Module four
getting legal
Watch the video below to listen to this page’s content, OR scroll to read the content instead:
If you find yourself wanting to skip over the section, don’t! The legality of running a business can often feel overwhelming, but that’s just because you don’t know what it entails.
This section is designed to clear up confusion, pull back the curtains on exactly what it means to operate a legal, legitimate small business, and help you see all the opportunities available to you as a creative small business.
GETTING REGISTERED
Before you fill out any paperwork, you have one simple choice to make: Are you going to start as a sole proprietor, an LLC, or jump right into an S-Corp?
This choice will likely be dependent mostly on how much money you anticipate making with your business and what your plans for future growth include. When I started my business, I registered my business name as a DBA (“doing business as”) and then included my income and expenses on our personal tax return using the Schedule C form.
If you like the idea of keeping your business separate from your personal finances and taxes, you might like the idea of registering as an S-Corp. For both a sole proprietor and an LLC, you simply fill out the Schedule C form on your personal taxes. Talk to your CPA about the benefits or drawbacks of either choice.
Quick note: These aren’t the only three business classifications or designations, but they’re the most common. For the sake of simplicity, we’ll just discuss these three.
As far as making sure your business is “legal”, you don’t have to do anything extra if you plan to just fill out a Schedule C on your taxes and keep the business as personal income.
However, if you’re wanting to reserve your business name, then the only thing you have to do to be officially legal is register your business with your city and state. Upon registering, your state will issue you a Tax ID to use for identification purposes.
Operating as a sole proprietor (on a personal basis, with no state registration or anything) is the simplest way to get started, but if you’d like to register as a single-member limited liability company (LLC), you’d receive the added benefit of protection from legal or financial recourse, should something happen during your business operations. As an LLC, if a customer or client felt wronged and tried to sue, they would only be able to come after your business assets, not your personal ones.
For a small business, the added protection from an LLC seems 100% worth it to me, especially as it’s no different than filing as a sole proprietor on your taxes. You fill out the same Schedule C form either way.
You can operate as a sole proprietor or LLC indefinitely, but once you hit the $20,000 to $30,000 net income threshold, you might consider filing as an S-Corp, which would allow you to set yourself up as an employee and be taxed at a lower rate on your personal taxes.
If you choose to register as a corporation, you’ll be issued an EIN (employer identification number) that basically acts as your business’s social security number.
The only other thing you might consider when starting your business is setting up a sales tax account number after registering with your state. If you will be selling any physical products or goods, you’ll need to collect sales tax on those purchases and file it quarterly. However, if you’re only performing services, you don’t need to worry about collecting or filing sales tax.
Here’s a quick breakdown or recap of some of those terms:
SCHEDULE C
A tax form used to report your income from your business on your tax return (used by both Sole Proprietors and LLCs).
LIMITED LIABILITY COMPANY (LLC)
A type of business organization that allows you to file with limited liability benefits without becoming a corporate entity.
S-CORP
A filing classification that allows your business income to be taxed differently by the government (profits and losses are passed to shareholders, rather than paying taxes on your income as if it’s a personal income).
STATE TAX ID
A state-issued ID number used to identify your business with your local and county governments and to set up a sales tax account.
EIN (EMPLOYER IDENTIFICATION NUMBER)
A government-issued ID number used to identify your business if you’re not using your own social security number.
It seems like a lot of information when you don’t know much about it, but in reality, it’s pretty simple to set these things up, and they are easy to do yourself with the help of a quick Google search to find the websites to register for in your local area.
Since that was so much information, I’ve put together a step-by-step checklist to help you “get legit” as you legalize your business.
ALL ABOUT TAXES
Taxes are another topic to consider when setting up your budget, and even when planning your pricing strategy. I always thought taxes were overwhelming, and I even considered them a barrier to starting my business, but now I know better — I’m actually obsessed with learning about how taxes work.
Taxes and deductions are just rules, and once you know the rules, you can play the game every time.
Again, a quick disclaimer: I am not your legal or financial counsel, and in no way should you take what is discussed here to be personal legal advice. Legal requirements vary by country, state, county, and city, and you’ll be well-served to find someone knowledgeable about your situation with whom you can discuss your plans.
The reason I’m so obsessed with taxes is that, as an entrepreneur, you get to play a different game when it comes to taxes. The general rule of thumb is to account for taxes each year that equal about 30% of your business profit. Notice that’s PROFIT, not INCOME.
The key to winning the tax game boils down to a basic formula of PROFIT = INCOME - EXPENSES. The goal is to get your expenses (or “write-offs) to almost match or equal your income. You can have a $50,000 year and write off $45,000 in expenses, and only pay taxes on that remaining $5,000. That’s totally legal!
From the start, keep a running list of all the things you buy for your business. Office supplies, equipment, and even a record of the miles driven to and from business-related events all count as expenses.
The expenses your business incurs are going to look different from those of any other business. But the categories are basically the same, so you can make tax season less overwhelming by tracking your expenses throughout the year using an expense tracking software program or spreadsheet provided by your CPA. I recommend doing this at the end of each month, rather than doing a whole year’s worth all at once each January.
The entrepreneurs that really excel at the tax game and are able to deduct the most are the ones that get the most creative. It might be obvious that tech purchases like a computer, your phone, or even your internet bill can count as a deduction. But did you know you can deduct pretty much anything as long as you can justify how the expense was used for your business?
Here are a few examples of creative deductions:
A percentage of your mortgage equivalent to the square footage devoted to your business.
An airplane ticket to visit your sister, where you’ll take a few pictures of her toddler wearing one of your products that you can use in your marketing.
The miles you spent driving to Hobby Lobby and back just to “browse” and see if they had the type of supply you were needing.
Daycare expenses (even when they come out of your personal bank account instead of your business one) can still be “reimbursed” from your business or just written off as an expense if you use that time to work.
One of my biggest business expenses is Labor — both my own and the labor paid out to a small team of contract workers who work for me. When you’re a sole proprietor or an LLC, you don’t get to count your take-home pay as an expense, since it’s all just listed on your personal tax forms (on a Schedule C). That means that if you want to take home the majority of your income, you’re likely going to get taxed on all of it. And since you don’t have an employer paying your social security and Medicare taxes for you, that’s really going to eat into your take-home pay. You can still count any labor paid out to contract workers as an expense, though.
Alternatively, if you’re registered as a corporation, you can pay yourself a wage as an employee and count that as an expense, as well as counting labor paid to contract workers. So simply by registering as a corporation, you avoid getting that money taxed both as business income AND as a personal take-home. That can amount to HUGE savings!
By being diligent in tracking your expenses, you’ll find new opportunities opened up to you, like the freedom of retaining more of your income for your business and family than giving it to the government.
Here’s the thing: You don’t have to get it exactly right this year. You’re not likely to get audited because you’re a small fish in a pond of much larger corporations, from which the IRS is more interested in gleaning money.
Start where you can, with what you have. Work each year at improving your understanding of how taxes work so you can modify how you record transactions until you find a system that works for you.
SETTING UP CONTRACTS
We can’t talk about the legality of running a business without mentioning the value of contracts!
Contracts don’t have to be complicated.
While there is value in bringing in an attorney or investing in contract templates from creatives online, I see many creatives putting off starting or progressing within their business because they’re afraid of the legal ramifications of not having a legitimate contract.
Take action, even if it’s not perfect, and you can tweak it along the way. Avoid delaying progress within your business by crafting your own contracts! They can be simple, as long as they include the following:
A basic overview of what is being traded (i.e. investment for service/offering);
A run-down of what to expect from both parties and the process itself;
Any additional details (like fine print and exclusions);
A notice that signing the document enters each party into the agreement, and termination expectations (like how much money can be returned or how to treat the agreement if canceled).
If you have no experience with writing something like this, I certainly wouldn’t recommend that you just make something up on the fly. But, with all the tools and resources available online, you could absolutely compile your own contract (just like I did!) that covers your bases while still simplifying the legal jargon so your customer understands the expectations.
My contracts consist of several years' worth of information I’ve pieced together and deemed appropriate to include in a contract for my business and offerings. I’ve spent a lot of time reviewing the details to make sure I completely understand what I’m saying and rewriting all the basics of the contract to sound more like me.
I want my contract to reassure my clients, not scare them away.
The purpose of a contract is to protect both parties, not just your business. This is especially important if you offer high-value services or offerings, or if there is any sort of physical component involved in running your business or completing your services that has the potential for harm or mishap (like operating machinery or traveling).
If you’re not confident in your contract, it’s probably worth investing in a template or hiring an attorney to have peace of mind knowing that it’s square. But, if you’re a DIY-er like me, consider using my Contract Building Workbook to craft a basic contract that lets your client know you care about the end result of your time together.
Once all your legal systems are in place, you’ll find you hardly devote any time to them. You get to operate your business with confidence, knowing that you’re doing everything you should to be legitimate and professional.
OPERATING PROFESSIONALLY
Speaking of being professional, whether you’re selling in-person or online, every customer values respect and professionalism. In fact, I consider these two traits the greatest tools for improving the perceived value of your offerings when you’re running a creative small business.
Not only does professionalism communicate quality, but it also helps you appear more legitimate. You might have poor product photography or be selling on Instagram while you save up for an e-commerce site, but you can still earn your customers' trust and business by doing things to convince them of your value.
Here are a few ways you can operate more professionally and communicate the value of your products despite being a smaller business without the legitimacy of a bigger, more established brand:
Represent — make your business look good. Invest in (or trade for!) quality product photography, branding, and a website that communicates your value. Use cohesive styles and color palettes in all your marketing materials to create a strong design reminiscent of a larger business.
Respect — treat your customers as if you value their time and attention. You don’t have to use fancy words or turn off your personality, just use proper grammar, spell-check, and respond on a respectful timeline. An extension of this is to keep the negativity off your business accounts and website. Use your business' social media platforms as a way to spread positivity, and never talk bad about yourself or others.
Respond — stay active on social media and on your blog. These are places potential customers look to see if a business is active or not. We’ll talk more about marketing strategies later on in this course, but the main goal is to be present, however, you define that. Having a sparse Instagram account in combination with a website that hasn’t been updated with new inventory in a while can be seen as a sign that your business doesn’t take a very large priority in your life, and customers may be hesitant to commit.
Remove — edit out the excess parts of your business. Not only will paring down the things that are “extra” (like services or inventory that just aren’t booking/selling) help you work more efficiently, but it will also offer less confusion to your clients, and focusing on a niche will help you appear more professional and focused.
Revamp — make small changes to improve the legitimacy and value of your brand. If you choose to operate with a free Gmail account, ditch the one you started in middle school and create a new one that matches your business name. Include extra value in your offerings, like surprising your customers with an extra goody in their package, or offering your clients a little more than what you promised in your original quote. And along these same lines, remember to separate your business finances from your personal ones. Many customers feel greater legitimacy from a business when they’re sending money to a business account rather than a personal Venmo.
Hopefully, you can begin to see the value of getting legal within your business, but here’s an important reminder if you’re new to all this:
Take it slow. Do things the right way the first time you do them.
Research and learn how to do it, or hire a professional, before you get so big you can’t prioritize working smarter.
And for those who are already running their creative business: use this education as a way to reflect on how you got into your business. Now is the time to fill in the gaps. You have it lucky because you can continue to operate and make some money while you’re going back through the basics of running your business and establishing a stronger foundation, but use this opportunity to slowly implement new, better practices that will compound over time to shape your work into a more efficient, successful creative business.
quick links to resources:
U.S. Small Business Administration website
Business Registration Checklist
The Legal Paige contract templates (haven’t used, but have heard great things!)
Dalton Forsythe with Freedom Financial Coaching
(Rachel’s personal financial coach)
Chase Thurgood with Incite Tax
(Rachel’s personal CPA)