Episode 012 – Andrea Yahr on Business Structures and Their Tax Implications

Subscribe on iTunes, Stitcher, Google Play Music, or wherever you get podcasts!

Summary

Andrea Yahr, accountant and tax preparer, explains the different business structures (sole-proprietorship, LLC, S-Corp, C-Corp) music teachers can choose from, and when different structures might make sense.

She also clear up some often misunderstood information around self-employment taxes and shares loads of resources.

Takeaways

Business Structures

A sole proprietorship is a good option for an individual who makes a small income from their business, or it isn’t their full-time gig. There isn’t a lot of paperwork involved and it is a good option for business that are considered “low risk.” By default, any music teacher who starts teaching lessons is a sole-proprietor.

If you want to distinguish your business from yourself by using a name that is not your personal name, consider registering a trade name to begin establish a brand for your business.

A partnership has the same criteria as a sole proprietorship, with the difference being you’re going into business with another individual.

As your business grows, liability can change. With these changes it’s time to consider registering as an LLC. This structure gives the business owner a hedge of protection between their personal and business lives from the potential unhappy customer.

Businesses that grow to have one or multiple physical locations or a number of employees might decide to transition to a corporation (C-corp or S-corp). Setting up a corporation is more complicated and requires forming a board of directors, developing policies, etc. It’s wise to consult a lawyer for help with all the paperwork required for this business structure.

Steps to Registering a Business

Find the business services section of your Secretary of State website
Verify that your business name is available
Register a trade name or a DBA (doing business as)
Register your business
- An LLC will file Articles of Organization
- A partnership will file Articles of Partnership
- An S-corp or C-corp will file Articles of Incorporation along with other requirements
Cost is usually < $300 if filed independently. LegalZoom, some accountants, and other similar services are an option if you want someone to file for you.

Not all businesses follow the same development pattern! The structure you choose really depends on the needs of your business. The U.S. Small Business Administration (SBA) is a helpful resource for understanding the various business structures as well as the steps for registering a business.

Tax Implications

Teachers who set up their studios as sole proprietorship or single-owner LLCs file the same tax returns. Both file a schedule C along with the 1040 form, and self-employment taxes are paid with either business structure. There is a special circumstance when an LLC can file taxes as an s-corp and not pay self-employment tax, but this is not commonly done and requires additional paperwork.

For the teacher friends who work as independent contractors, they should keep track of all out-of-pocket expenses that are not reimbursed by the music school. They will receive a Form 1099-MISC every year, will have to pay self-employment tax that should be completed in quarterly estimated payments, and will likely have to file a schedule C.

An EIN is a federal employer identification number that is required when you are going to have employees. As the business owner, it’s nice because you can use the EIN on tax forms that you give to employees and contractors instead of using your own social security number. A sole proprietor is not considered an employee, so an EIN is not required in this situation, but there’s really no reason not to get one, since they are free and easy to obtain online.

EINs are only granted once per social security number, so if you’re a sole proprietor and plan on owning multiple businesses, don’t count on getting multiple EINs.

Self-employment tax payments are required by anyone who owns a business of any structure and makes more than $1000/year. Self-employment taxes are 15.3% of profits earned and can be paid quarterly.

Generally, setting aside 25% of profits will be enough to cover self-employment, federal, and state taxes. It is wise to calculate what this amount will be for your business and to set aside the money monthly to avoid surprises.