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.
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.