Whether it’s apparent or not, streamers and influencers are each a business. However, many of these individuals have not considered that their current business entity structure may not be the best option for them, given the risks at stake and the protections that could otherwise be available to them. Let’s explore the different types of entities and how they relate to streamers and influencers.
Sole proprietorships are one of the most commonly used business structures by streamers and influencers in the videogame and esports industries, as they are the simplest to create. In order to ”create” this structure, no formal action is necessary. The sole proprietorship is created once the individual begins performing business activities. As a result, streamers and influencers often operate under this designation without being aware of it.
Sole proprietors can operate under their own names, or a trade name. If an owner does decide to use a trade name, states generally require the owner to register the fictitious business name with the state. Any trade name should always be unique.
In addition to its uncomplicated setup, the taxation of sole proprietorships is relatively easy since there are no distinctions between owners and their businesses. Any income earned by the sole proprietorship will be reported as income by its owner on his or her personal income taxes. The owner will also have to report any losses to the business on their personal taxes.
Though a sole proprietorship is the easiest kind of business to establish, it’s also the most risky.
Limited Liability Company
LLCs are a popular entity selection for business owners because they provide their members with the benefits of limited personal liability and tax flexibility, while still being relatively simple to create and operate. LLCs are created by filing the requisite certificate of organization with the state where the LLC will be located.
The most substantial benefit to an LLC is that its owners are not subject to personal liability for debts/liabilities incurred on behalf of the business. Since LLCs are designed to separate business assets of the company from personal assets of its owners, the owners’ personal assets remain protected while the business’ creditors are only able to reach the business’ assets. For streamers, this protection from liability means that if, for example, you are sued for failure to perform your sponsorship obligations, the only assets that the sponsor could sue you for are the business’ assets (your computer, the business bank account, etc.) and NOT your personal assets and income that your business has paid you to perform your services. Accordingly, this is an easy way to protect your life from the activities of the business.
With respect to taxes, profits and losses from an LLC pass through to the owners’ tax return and losses can be used to offset other the owners’ income, but only up to the amount invested. As with sole proprietorships, this is helpful as the business itself is not subject to its own taxes.
LLCs are a good option for streamers and influencers because it shields liability while still allowing the streamers or influencers to profit off of their business as they would have if there were no business entity in place. However, it is important to note that the liability protection is not perfect, as certain actions can limit and/or destroy that liability shield if the LLC is not managed properly.
Corporations are the most rigid business structure. Corporations are created by filing an articles of incorporation with the State. Once the company is incorporated, it issues stock to its shareholders in exchange for cash or other assets. The amount of stock each shareholder receives determines the shareholder’s ownership percentage in the corporation. There is no limit to the amount of stock that can be issued.
Choosing to set up an organization as a corporation will provide its shareholders with several benefits. Similar to that of an LLC, corporations provide its owners with protection from personal liability. Additionally, this type of structure is generally more attractive to investors than an LLC. Furthermore, companies using this type of structure may also use stock as a business incentive to their employees. This has become a popular option for start-up companies who, in their beginning stages, do not have the amount of capital required to pay talented employees. However, corporations are taxed separately to its owners, meaning that any profits that the business earns are taxed at the corporate level, and then any profits paid to the owners are taxed as income.
Corporations are not ideal business entities for individual streamers and influencers due to the rigid nature of the structure and double taxation. However, it is plausible that a corporation could be a good fit for a group of streamers or influencers who wish to come together and create a business bigger than any of them individually.
Streamers and influencers should be aware of the various business entities that they could utilize to perform their services while possibly offering themselves a shield from liability. Though it may seem odd, any streamer or influencer is a business unto themselves. Though the choice of business entity will always vary based on the business owner’s circumstances, exploring the possibility of creating an LLC to perform their services is a sound business decision. If you’d like to discuss how our attorneys can help you establish your business, please contact us.
When starting a business, one of the most important choices that is frequently overlooked is the business entity selection. The choice between forming your business as a sole proprietorship, partnership, LLC, C Corporation or S Corporation is much more than a choice of letters. Each entity alters how the business must be structured, how taxes are reported and paid by the owners, and the impacts the business' ability to raise capital. Further, it is difficult to change business entities once the business is running, and may incur substantial costs. This post will be the first in a series of explanations of the different corporate entities as well the features that make them attractive or unattractive to new businesses.
Sole proprietorships are a common business structure for single owner small businesses. Forming this type of business entity is very simple. Several states, including New York, only require you to register with the state if you will be doing business under a name other than your own. For instance, if Bob Jones opened up Happy Time Graphic Design in New York, he would have to register his sole proprietorship with the state. On the other hand, if Bob Jones were to do business under his own name, he could operate his graphic design business without having to register with New York. This ease of formation is what attracts single owner small businesses to this structure. Additionally, under the sole proprietorship, income is directly imputed to the owner. That means the business income is reported on the owner's taxes directly.
Sole proprietorships have two main disadvantages. Firstly, the business owner and his/her line of credit is all that is available to the business should it need additional capital. This could become particularly problematic if the business owner's credit score is low. In contrast, other business entities have the multiple methods to raise capital for their businesses. Secondly, and most importantly, sole proprietors face unlimited liability. This means that the owner can be personally sued for any debts obtained in the process of running the business or any accidents at the business. For most, the risks should outweigh any advantage. Hypothetically speaking, a sole proprietorship structure is not worth losing your family's home because someone slipped at your business and broke their arm. Yes, an owner should have insurance which would help mitigate the liability faced by the owner, but the coverage may not be sufficient.
So what types of businesses are best suited for a sole proprietorship? Home businesses are best suited for sole proprietorships. Assuming that the home business does not meet with clients in the home, the liability risk for accidents on the business premises is eliminated. The business would still be liable to creditors, but at home businesses generally operate with little overhead as compared to their storefront counterparts, so the need for a line of credit may also decrease.
These are just some of the advantages and disadvantages of sole proprietorships. It is important to remember that the best choice of entity varies business to business.
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