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.
In the past few years, e-sports (playing video games competitively for profit) has seen staggering growth in the United States. This growth has largely been fueled by the development of a professional tournament association, the inclusion of e-sports in the X Games competitions, and at its core, technology which allows players to connect and compete in ways never previously possible.
Viewership of the e-sports tournaments is also extremely high. Last year, online viewers watched a total of 2.4 billion hours of competition footage. Live events have also sold well, prompting Major League Gaming (the preeminent e-sports tournament body) to establish an arena in Columbus, Ohio. As with the rapid rise of any industry segment, e-sports tournaments have received sponsorships from well-known brands such Coca Cola and American Express. Although the tournaments and their governing bodies have received substantial sponsorship income, teams have not had the same financial success.
Many teams are able to secure small sponsorships which supply products such as controllers and apparel. However, there is a lack of sponsorship dollars supplied to the teams, which may be what is needed most as the expenses of professional gaming can be high. One of the reasons that teams have difficulty securing sponsorships is due to their business organization, or rather the lack thereof.
For e-sports to develop into a true professional league, and for teams to see the sponsorship dollars they desire, teams will have to learn from the businesses of their MLB, NFL and NBA counterparts. Firstly, professional sports teams are business entities, not just a group of people who are acting together. This is extremely important because State law differs as to whether unincorporated associations can enter into contracts, and as to the rights of these associations as a whole. Further, choosing a business entity for the team simplifies the sponsorship process for the brand as it eliminates any question regarding whether the contract is enforceable.
The choice of what business entity to select is a trickier subject, and would have to be determined on a team by team basis. At this early stage of professional gaming, there is no "one size fits all" approach. Professional sports teams have Owners and front offices that handle the business end of the team while the players play. However, that wouldn't be the case at this stage of e-sports. Simply put, the players will also have to handle their team's business. That can become problematic in several situations, especially when team members are minors. Minors' business activities are restricted by State and Federal law, but State law may allow for some creative business-formation possibilities if there are team members over 18 who can start the business. For instance, some states allow minors to be shareholders in a business. Any team considering turning their team into a business should consult an attorney before doing so.
There are a myriad of reasons teams don't receive the sponsorships they desire, including the lack of a formalized business structure. If your team wants to be treated as a legitimate business, make sure your team is actually a business first.
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 impacts the business' ability to raise capital. Further, it is difficult to change business entities once the business is running, and doing so may incur substantial costs. This post will be the third, and final, in a series of explanations of the different corporate entities as well the features that make them attractive or unattractive to new businesses.
The final two types of business entities to discuss are known as C corporations and S corporations. Although the corporate entities have important differences, the formation of the corporations is the same. Firstly, it is important to recognize that a business which wishes to incorporate should do so in Delaware, as the State has the most robust corporate governance law in the country. In order to create a corporation in Delaware, the business must first choose a name including some derivation of one of the following words: Incorporated; Institute; Society; Union; Syndicate; Company; Club; Foundation; Corporation; or Limited. This name must be unique. Next, the business must prepare to file the certificate of incorporation. On the certificate, the business must state its registered agent, the nature of the business, the amount of shares of stock of the incorporators, the directors, and addresses for all named parties. Once completed, the certificate of incorporation must be filed with the State. Delaware also requires that corporations maintain written bylaws, although they are not required to be filed with the state. The bylaws establish the rules and procedures of the corporation, such as the size of the board of directors, the board's responsibilities, who may call shareholder meetings and where the meetings are to occur. Next, the corporation must appoint its initial corporate directors, hold its first board of directors meeting, and issue stock. Lastly, corporations must comply with any other business, tax, state (if conducting business outside of Delaware) or industry specific regulations, such as obtaining the necessary licenses to do business and filing other required paperwork.
The sole additional step in forming an S corporation is that the business must designate "S" status with the IRS within 75 days of the incorporation date (the date the business filed the certificate of incorporation). The S corporation must also meet the additional requirements of not having more than 100 shareholders, the shareholders cannot be non-resident aliens or corporations, and S status must be approved by all shareholders. These requirements generally necessitate that S corporations are small businesses.
The key distinctions of S corporations and C corporations are in the benefits that each structure receives. Although the directors and shareholders of both corporate structures enjoy limited liability, S corporations are taxed as "pass-through" entities, like LLCs and sole proprietorships. This means that the profits are passed directly to the shareholders, who must report their share of the profits as income on their personal taxes. In contrast, C corporations' profits are taxed twice as the forming of a C corporation creates its own taxable entity. The C corporation is taxed when it turns a profit, and is also taxed when the corporation pays dividends. However, a distinctive advantage for the C corporation is its ability to attract investors due to its highly regulated structure. Simply put, the regulated nature of C corporations makes the structure predictable and easily understood by investors. Contrast that with LLCs which are similar but can be structured any way the members please. Additionally, C corporations are also attractive to investors as shareholders are not subject to taxes unless the corporation pays them through dividends, distributions, or salary. This relieves investors of the possibility of being taxed on money they may not have necessarily received, as could happen under "pass-through" companies such as LLCs or S corporations.
The disadvantages of S and C corporations are few. Firstly, the requirements of S corporations, particularly that its limited to 100 shareholders, limits S corporations to small businesses. It would be extremely difficult, if not impossible, for a large corporation (or a company planning on expanding very quickly) to limit itself to 100 shareholders. Additionally, S corporations are restricted to one class of stock. Multiple classes of stock are normally issued in C corporations to establish different levels of voting rights. Under a single class of stock, the voting rights are equal. The disadvantages of C corporations are predominantly administrative. C corporations are costly and time consuming to start and operate. Additionally, C corporations have increased paperwork and recordkeeping burdens as it is highly regulated by federal and state governments. The most notable disadvantage to C corporations is the double taxation at the corporate and individual level. However, corporate tax levels are favorable as compared to income tax.
As a result of its requirements, advantages and disadvantages, S corporations are best suited for small businesses who seek greater structure than LLCs have to offer, and intend to remain small businesses. The 100 shareholder requirement is limiting, and it is important to note that changing corporate structures can be costly. As for C corporations, they are best suited for businesses that plan to utilize investor funding and/or plan to expand rapidly into large corporations. The startup and operating costs are greater than its S corporation counterpart, but any need for investor financing logically requires a business to form a C corporation.
These are just some of the advantages and disadvantages of LLCs. It is important to remember that the best choice of entity varies business to business.
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 impacts the business' ability to raise capital. Further, it is difficult to change business entities once the business is running, and doing so may incur substantial costs. This post will be the second in a series of explanations of the different corporate entities as well the features that make them attractive or unattractive to new businesses.
An LLC is an unincorporated business organization established by a single member, or group of people, who have limited liability for the debts and liabilities of the business. State law determines the formation and operation of an LLC. To form an LLC in New York, the organizing members must file the business' Articles of Organization with the state and pay the requisite fee. Subsequently, a notice that the LLC was formed must be published in two newspapers (that are designated by the county clerk of the county where the LLC is located) consecutively for six weeks. A Certificate of Publication, affidavits of publication in the newspapers, and the requisite fee must then be filed with the Department of State within 120 days of the initial filing of the Articles of Organization. The timing of the submission is important, as failure to provide this documentation would result in the suspension of the LLC's ability to conduct business. Additionally, the members of the LLC are required by New York law to adopt a written Operating Agreement. Under New York law, this agreement must be entered into no later than 90 days after the filing of the Articles of Organization. This document does not get filed with the State but is maintained internally by the LLC. Lastly, depending on the industry the LLC does business in, the members may have to comply with other tax and regulatory requirements. Although there are fees and several steps required to form an LLC, the benefits to its members are substantial.
The LLC is a flexible business structure that avoids some of the pitfalls of sole proprietorship. This entity allows the business to add members as it sees fit, unless otherwise provided for in the Operating Agreement. The necessity of an Operating Agreement also allows businesses to create its own organizational structure. One of the greatest advantages to the LLC is that members enjoy limited liability. This means that the members do not share in the liability of the business' debts or judgments like sole proprietors do. Essentially, the business insulates its members from liability by absorbing any debt or judgment. Limited liability is extremely beneficial to the members as their personal lives are not on the line with every debt or lawsuit. Additionally, LLCs are usually taxed like sole proprietorships, as they are considered "pass-through" entities. This means that the LLC's members report their share of the business' profits on their personal tax return. LLCs can also elect to be taxed as a C or S corporation instead of "pass-through" taxation (which will be discussed in a future blog post).
The disadvantages of LLCs are few, but could be impactful to a business. Firstly, it may be difficult for LLCs to raise money from investors. Generally, investors are hesitant to invest in LLCs due to the lack of a mandatory corporate structure and "pass-through" taxation structure. Simply put, investors may not be amenable to investing in LLCs because they would be taxed on a share of profits from the LLC, despite potentially not receiving any money to pay the taxes, and/or have tax-exempt partners who do not want to receive business income. The need for investor funding should be heavily weighed during business formation. If investor funding is, or will be, necessary for the business to thrive, it may be more advantageous to form a C corporation. Additionally, it is a disadvantage that there are no structural requirements to an LLC because it necessitates an all encompassing, tightly drafted, Operating Agreement. Such an agreement can be difficult to draft, review, negotiate and agree upon between the members.
These are just some of the advantages and disadvantages of LLCs. It is important to remember that the best choice of entity varies business to business.
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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