When Sarah first started her design business, it was all just “leap and the net will appear.”

She only made about $17K the first year of her business, so she never really had to consider taxes, or even to be bothered by boring phrases like “sole proprietor” or “legal entity.”

But during her first year in Uplevel Academy™, her revenue jumped to $61K. Sarah was ecstatic.

That is, until she got her tax bill for the year. $11,127.23.

This was an unexpected hit to Sarah, who was still riding high on more than doubling her revenue in a single year. (And yes, she was on track to go even higher in the coming year.)

My peeps, this is one of those critical moments.  It’s when you must consciously make a key decision.  That decision will go something like this:

Do I take this growth as an indication and inspiration to keep growing and getting out of my comfort zone? Or do I shrink and leave my big girl panties tucked away in the lingerie drawer?

Well, this brief article is for the Sarah’s of the world. The very ones who are tempted to stay small in order to avoid discomfort, tedium, and lawyers.

Now, I can’t give you legal advice. But I can give you some pearls I’ve gotten from my own trial and error. I’ve built not one, but two business. And I pay more in taxes now than I used to make in an entire year.

So prop your eyes open with some toothpicks and stick it out with me here.  I don’t promise orgasms or pie, but I will make this brief foray into the legal and tax world as un-boring as possible.

You’ll thank me later. 🙂

The Sole Proprietorship: How You Got Started

When you start a business and it’s just you, you’re called a “sole proprietor.”  (That’s in the U.S. Not sure about you peeps in Brazil or Turkey or Yemen.)  This is the easiest path to get you going.

You get a DBA. (“Doing Business As”)

You get a bank account.

And you hit the streets.

But then your business grows. And when that happens, you now have to consider three things:

1 – “Self-Employment Tax”

When you are legally a sole proprietor, you pay something called “self-employment tax,” which is what happened to Sarah.  It can be a huge chunk, especially as you start to Uplevel your revenue.

2 – No Business Entity

Your business name is simply a trade name. It’s not a separate entity from you. All money and debt? It’s yours. Personally.

3 – No Legal Protection

The result of the set up in #2 is that you don’t have legal protection if anything goes wrong.

(And if you’re thinking, “Christine! What could possibly go wrong?”…ask me over a glass of wine some night to share the story of my New Year’s Eve performance at a church when I thought it would be a good idea to light up a lonely dried-up advent wreath to lend some “ambience” to the evening.)

This brings me to the TWO BIG REASONS to stop being a sole proprietorship…

1 – Tax Reasons

When you form a corporation, you create an independent tax-paying entity. What this really means is that your corporation — not you, the owner — pays the income taxes on your business profits.

And the corporate tax rate is typically lower than the personal tax rate.

2 – Legal Reasons

When you form a corporation, it’s an independent legal entity owned by its shareholders (which may just be YOU at this point, which is fine).

The point, you ask?

This way, you’re not legally liable for the debts or actions of your business. The business corporation itself is.

SO! What this means is, when some lawyer calls you up and wants to sue you for everything you’re worth because the dry pine needles on an advent wreath caught on fire during your performance and singed a mark in the carpet of the church…?

…then your ass… (and your assets) are protected.

(I know. You’re thinking, “I’d never be that stupid” But you never know. In a super-litigious world, this protection is worth thinking about. Trust me. I even offered to pay out of pocket for the damage – but they chose to come after me for everything they could get. And they got nothing.)

The Dark Side of Incorporating

Now, before you think this all makes sense and you’ll just swing by the attorney’s office on your way home today, here are some things to consider…

1 – It costs a good chunk of cash up front

Depending on how you do it, and how much cash you have on hand, setting up a corporate entity can be costly. Especially if you’re just riding the winds of a new higher income level. (Which doesn’t equate to “cash is sitting around waiting to be handed to your new lawyer with the giant leather furniture that has all the gold studs in it.”)

There are online legal services which can defray costs. However, I recommend having a lawyer do the work for you.

Here’s why:

If you are at all like me and like my clients, then you aren’t a huge “detail” person. Though some people would like you to feel ashamed of this fact, I’ll tell you to honor it, and recognize that it’s a gift. 

But it also means that it’s worth it NOT to DIY something that has lots of small print. One over-looked DIY glitch can affect you many years down the road… when you least expect it.

2 – Tedious paperwork

With a more complicated business structure, you’ll have higher administrative fees and more complex corporate tax returns. It will take time to understand and align with a new framework for turning in required documents and financial info.

Do I have to incorporate? What about an LLC?

Besides incorporating, another option is an LLC — Limited Liability Corporation. Both routes have their pros and cons, depending on your ultimate goals; every business is different. Do your homework here. Have a conversation with your accountant or lawyer. 

Bottom line is this:

Yes, it’s easier to continue down the well-worn path, pay a few more taxes every year, and not be burdened by all of these unpleasantries.

But if you’re like me, and I suspect you might be, your business is your passion, your unique expression — your purpose.

Give it the structure it needs to outgrow the “leap and the net will appear” idea that got it started. That way, it has a chance to become a true movement that changes the world.

And you get to sleep better and do the important work you need to do with all the energy you need to make it grow.

21 COMMENTS ADD A COMMENT
  • David

    I went the online LLC route. Needed to hear this again. So I can realize where I am at is just a stepping stone to a bigger level of growth. Lawyer, more responsibility and accountability to my passion. More earnings. Expansion. I feel like the first day of school 🙂

  • Christine Morse

    Thank you for your time Christine. I adore you and have referred several people to your site and information.

    Have a great day.
    Christine

  • Mary Therese Christoffersen

    Thanks for caring enough to share your experience with us. For sure will look into this

  • Janell Pekkain

    This is such good advice. I wish I had had it when I first started and even as recently as six months ago when I switched my entity from General Partnership to LLC single member (then canceled it because of timing and all of the changeover that needed to happen before tax time that I didn’t make time for) and ended up with a Sole Prop. I’m STILL dealing with changing everything from health dept permits to EIN to bank accounts. I have a sickening feeling knowing that I’ll need to change again to step into those big girl panties. The self-employment taxes are painful. So wise to start off with the best entity for your big business dreams.

  • Caroline

    Currently I’m DBA … with my artist name as the name. At what point would I switch to LLC or s Corp?

    • Christine Kane

      Caroline – I would have a chat with your accountant and weigh out the benefits of either one. When I was a musician – my accountant urged me to incorporate the year I got to about $80K and it looked (and I had intended!) like I would keep going higher and higher. (Always take into account your own intentions!)

  • Mary Bryson

    Hi Christine,
    I already have a business that’s incorporated. It’s my name, Inc. I’m starting something new and was wondering what do I need to do to do DBA under my existing corporation.

    Mary

    • Christine Kane

      Mary – I think it’s a pretty simple process of going to the chamber of commerce and applying for a DBA – but i’m not sure if it differs state to state!

  • Tammy

    Oh no…my quarterly reporting got packed. 🙁

  • Andrea Mock

    As a sole proprietor you can get general liability insurance. Mine costs about $200 a year. That’s an in-between solution if you don’t want to grow big, which I don’t.

  • Patrice A Federspiel

    Great Timing Christine! This has been on my mind a lot lately, apparently the time to take action is NOW! Thanks for the nudge.
    Aloha, Patrice

    • Christine Kane

      Go Patrice! (and i’d say that YES, as successful as you are…it’s definitely time. 🙂 )

  • Sandy Rees

    I JUST went through the process to switch from a sole proprietor to a corporation. It was a nightmare of paperwork, opening new bank accounts, new credit cards, etc., but it was worth it. I FEEL different about my business now – it’s a real business. And I’m the CEO and President. Breathing that one in every day. 🙂

  • Alexandre L’Eveille

    Great advice. I did get a DBA early on (2004) when I decided to be a business, but it was not until about 2013 that my accountant recommended setting up an S-corp.

    I think for those of us in the creative fields especially all that icky legal and accounting stuff is zero fun and a deep dark cave full of dwarf wielding axes that we avoid like the plague. But, of course, the thing we fail to confront is that thing that comes back to bite us in the a$$.

  • Marsha

    Ha! Great timing!

    I haven’t started my business yet but I was scheduled to have lunch with an accountant today to discuss what legal form it should take. And here I thought I was putting the cart before the horse…!

    Lunch is rescheduled because of the snow problems still in the WNC mountains. But I am coming to Click. I will not be stopped!

    Thanks for this quick breakdown, Christine. You answered several questions.

    Cheers!
    Marsha

    • Christine Kane

      Marsha – You are most welcome! “I will not be stopped!” I like that! can’t wait to see you at CLiCK!

    • Christi

      Hi Marsha…. I’m a CPA too and I’ll be at Click….. more than happy to give you some info if you’d like!

  • Michelle

    I hired my first accountant (yes!) and the first thing she suggested was switching my business from an LLC to a corporation. Not only will this save us money on our taxes moving forward, she was able to refile our 2014 taxes under this new corporation and we’re getting back nearly $4,000! I had no idea. This is why you hire professionals. And, since my husband will no longer be handling our taxes, the stress level in our marriage will be nothing like it was last April!

    • Christine Kane

      Michelle! If I could upload a photo of me toasting you with my gorgeous champagne flutes, I would totally do that! i loved reading this!

    • Christi

      I’m a CPA and so excited that you went and got the good advice! So many people think a simple LLC alone will save tax dollars and they are wrong…. Sub-S corp structure will (up to a point) but C corp structure is very bad. There are some clear lines and lots of grey areas. Good for you and congrats on that $4,000!