To incorporate or not to incorporate . . . that is the question facing many artists. From filmmakers to choreographers to graphic designers, the issue of incorporation appears daunting at first, but can be more straightforward than most artists think. For this installment, Ask Dr. Art discusses the benefits and drawbacks of incorporation from an artist’s perspective.

Sole Proprietorships and Partnerships

Although you probably aren’t aware of it, if you are making art with the hope of earning a little money in return, you are operating a sole proprietorship (you are the owner of a business that you run by yourself). By default, most individual artists function as sole proprietors of their art business, regardless of whether the artist employs one or 100 employees. Sometimes artists work collaboratively with other artists in creative teams of two or more artists under a common name. In legal jargon, this is called an (informal) partnership.

Both sole proprietorships and partnerships, however, carry risk. In both, there is no separation between an artist’s personal assets (or the personal assets of the partners individually) and the assets of the artist’s art business. In the eyes of the law, the artist’s personal and business assets are one and the same. This, of course, has its pros and cons. For instance, all profits an artist earns are automatically personal income; all debts, though, become personal debts. If an artist’s art business is sued, the artist personally gets sued. This places all belongings at risk—an artist’s home and car, equipment and materials, cash and investments, personal belongings, etc. This is where incorporation becomes important.

The Corporation

Incorporation offers a pair of big advantages. A corporation exists as a separate legal entity. It places a legal barrier between an artist’s personal assets and her or his art business. It also allows an artist to raise money by allowing individuals to invest in her or his art business (these investors are called shareholders).

There are two main types of corporations: Subchapter “C” and Subchapter “S.” The main difference between them is in the way taxes are collected. “C” corporations are the norm. Companies listed on the New York Stock Exchange, for instance, are “C” corporations. This type is good for growing companies in a traditional sense. “S” corporations, however, are better for small businesses, such as artists, who often prefer to be taxed as if still sole proprietorships or partnerships.

Weigh Your Options Cautiously

An artist should first carefully consider whether or not she or he needs a separate business identity for her or his art. To make an educated decision, enlist the help of an attorney and an accountant.

An attorney will advise on all legal pros and cons, and, when appropriate, will be able to set up the corporation in the legal sense. To do so, the attorney will check to see if the name an artist has chosen for her or his corporation can be used, write up a document of incorporation, and file all necessary papers. An accountant, on the other hand, will lay out an artist’s new responsibilities and expenses that come with establishing a corporation, including having her or his books audited annually, paying taxes on corporate profits and payroll, and more.

Prior to incorporating, an artist should complete a careful cost/benefit analysis of establishing and maintaining a corporation. Typically, the cost of setting up a corporation from start to finish is around $1,500. Furthermore, there are additional annual costs to consider, including yearly accounting bills and annual taxes (there is an annual minimum fee) starting at several hundred dollars on up. Incorporation may not always be the most cost-effective solution for many artists.

Be aware that incorporation is a serious step and it implies an acceptance of ongoing responsibilities. An incorporated art business will also become more administration-heavy (regular filings, bookkeeping, etc.). In other words, the corporation itself will need to receive ongoing tender loving care, in addition to the attention an artist pays to her or his own creative work. Do not incorporate unless a very clear need and benefit can be identified. There may also be alternative solutions to treat specific business-related issues, such as improved insurance plans, hiring new consultants or employees, or others.

When to Incorporate

Very few artists just starting out will have any need to even consider incorporation. Here are a few reasons, however, to consider it:

• Liability protection for personal assets (particularly for projects that employ other people or have the potential for physical injury or property damage);
• More than one owner of the art business;
• To raise money for a specific project through investors;
• Tax and payroll tax savings for “S” corporations;
• Ability to conduct business in multiple states;
• Better access to certain small business services, including loans, insurance, and more.

Incorporation Resources:

Volunteer Lawyers for the Arts New York: 212.319.2787 x1 or www.vlany.org. Contact for legal advice relating to incorporation.

New York State Department of State/Division of Corporations: 518.473.2492 or www.dos.state.ny.us. Contact for incorporation filing information, forms, and fees.

New York State Department of Taxation and Finance: 800.225.5829 or www.tax.state.ny.us. Contact for tax ID numbers and corporate tax payments.

Office of the New York State Attorney General: 800.771.7755 or www.ag.ny.gov/. Contact for guidelines and forms for incorporating or registering as a not-for-profit.

US Internal Revenue Service: 800.829.1040 or www.irs.gov. Contact to apply for “S” corporation status and Employer Identification Number.

The New Tax Guide for Artists of Every Persuasion, by Peter Jason Riley, CPA (Limelight Editions: New York City, 2002).

Poor Dancer’s Almanac, edited by David R. White, Lise Friedman, and Tia Tibbitts Levinson (Duke University Press: Durham, 2000).

(The preceding article is for informational purposes only and should not be understood as business/legal counsel.)

NYFA Quarterly’s columns Ask Dr. Art and The Long Run: A Performer’s Life are made possible through the generous support of the NYFA Source Consortium: Basil H. Alkazzi; Lily Auchincloss Foundation, Inc.; Cordelia Corporation; The Cowles Charitable Trust; The Elizabeth Foundation for the Arts; The Robert and Helen Gould Foundation; Independence Community Foundation; The Liman Foundation; Albert A. List Foundation, Inc.; Virginia Manheimer; The Joan Mitchell Foundation, Inc.; New England Foundation for the Arts; Eva J. Pape; Pew Fellowships in the Arts; The Pollock-Krasner Foundation, Inc.; The Judith Rothschild Foundation; The Marie Walsh Sharpe Art Foundation; and The Andy Warhol Foundation for the Visual Arts, Inc.