What's Best for Creators: LLC vs S-Corp vs Sole Proprietor?
If you are brand new to being an influencer or creator and need help understanding terms that brands or agencies are throwing at you, this post is from a series called Influencer Marketing Terminology.
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I am not a CPA or a licensed tax professional or a lawyer. In no way does this video constitute financial advice or am I condoning any sort of tax avoidance. The purpose is to make you more informed about the different business structures in the United States. For advice on your specific financial situation, it’s always best to consult a professional in your area.
What is the difference between an LLC, S-Corp, and Sole Proprietor?
"Sole" meaning it's just you. So there is no special paperwork you need to fill out, that's just the classification. So when tax time rolls around, you will be taxed the same as if you had a traditional 9-5 job. You'll be paying Federal income tax and state income tax if you live in a state where there is income tax, and then an employment tax called FICA (Federal Insurance Contributions Act to fund Social Security and Medicare) which is around 15%.
LLC or Limited Liability Company:
An LLC is also known as a Limited Liability Company, and it has a couple of advantages. It creates a separate entity that is distinct from you.
If you get sued by someone, let's say it's a brand deal gone wrong or something, they can't come after your personal assets for example your house. They can only come after the assets of your LLC, which will probably just be the cash that's in the company's bank accounts (which as a side note, is a good reason to not keep much cash on the books in your business accounts).
When tax time rolls around for your LLC, it acts as what's called a "pass-through entity" meaning your profits, you know, your revenue minus your expenses of the business, pass through directly to your personal income.
If you also have a 9-5, it just gets added to the top of that and taxed at your normal personal income tax rate.
Aside from the legal protections an LLC can offer, there is something called an S-Corp election, this election allows you to be treated as both an owner of the LLC and an employee of the LLC. The reason that that's important is that, you can now pay yourself what the IRS calls a "reasonable salary" and also give yourself what are called "shareholder distributions" where you pay yourself money that is not subject to that 15.3% self-employment tax.
Did I lose you? Okay, let me break it down.
Let's say you're on track to make $75,000 profit this year from being an influencer, that's $90,000 revenue minus $15,000 in expenses.
If you're a sole proprietor and you're filing single, your Federal tax rate will be 22% or $16,500 in taxes.
Your FICA which is 15.3%, will be $11,475. Which makes your total Federal tax rate, $27,975.
However if you have an LLC with an S-Corp election, you can pay yourself a reasonable salary of let's say, $45,000, so 22% for your Federal taxes, 15.3% for FICA, so your total taxes would be $16,785.
But wait, your shareholder distribution will be $30,000, and it's taxed at just 22%, or $6,600, making your total taxes, $23,385. That's a tax savings of $4,590!
Remember when I said in an LLC with an S-corp election, you have to pay yourself a "reasonable" salary? Well, you can't just pay yourself $1,000 in payroll the entire year and take a $74,000 distribution. That's gonna raise a red flag to the IRS and increase your risk of getting audited. But as long as you're paying yourself something reasonable, a good rule of thumb would be at least half of your annual profit, you should be good to go.
Another thing to consider is that maintaining an LLC is a little more complicated than having a sole proprietorship. You'll have to have payroll now, so you may need a payroll provider which costs money, however there are many options.
You will have to file a separate tax return for the LLC, so that's in addition to your personal return as well. If you don't want to do that yourself, you're gonna have to pay a tax person to prepare the return, and there may be other fees too, like a yearly filing fee for your company that can vary state by state.
That money can all add up, and so you'll want to make sure that the tax savings that you're gonna get will be more than the cost of the logistics of having the LLC. A good rule of thumb is that, it'll likely cost maybe $1,500 a year to maintain. But I bet you can see pretty easily that as you start making more money and you get into different tax brackets, the amount of money that you can save starts becoming seriously significant.
Which business type is best for influencers? If you're making less than $60,000 a year, being a sole Proprietor should be totally fine, you should probably be able to go several years like this. However once you start making more money as an influencer, it may be time to start thinking about the other types of business structures like an LLC or an S-corp and which ones will benefit you most.
How can you find someone as a creator to help you set up an LLC or S-corp?
Pretty much any corporate lawyer in your area should be able to help you set up the legal structure of your business for anywhere between 1,000 to $3,000. I would honestly ask family and friends if they have any lawyers they can recommend or you can even look on Yelp. There are lots of legal services online these days that can do it for much cheaper of course, but the only caution that I would give is that, online legal services tend to be pretty boilerplate and customizing anything about your situation starts adding to the cost. You will want to consider that when setting everything up.