Launching your own art startup can be scary, whether you are opening a photography business, a gallery, or a software company building new apps for mobile devices. Each day you discover more things you need to accomplish to move your business forward. There are not enough hours in the day. Many entrepreneurs in creative industries, whose focus has been on creativity, find legal or financial aspects of their business overwhelming. Given the limited time and money available during a business’s startup phase, it’s not surprising the areas we are least familiar with take a back seat to more tangible needs, like buying equipment, creating marketing materials, or renting an office. The economics usually win out over legal needs or longterm planning. That doesn’t mean that unfamiliar areas should be neglected in the start up phase due to discomfort or limited resources. Rather, the trick is to find an economical way of accomplishing these important tasks, and perhaps, to find someone to guide you through the process without it costing you an arm and a leg. Here are a few tips and online resources that may help.
Incorporation and Liability Protection
First, it’s important to start any new venture with an appropriately formed corporation. Why is a corporation necessary? Well, besides some significant tax benefits, a corporation is designed to shield the owners and manager from putting their personal assets at risk. For example, let’s say you are a wedding photographer. You have a wife, a new baby, and just bought your first house. Out on the job, you are taking pictures from the top of a ladder, which you brought to the event. Unfortunately, the ladder collapses and you fall into a guest, who then hits his head and is rushed to the hospital. The guest sues you for negligence. If you did not set up a legal entity from which you conduct business, then should the guest win, you would be personally liable. You could be forced to sell your house, for example, if you could not afford to pay. On the other hand, with the proper corporate setup, only company funds are at risk, and your personal assets would likely be secure.
So, let’s discuss choosing a structure for your startup. Should you start an LLC, an Inc., or just a Partnership? While Partnerships and Sole proprietorships are the easiest to manage, and certainly the least expensive to set up, they are risky because they don’t protect your personal assets. Limited partnerships (LP), limited liability partnerships (LLP) Limited Liability Companies (LLC) or Corporations (Inc.) create distinct separations between the company and you, which protects your personal assets from potential claimants. This is known as the corporate veil. However, the corporate veil can be “pierced” under certain conditions, making your assets vulnerable. Having a well thought-out Operating Agreement, Articles of Incorporation and other formation documents are important to ensure that the corporate veil is intact.
There are many other benefits to the various business structures, although too many to discuss in this overview. So, it is important to discuss your business with an attorney who can help you choose the right formation and create proper documentation. But that’s the problem, right? Legal counsel is very important, but few startups have the money for expensive attorneys.
One option is to do much of it yourself, and have an attorney review what you have done, rather than having the attorney incorporate you and write your Operating Agreement from scratch. For corporate formation, try specialized online services, such as Biz Filings, My Corporation, or the Company Corporation. Each site provides easy-to-use online tools that guide you through the formation process and help you with the specific filing requirements for each corporate structure in each state. Some, like Biz Filings, provide live consults along with products and services useful to entrepreneurs. For sample legal documents, such as Articles of Incorporation, Non-disclosure Agreements and Contracts, look at legal document sharing sites like Docracy. Download multiple versions and mix and match sections. Understand, however, that these tactics should only be considered temporary, not substitutes for attorney-crafted documents specifically tailored to your company. When you have the resources, you should consult an attorney and have the documents redrafted to take into account the specifics of your business.
SCORE for Business Consulting
There is so much to know when launching your art startup. The problem for most people who have not been through it before is that you don’t even know what you don’t know. While you can certainly do the research, or visit sites like Artrepreneur, there is often limited time to both build the business and learn how a business should be run. One effective shortcut is to find a mentor willing to help you, or at least someone you can ask questions. If you cannot find a good mentor, consider contacting one of the myriad of non-profit organizations around the country that provide financial consultations and legal advice.
One of the most popular is SCORE, a national organization started in 1964, which provides mentoring services to small businesses. SCORE has local chapters throughout the United States where you can meet with mentors, see seminars, or participate in workshops on topics ranging from creating business plans to marketing and financial planning strategies. SCORE partners with the U.S Small Business Administration, (SBA) which is also an excellent resource. The SBA provides low-interest loans to help startups and small businesses. Additionally, you may be able to find non-profit organizations in your area that cater specifically to the art industry. In Miami, for example, Canonball provides affordable legal services, grants and educational opportunities for the art industry. In New York City, a great organization catering only to the art community is the Volunteer Lawyers for the Arts (VLANY).
Financial Accounting and Bookkeeping
Another challenge for the creative entrepreneur is financial accounting and bookkeeping. Bookkeepers can also be an unaffordable expense for an art startup. As an alternative, there are inexpensive cloud-based solutions that are not only comprehensive, with reports and other tools that help you understand your financial position, but also fairly easy to master. A few of our favorites are Freshbooks, Zoho Books, or Xero. They require minimal setup, include excellent documentation and video tutorials to help you get up and running quickly, and are robust enough to handle your business as it grows. They save you time by pulling transactions directly from your bank. Just click “approve” or make a change to the transaction type and you are done. Push a button and generate reports that analyze your business or print ones needed to complete your taxes. You can give your employees limited user access, which allows them to work only with the specific items they need. Some, like Zoho, have additional modules such as a Customer Relations Management (CRM) to manage business contacts, clients, and sales leads or Project Management to manage tasks and resources.
The last tip applies to an item that is often overlooked until the end-of-year tax meeting with the company’s accountant (if you’re lucky enough to have one). That is corporate deductions. Companies can deduct expenses against income, but not all expenses can be deducted, or some may only be deducted in part. For example, a sole proprietorship cannot deduct the full price of equipment purchases in the year that they are purchased; they must account for depreciation of the equipment value. That isn’t true of an LLC (and another reason why it is critical to pick the proper corporate formation): If you made $50k in 2016 but also bought $15k worth of camera equipment, then your declared income from your LLC would be $35,000. If you were a sole proprietorship, then your declared income could be $45,000 or more, depending on how much of the equipment depreciation is allowed. Each state has its own rules, so depending upon your business needs, you may want to incorporate in a different state than the one you operate in. One of the most popular states for incorporations is Delaware, due to its laws being very favorable to corporations.
Additionally, there may be expenses that you didn’t even know were deductible, which is like leaving money on the table. It’s always a good idea to have an initial meeting with your accountant, who can tell you the kinds of things you should track. All you have to do is mark those categories of expenses as tax deductible in your accounting system. These items will be broken down in your reports. The more you can do before handing over your information to an accountant, the less he or she is likely to charge you for services.
You may also want to get a company credit card and use a different accounting program and even a different bank for your business and personal finances. Remember we talked about the corporate veil earlier? Well, one way that a potential creditor can pierce the corporate veil and come after your personal funds is if you mix your business finances with your personal finances. Think of it like this: if your personal and business finances are so intertwined that it is hard to tell which is which, then the courts won’t make the creditor figure it out. The court will just lump all of the finances together, and your personal assets would be available to the creditor. Having a business credit card and separate banks will help ensure that all business and personal finances are separate.
Launching an art startup is not easy. It can result in a lot of stress and sleepless nights, but being your own boss can be incredibly rewarding. The best chance for success is to make sure that the business is set up properly from the beginning, with the right technologies to make your business efficient and profitable. These few tips and resources are just a starting point. There are many other ways to get things done or get help without it costing too much in money and time. So before you think, “I don’t need that now, I can put it off until later,” perform a quick search for support and resources, like organizations and online tools that can help your art startup succeed. You may find you’re able to tackle some of these daunting tasks more easily than you think.