Hey Guys,

I'm ready to step my show up to the next level. I'm wanting to move over into the business side of it. I've been able to book some magic show for birthday parties, charity events, and company picnics and I expect that these will become regular clients. Some already are. Should I go with a sole proprietorship? My shows are usually made up of balloon animals for 1/2 and hour and a a 1/2 hour of children's magic.
What do you do?

What are you trying to accomplish by incorporating?

These quotes: "Should I go with a sole proprietorship? My shows are usually made up of balloon animals for 1/2 and hour and a a 1/2 hour of children's magic" and "I've been able to book some magic show for birthday parties, charity events, and company picnics and I expect that these will become regular clients. Some already are", confuses me as one has nothing to do with the other. How you setup your business has nothing to do with the things you're mentioning. You incorporate to establish a business entity and for protection. Your choice of the three or four popular choices should be based on your goals, business plan, assets, and whether others are involved in your business plan. Tell us more.

My question is should I incorporate or should I go with a sole proprietorship? Basically what I'm asking is, I'd like to go with the most convenient route via sole proprietorship. Do I need the protection of incorporating? What do you, as fellow magicians go with?

Each State has different rules.

The big advantage of LLC, right now, is when it comes to paying taxes. It is a long post to list all the advantages.

This is not true with sole proprietorship. A good accountant friend can help you here.

Real briefly, if you buy $1,000 worth of magic and subscribe to magic organizations, go to conventions, dues and expenses are allowed in an LLC, with rules which I will not go into. Sole Proprietorship, is limited deductions to the amount of income claimed (I think).

In NJ it cost $50 for LLC and it gives you that license and tax ID you can use for purchasing items, and the sort.

If you are serious in getting into this business full time then go LLC.

As Dennis said, each State has different rules.

But usually a simple sole proprietorship will work fine for most.

In business the best protection is, always do the right thing,
and carry good insurance.

Tom

Ricky, each responder to your post has given you good advice. However, as they have all pointed out, you should be directing this question to a good CPA, not to your fellow magicians. If performing magic is your principal occupation, or on its way to becoming your principal occupation, try to find not just a CPA, but one that represents other entertainers. Likewise hook up with an attorney who has an entertainment law practice. Offer to take him or her out to lunch and explain to them what you're doing and chat about it. Lawyers have to eat too, and the fee meter probably won't be ticking as long as your buying the eats. (Fast food doesn't count). When the day comes and your CPA says it is time to go LLC, say "great" then bring your attorney into the discussion. I love CPA's, but they aren't lawyers and vice versa. You need both in your life. Sorry about that. As for what to do tomorrow morning, Tom has given you the best advice. Your first line of protection, regardless of whether or not you are operating as a sole proprietor or as an entity, is INSURANCE. Are you in good hands? Oops, I couldn't resist that

May your life go magically well.

There "can" be tax benefits to being an LLC, depending on the nature of your business.

You are not limited in your deductions because you are not an LLC.

If your business is a "hobby" (as deemed by the IRS), then you can only deduct up to the amount of income you receive from your hobby. For example, if you earn $5000 a year performing magic, then you could write off up to $5000 in expenses.

The IRS presumes it a "hobby" if you do not show a profit in at least 3 of the last 5 tax years. You can still prove to the IRS that it is a business at that point, but you have to show them that you really put a lot of time and effort into the business.

For more information, look at the IRS website for "hobby income".

Each state has different rules, but typically an LLC is not expensive or difficult to set up. I don't know what state you live in, but I recommend with the advice above and talk to a good CPA in your area.

In addition to what has been said, an LLC provides protection - ie limited liability - from lawsuits. For example, if someone falls due to loose pieces of paper from a snowstorm finale, a sole proprietor faces more direct liability that can go deeper than an LLC. Having said that, check with a CPA and see what a LLC means in your state. In an age of lawsuits, you might want to consider an LLC.

I've had an LLC for the past several years specifically for the legal protection (on the advice of a laywer).

One thing to look out for when you're setting up an LLC for tax reasons is the state you set it up in. Several years ago you could set up an LLC in Delaware or Nevada, two states that don't have a state tax. While you can still do that, if you don't reside in those states, you may have a problem opening up a bank account for the LLC in your state. Banks won't accept your out of state LLC without a you also registering your LLC with the state of your residency, referred to as a Foreign LLC. If I'm not mistaken, you will then be responsible for state taxes in your state of residency.

I've set up several LLCs over the years and it's easier than ever now. You don't have to go through one of the online legal sites or even a site that specializes in LLCs. The last one I did through my state's site. Within 15 minutes I had an LLC registered with the state and a new EIN with the IRS (also through their website). In my state it was only $50.00 (the EIN is free). Print it all out, head down to the bank and you're ready to go.

Lots of information from several people, but the best advice so far is to seek PROFESSIONAL advice and I'll tell you that CPA's are not always the best place to get LLC or corporation advice. An attorney who specializes in corporations is a good place to start, but even they are not always 100% up to speed on the cost vs. benefits of all the choices you have.

First, a LLC is one of several choices you have. You also have "S" corporations, "C" corporations, LLLC's, LLLP's, and a variety of trust options as well. There is a lot more to it than simply printing out some paperwork, filing it on line and paying a $50 fee. If you follow the advice of "do it on-line, print it out and you're ready to go" it's a recipe for disaster if your corporation legitimacy is ever challenged by someone who wants to sue you.

I don't profess to be an up to date expert in this field, but prior to beginning performing full time in 2005, I owned and operated (1) Sub-Chapter "S" Corporation, (4) "C" Corporations, a LLLP (Limited Liability Limited Partnership), one 501(c)(3) Not For Profit Corporation and (2) trusts. The corporations were domiciled in (2) different states and there were HUGE benefits to be had from the set up I had. But, it did cost me a ton of $$$ to maintain the paperwork and reporting responsibilities for the various business entities I maintained. At the time I was generating multiple millions of $$$ in annual revenue (not in the entertainment business) and received not only personal liability and asset protection, but substantial tax (and other) benefits as well. I had a corporation consulting firm on retainer and they helped me through the in's and out's of how to make the laws work to my benefit.

The biggest lesson I learned is that those who make the laws create "loopholes" for the rich and if you have someone who understands those loopholes, you can 100% legally use those loopholes and various tactics to your benefit. And there are SUBSTANTIAL benefits to be had I assure you. BUT, at the same time, until you get to a point where you expect to NET $250,000 - $500,000 PER YEAR, these options won't be financially feasible (read: It will cost more to jump through the hoops than it's worth).

The bottom line: It's a complicated corporate world out there. If you're looking for simple asset protection from someone suing you, then incorporate as an "S" corporation AND get GREAT INSURANCE. Your insurance will be more valuable than "corporate protection" because in 48 states, any attorney with modest corporate litigation experience can "pierce the corporate veil" and still hold you personally liable for most any issue. In other words, the "corporate protection" isn't nearly as strong as you might expect...with some significant exceptions (such as the state where you incorporate and how your corporations and trusts have business relationships structured).

Sorry if this comes off as a buzz kill, but while it's kinda cool to say "I own a corporation", to do so correctly and gain all of the possible benefits and protections you might like, it'll take a lot of professional expertise and that is indeed expensive.

One more thing: Domino Magic stated "One thing to look out for when you're setting up an LLC for tax reasons is the state you set it up in. Several years ago you could set up an LLC in Delaware or Nevada, two states that don't have a state tax. While you can still do that, if you don't reside in those states, you may have a problem opening up a bank account for the LLC in your state. Banks won't accept your out of state LLC without a you also registering your LLC with the state of your residency, referred to as a Foreign LLC. If I'm not mistaken, you will then be responsible for state taxes in your state of residency." The truth of the matter is a corporation of any type, and regardless of where its incorporated, won't provide any real state tax benefits because, as he accurately indicated, you will have to register your corporation in your state as a "foreign corporation" (if you've incorporated in another state) and ultimately you'll have to pay state corporate income taxes on your revenues. Again, there are methods to get around that, but those methods include multiple corporate entities and detailed contractual agreements between those entities....and like I indicated earlier, it'll cost more than it's worth until you get into some substantial net revenues.

Best wishes in your endeavors.

MagicAL

As a follow up to my previous lengthy post, Nevada does not have a personal income tax, but corporations DO pay taxes in Nevada based on the type and amounts of net revenue generated. So just because you set up your corporation in a state like Nevada, that does not mean you can get out of paying corporate taxes.

I had a Delaware Corp., in addition to paying Delaware an annual fee, I also had to pay NJ a fee $800 for working in NJ. So the Corp was dissolved. This move by NJ forced most small business out of business.Then LLC came around for $50 a year, a much better solution.

The single best advantage is a law suit can't go after your private family money. Limited in that what you do is legal, illegal stuff under a LLC is a different and one can go after your home and stuff. (Writing balancing checks when you know there are no funds in the account to intentionally receive items would be an example.)

To get a business checking account, get business discounts, buying stuff wholesale, etc., you are asked for your Federal ID, which requires at least an LLC, but I don't think a Sole Proprietorship gets that ID number, but I don't know for sure.

Ask yourself these questions/statements:

I am going to resell items: LLC (buy items without tax to resell and collect tax)

I want to purchase/sell my already owned illusions to my corporation and get the benefits of deductions: LLC see CPA on this

I want to set up a health insurance (Join a group health insurance plan), pension system, pay employee wages, workman's compensation and social security benefits, with an LLC you can do this. I also want to collect on these. (See a Lawyer and a CPA) (So David is right above.)

Know why you want an LLC.

Specifically, Ricky I think you should operate as a sole proprietor and maintain very good insurance. (I currently net less than $100,000 per year as a performer and I operate as a sole proprietor.) Once you start approaching $250,000+ annual net income and/or $1,000,000 net worth, then you can (and should) start thinking more about corporate options and trusts. If asset protection is your primary concern, you could consider some trust options (even now). Personal and family assets held in a family security trust are not vulnerable if you are ever found personally liable in a lawsuit.

Previous posters are right, you have to determine what you want to accomplish and then speak to seasoned professionals who can guide you in the proper direction. Those of us who comment here can, and should, only provide generic responses as to what we have experienced in our own businesses and not offer legal or accounting advice (unless they are trained and licensed in that field). Ultimately your situation is unique and you need the professional advice of a trusted and experienced professional.

Again, best wishes in your endeavors!

A ton of very good information above.

Worth repeating what LVMagic said. No lawyer or CPA anywhere could have said it better:

"Your insurance will be more valuable than "corporate protection" because in 48 states, any attorney with modest corporate litigation experience can "pierce the corporate veil" and still hold you personally liable for most any issue."

You can't hide, and it doesn't matter how big your company is, you can still be named (held personally responsible) when sued.
I'll take a good insurance spokesman over a lawyer anytime.

"The Buck Stops Here" has some meaning, especially when you the chief cook and bottle washer.

I personally see no reason you can't just start out as a sole proprietor, it has no effect on how you can do business, and then grow as you go. But as others have said, always seek professional local help in matters like this.

Tom

Here's a source for some information about corporations and their benefits. It's nothing more than a site which offers a free book about the benefits of incorporating (in Nevada in particular). I got the book years ago and it has some good information in it. Here's the link: http://www.thenevadaedge.com/?sid=50115

I'm not an "affiliate" and have no personal or financial interest in the company which makes the above mentioned offer.

My accountant suggested that I get an LLC when I started selling product as protection against lawsuits, as well as many of the things Denny lists. So I did. Cost me $100.