Why should you incorporate?  What kind of corporation should you have?  What about an LLC (limited liability company)?  What are the tax issues?  All of these questions are enough to cause a musician's eyes to glaze over when first confronted with the subject of incorporation.

The primary reason for incorporation is liability protection.  You are operating a business, whether you think of your music that way or not.  Businesses are exposed to different kinds of liability: for contracts, and for torts (injuries or damages due to negligence).  Operating in a corporate form can give you some protection from liability, although it is not ironclad.  Because of the relatively low cost of incorporation in most states, it is worthwhile to have this protection.  Operating your business under the umbrella of a corporate entity can also have tax advantages.

The “standard” corporation is the C corporation (referring to Subchapter C of the relevant IRS regulations).  C corporations have their income taxed at the corporate level.  Any dividends issued by the corporation to shareholders are then taxed to them as income.  For most people operating as small businesses, C corporations are not the best choice because of this double taxation.

A corporation that files the Subchapter S election with the IRS gets to be treated like a partnership for tax purposes.  That is, income earned by the corporation is not taxed at the corporate level.  It is taxed as personal income to the owners of the corporation.  Also, portions of the corporate earnings can be designated as “dividends” that are not subject to the so-called self-employment tax: Social Security, Medicare, etc.  This provision can substantially reduce your tax liability.  An LLC is usually not a good choice for an independent musician, as all income to the LLC is taxed to the individual (like the S corporation), but ALL of the income is subject to the self-employment tax.

Legitimate business expenses can be deducted from the gross income of the corporation, which can allow the owners to shelter portions of their income.   In many states, the annual cost of maintaining the corporation (annual filing fees, etc.) is absurdly low.  Some states may have taxes on corporations that affect your choice of which entity to use.

We are happy to discuss with you the options available to you. 

Disclaimer: The above material is presented for general information purposes only, and does not constitute the provision of legal, accounting, tax planning, or other professional advice.   This information is widely available to individuals from easily-accessible government and private sources, and Portal Production claims no copyright in any of the foregoing material.