Starting an S-Corp LLC is a common misconception among new label and publisher owners in the music business. Many believe it’s the best option, thinking it offers tax savings, professionalism, and anonymity. However, this setup can lead to significant complications and isn't always the best route, especially if your music business is still in its early stages. If you want to establish your LLC correctly and avoid unnecessary headaches, read on.
The Saving Taxes Lie!
The idea that S-Corp LLCs will save your business money on taxes is a myth often perpetuated by registered agents, YouTubers, lawyers, and newbie accountants. While an S-Corp does allow you to separate business taxes from personal taxes, it doesn’t necessarily save you money. Instead, it helps reduce the tax liability on profits, which can then be reinvested into the business. But if your business isn’t profiting significantly, these benefits might not apply to you.
Are You Profiting $50,000 or Better?
An essential consideration before setting up an S-Corp is whether your business is profiting $50,000 or more annually. If not, the S-Corp structure may not be beneficial. To get money out of an S-Corp, you must pay yourself a reasonable salary, which becomes a business expense. However, if this payroll causes your business to run at a loss, it indicates that your business isn’t making enough money, which could lead to financial difficulties.
What Your Paycheck Needs to Look Like
Your paycheck as an S-Corp owner needs to reflect a reasonable salary for someone working full-time in your area. Typically, it would be best if you based it on the median household income in your county or state, keeping it within 10% of that figure as your business grows. Overpaying in taxes on your salary is another pitfall to avoid.
Payroll Services and Tax Considerations
Payroll services for an S-Corp start at around $1,100 annually. However, beyond affording the service, you also need to ensure you can afford to pay yourself a livable salary. Otherwise, you may find yourself in a financial bind.
You Can’t Take Owner’s Draws
Unlike a single-member LLC, in an S-Corp, you can’t just write yourself a check for an owner's draw to cover personal expenses. This is particularly problematic if your business income is your primary source of funds.
What if I Write Myself a Check or 1099 My Business?
You might think it’s a smart move to write yourself a check or 1099 your business. However, doing this evades payroll taxes, which were supposed to come from your paycheck. The IRS is aware of these tactics, especially since you created the EIN with your Social Security number. Expect a knock on your door a few months after your taxes are filed if you try this.
Can’t I Just Take a Distribution?
Taking a distribution from your S-Corp might seem like a way around these issues, but it could trigger an IRS audit. The IRS doesn’t want business owners to abuse tax-free withdrawals from the business.
Why Do They Sell Us This Lie?
New business owners often want to appear as professional as possible, which makes them vulnerable to advice that seems to promise just that. Unfortunately, this dream setup can lead to significant complications down the line.
What Should I Do Then?
The better option for most new music business owners is to remain a single-member LLC. While your tax rate may be around 30%, it’s much easier to manage. The accounting is simpler, and as your business grows, you can hire an accountant to help navigate the complexities.
Use This to Build Your LLC the Right Way
If you're a music creative or executive looking to build your label or publishing company in 60 days or less, with a foolproof, step-by-step process, consider taking the 60-Day Record Label Course. This course will guide you through obtaining real funding, protecting yourself from bad contracts, and keeping middlemen out of your pockets. If you’re still unsure, download the free guide, "10 Ways to Increase Your Record Label Profits," which includes a complimentary split sheet.
Staying a Single-Member LLC
Staying as a single-member LLC will save you from countless headaches and streamline your process. As your business grows, accounting will become more complex, but hiring an accountant will ease the burden.
S-Corp Conclusion
If you are debating whether to start your LLC as an S-Corp, it’s crucial to think about your future financial needs. Consider whether you’ll need immediate access to funds or if you can wait. By staying a single-member LLC, you’re choosing a path that prioritizes simplicity, flexibility, and long-term stability. This decision will allow you to focus more on growing your music business rather than getting bogged down in complex tax structures and potential IRS scrutiny.
Comments