) The above assumes a business in the US.

2) Sales tax regulations vary from state to state.

gt

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Even if a business license is obtained with the idea of deferring sales tax (not paying sales tax at the time of purchase), you also have to collect sales tax from your rental customers and pay it to the state department of revenue, either monthly or quarterly (a real pain for a 1-person operation).

The issue of whether or not to incorporate your business has too many variables for me to be able to offer a useful opinion. That is truly an area where professional legal assistance is needed.

The decision of whether or not to obtain a business license is another matter. I strongly recommend that anyone, especially if doing business in the Los Angeles area, obtain a business license. In any region, a license gives your business some legitimacy and other parties are more likely to deal with you seriously. I have encountered clients who declined to rent equipment from any entity not incorporated. When I informed them that, while not incorporated, I did have a business license, they checked with their counsel and approved the transaction.

Also, in Los Angeles, there is the matter of city taxes. Small businesses are expected to pay taxes to the city. If you have a license, you may fall within the very-small-business exclusion and owe nothing. But, if you are unregistered, no such exclusion applies and you may owe a percentage of your earnings going back several years. The city culls this information from income tax returns.

The issue of having a tax ID account that permits purchasing equipment without paying taxes is a separate issue from having a business license. (although it may be necessary to have the one to acquire the other)

And, finally, if one pays the sales tax when purchasing the equipment, there is no necessity, in California, to collect taxes on the rentals. This is how Location Sound operates. When they obtained legal opinion on the issue, they gradually sold off all the rental gear they had acquired through their resale account and purchased replacements, paying sales tax on the new purchases. Now they rent gear free of sales taxes on the rentals.

David

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In washington state, if you don't pay sales tax on your purchased equipment, either with a wholesale liscence or from out of state, the state levys a use tax which is the same rate as the sales tax, so your supposed to pay it either way. That's just on purchases.

Rentals in wa are taxed by the sales tax, but I recently discovered there is an exception for film and video production rentals.

I guess that's all OT from the original post. I can't claim to know a lot about the ins and outs of corporations vs. Sole pops, that a lawyers job, but I have yet to see any reason or advantage for me personally to incorporate, which makes the costs and hassles a waste. Everyones situation is different, and the decision needs to be looked at for each particular situation. From my understanding, incorporating starts to become more impotant once you have employees, but as a single owner/operator you are the defanition of a sole proprieter, and the reason the category of business exists.

Just my rambling thoughts

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I strongly recommend that anyone, especially if doing business in the Los Angeles area, obtain a business license. In any region, a license gives your business some legitimacy and other parties are more likely to deal with you seriously. I have encountered clients who declined to rent equipment from any entity not incorporated. When I informed them that, while not incorporated, I did have a business license, they checked with their counsel and approved the transaction.

Also, in Los Angeles, there is the matter of city taxes. Small businesses are expected to pay taxes to the city. If you have a license, you may fall within the very-small-business exclusion and owe nothing. But, if you are unregistered, no such exclusion applies and you may owe a percentage of your earnings going back several years. The city culls this information from income tax.

David

Knew I would love this thread!

Did a little research, and the City of Santa Clarita requires no business license!

I'm off the hook for now, until I buy a new home and start renting the one I'm in. Then I'll worry about my liabilities.

Robert

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Good topic. a few notes from a canadian perspective: I am not an incorporated entity myself, but many other sound mixers are. My business is registered (in Ontario) as a sole proprietor. I am legally required to collect and remit HST (harmonized sales tax) to the government. For my trouble, I get to keep a small percentage of tax collected to cover my administration costs. My clients get to claim back the tax paid. I can claim any HST I paid for the purchase of equipment or other capital items used in my work (whether my business is incorporated or not). Frankly I find it a huge pain in the ass, but there's no choice. For some projects (movies/series) I am deemed an employee of the production company and income tax and other deductions, are taken off paychecques for my labour. One advantage to this: I am covered under Worker's Compensation (as a freelancer I am not covered). I get rental fees for equipment through my rental company (on which i am required to charge sales tax) Phew.. boring shit i know, but thought you might like to know.

chris newton

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Some large companies will not consider you a vendor (therefore take out no taxes and do a 1099) unless you are incorporated. If you're not incorporated, their policy is to treat you as an employee. I've found this to be the case with several large production companies and at least one major network.

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Good topic. a few notes from a canadian perspective: I am not an incorporated entity myself, but many other sound mixers are. My business is registered (in Ontario) as a sole proprietor. I am legally required to collect and remit HST (harmonized sales tax) to the government. For my trouble, I get to keep a small percentage of tax collected to cover my administration costs. My clients get to claim back the tax paid. I can claim any HST I paid for the purchase of equipment or other capital items used in my work (whether my business is incorporated or not). Frankly I find it a huge pain in the ass, but there's no choice. For some projects (movies/series) I am deemed an employee of the production company and income tax and other deductions, are taken off paychecques for my labour. One advantage to this: I am covered under Worker's Compensation (as a freelancer I am not covered). I get rental fees for equipment through my rental company (on which i am required to charge sales tax) Phew.. boring shit i know, but thought you might like to know.

chris newton

Depends how much money you bring in. If you bring in 80 grand as a SP you have to pay 40% back to the government. If you are incorporated you can cut that down to 20% or less. Plus you can write off a lot more of your purchased gear, rentals, Exspenses and GST/HST.

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Depends how much money you bring in. If you bring in 80 grand as a SP you have to pay 40% back to the government. If you are incorporated you can cut that down to 20% or less. Plus you can write off a lot more of your purchased gear, rentals, Exspenses and GST/HST.

Yes, but as I understand it, as the corporation's only employee, you'll have to pay yourself at some point from the money in the corporation. Then you'll have paid the 20% and whatever personal income tax is due. Although I guess you can choose to pay yourself only what you need at a lower incone tax rate, and take money out the company the years you aren't working.

I guess I'll find out this year, as I expect to get killed on my taxes. Fortunately that also means I've had my best year.

Robert

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Sales Tax in California

THE LAST THING YOU EVER WANT TO DO is get a resale cert. from the State Board of Equalization.

1. If you use a cert (resale #) when buying a piece of rental gear, you are liable for the sales and use tax EVERY time you rent it out.

2. Once you get a resale cert., it is almost impossible to get rid of it, and when you shut your business down, the SBoE has the right to audit you back to day one, at YOUR EXPENSE.

3. If you use a resale cert. to buy an asset, such as a printer, copier, etc. the SBoE has the right to charge you the full tax you avoided at purchase EVERY YEAR! Non-profits are getting whomped right now for just that reason.

What to do?

Film and television production and post-production equipment falls under Regulation 1532 of the SBoE, which allows you to pay a reduced sales tax of about 3.5%. Any reputable vendor in CA will honor 1532 if you file the appropriate form with them, relieving them of liability. File once with Coffey or LSC and every purchase (of equipment) will be taxed at the low rate.

But most importantly, on gear or expendables, PAY THE %$##$%ing SALES TAX at purchase, and you are in the clear forever.

Jay (lessons learned the hard way...)

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You are only taxed after "expenses", which for me has worked out to 10% or less these past 15 yrs. Last year, I actually got a $1700 refund! (due to being an employee and having source deductions for ONE gig)

Depends how much money you bring in. If you bring in 80 grand as a SP you have to pay 40% back to the government. If you are incorporated you can cut that down to 20% or less. Plus you can write off a lot more of your purchased gear, rentals, Exspenses and GST/HST.

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Yes, but as I understand it, as the corporation's only employee, you'll have to pay yourself at some point from the money in the corporation. Then you'll have paid the 20% and whatever personal income tax is due.

Robert

Exactly.

I used to be based out of Toronto, and one year many production companies based in Toronto were audited, and were found to have freelancers that were deemed to be employees in the eyes of the government. The production companies were then on the hook, for all of the withholding taxes that they had not been collectiing from their 'employees' for past years.

After production companies started asking crew to sign on as employees, a lot of crew incorporated.

As well, as a freelancer working for an investigative journalism show, and it was suggested to me by my lawyer to incorporate for liability reasons...

Tax credits change, as well, based on business structure... I know in Ontario, where I live, there are television production tax credits that would be less if I were an incorporated company with more than one employee, versus tax credits received as a single employee corporation.

Helps to know how your business structure will affect how hireable you are to a client.

R

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Exactly.

I used to be based out of Toronto, and one year many production companies based in Toronto were audited, and were found to have freelancers that were deemed to be employees in the eyes of the government. The production companies were then on the hook, for all of the withholding taxes that they had not been collectiing from their 'employees' for past years.

After production companies started asking crew to sign on as employees, a lot of crew incorporated.

As well, as a freelancer working for an investigative journalism show, and it was suggested to me by my lawyer to incorporate for liability reasons...

Tax credits change, as well, based on business structure... I know in Ontario, where I live, there are television production tax credits that would be less if I were an incorporated company with more than one employee, versus tax credits received as a single employee corporation.

Helps to know how your business structure will affect how hireable you are to a client.

R

Yes that is true. But trust me you pay a lot less taxes being an incorporated company than a SP in Canada. I just did it this past year.

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I formed an LLC in 2006 -- it didn't save me from being liable for self-employment tax, but then I was still at an income/write-off ratio that kept my taxable income pretty low... in 2008, I formed an S-corp at the advice of my CPA -- largely due to the increase in my income as well as the decrease in write-offs. I've managed to save between $16k and $20k a year in tax liability, but it's not been without a cost -- when you fully incorporate and start paying yourself a wage, you have to file quarterlies, and you have file annually as both a company and as an individual... if you have a good accountant, and are getting hammered by self-employment tax, it might be time to consider fully incorporating, but my advice would be to avoid it as long as possible. One of the best things you can do is try to avoid 1099 work -- a lot of employers are 1099'ing their employees illegally -- you can only legally be considered a contractor (or sub-contractor) if you set your own hours. It doesn't matter that you use your own gear, and have an LLC or EIN... if you show up based on a call-time you're an employee, and you should be W-4'd, not 1099'd... OTOH, you can (and should) 1099 for your kit rental -- and if that income gets high enough annually, it might be time to consider fully incorporating... the best thing you can do is get with an accountant you trust, and let them guide you.

~tt

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The set your own hours criterion is just one of the better known of the list of ten things the IRS uses to determine if someone is an employee or independent contractor. The gotcha is that it is up to the sole discretion of the IRS which of the criteria they use and how they interpret them. They (the IRS) started a move back in the nineties to try to make everyone possible an employee. They even jumped all over a friend of mine's business insisting that the accounting firm he used was an employee. This was a large well-established accounting firm with a number of its own employees.

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I had always understood that setting hours was just one test of many, though it is a recognized test. However, if you hire a concrete delivery service to pour concrete at 9 am for your construction crew, the concrete company isn't an employee. They just need to provide time sensitive services. Here's a good article with 20 points that the IRS may look at.

http://pfmproduction.com/pdfs/PFMP_Fall09/PFMP_Fall09_Subcontractor.pdf

Cheers,

Larry (The Non-Lawyer) Fisher

[snip]

One of the best things you can do is try to avoid 1099 work -- a lot of employers are 1099'ing their employees illegally -- you can only legally be considered a contractor (or sub-contractor) if you set your own hours. It doesn't matter that you use your own gear, and have an LLC or EIN... if you show up based on a call-time you're an employee, and you should be W-4'd, not 1099'd.[snip]

~tt

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Yeah John,

It sucks but unfortunately, it's better for the IRS and Fed. Gov't to have as many 'employees' out there in the world as possible -- they don't want people going out and being successful on their own -- with employees, there is far less room for 'creativity' when it comes to alleviating tax liability. A person can probably go for years and manage to stay under the radar so-to-speak, but rest assured, once they catch wind of it, and someone decides the gain will outweigh the cost (ie: they'll get more out of you in back taxes and penalties than it will cost them to audit you) then they will almost definitely come knocking. Err on the safe side -- avoid 1099 work excepting your kit rentals and/or jobs where you can prove that you've set your own hours. (John is correct in that there are several other criteria by which they decide whether or not you're actually a contractor, but the setting your own hours thing is the biggest as I understand it.)

If you do incorporate, HAVE A GOOD ACCOUNTANT!

Larry,

Thanks for posting that link! I think it pretty much sums it up. There is still room for interpretation on many of the points, but again, I think to err on the side of caution would be wise in this case -- don't fuck with the IRS : )

~tt

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