Choosing the Right Legal Entity for Your Social Media Business

Helping Clients Navigate Legal Entity Options for Their Social Media Business

Most social media businesses are solo businesses, meaning you are the owner, administrator, CFO, content creator, editor, designer, and marketing department. The buck stops with you, but that doesn’t mean the liability should.

Once you consistently generate income from your content – such as with ads, sponsorships, brand deals, or commissions through affiliate links – it may be time to form a legal entity. And ideally, before you sign a major contract.

Other signals that it is time to set up your business as an LLC or other legal entity include:

• Your social media following is growing exponentially, and you’ve attracted more than four or five thousand followers;
• A piece of your content has gone viral;
• Your content covers highly regulated topics, such as financial advice or health and nutrition information, or you target a younger audience, including minors; or
• You draw income from several sources, have partners or investors, or are ready to hire employees.

If you are a social media “solopreneur” and have reached any of the milestones above, consider setting up your business as a legal entity. Without one, your business is essentially a sole proprietorship.

Call Hendershot Cowart P.C. today at (713) 783-3110 or contact us online to learn more about forming a legal entity for your social media business!

Understanding the Pros and Cons of Operating as a Sole Proprietorship 

A sole proprietorship is a business owned and operated by one person and is not a separate legal entity from the owner. The owner is entitled to all profits but is also responsible for the business's debts, losses, and liabilities.

It requires no formal registration process; you can operate under your name. Note: If you do not conduct business under your legal name, Texas law requires you to file a “Doing Business As” (DBA) form with the county clerk’s office in the counties where you are conducting business.

The IRS does not differentiate income from a sole proprietorship from other personal income. That means you report all business income and expenses on your tax return, which can be more straightforward, especially for new businesses.

A major drawback, however, is that you have unlimited personal liability. This means your assets (like your car, house, or savings) can be at risk if your business faces lawsuits or debts.

A sole proprietorship is a good way to test the waters of a business idea or for businesses with minimal income and expenses. However, if you plan to grow your business significantly, engage in contractual agreements with sponsors, hire employees, or create content related to a high-risk or highly regulated industry, a limited liability company (LLC) might be better.

Exploring the Advantages of Forming an LLC for Your Business 

An LLC offers a key benefit: limited personal liability.

An LLC limits personal liability because it is legally separate from its owners. An LLC is responsible for its own debts and obligations, and owners’ personal assets cannot be used to satisfy business debts. Limited liability may also make securing a line of credit easier for your business.

Other benefits of an LLC include:

• Pass-Through Taxation: LLCs are considered pass-through entities. Like a sole proprietorship, profits and losses pass through to the owners’ tax returns, simplifying your tax filing responsibilities. LLC owners do not have to file a corporate tax return, and the business doesn't pay income tax. Owners simply report their share of profits and losses on their tax returns.
• Management Flexibility: LLC owners have greater flexibility in running their business. Unlike corporations, LLCs are not required to use a formal governance structure or establish bylaws. LLCs also have greater flexibility in profit sharing and are not required to distribute profits equally or by ownership percentages (if they have partners or shareholders).
• Tax-Deductible Business Expenses: The IRS recognizes an LLC as a business, allowing you to deduct tax for business expenses related to your social media influencer business or content creation. Your accountant can advise you on which expenses are deductible or not.
• Brand Protection: Creating a separate business entity, such as an LLC or corporation, is not mandatory before trademarking your brand name. However, registering your trademark under the business name is advisable to protect you from any liability resulting from that trademark, such as infringement claims or licensing issues.

Forming an LLC requires filing paperwork with your state's Secretary of State. The LLC formation attorneys at Hendershot Cowart P.C. can create your Texas entity, ensure you have the correct governance documents, and help you comply with the new Corporate Transparency Act.

Maximizing Tax Benefits: Electing S Corporation Status for Your LLC  

Another option to consider for your social media business is to elect to have your LLC taxed as an S corporation.

As the owner of an LLC taxed as an S corporation, you can pay some of the profits to yourself as a reasonable salary – taxed at the self-employment tax rate – and distribute other profits as dividends free of self-employment tax.

To be clear, an S corporation is not a type of business entity but a tax classification. Both corporations and LLCs can elect S-corp taxation by filing a form with the IRS. Speak to your accountant or tax advisor to decide if this is the best option for your social media business.

Which Entity Is Right for Your Social Media Business? 

Ultimately, the best entity for your social media business depends on your goals, income, and business complexity.

The business attorneys at Hendershot Cowart P.C. have been establishing a business on the right footing for decades. Additionally, our law firm was among the first to recognize the legitimate legal risks and regulatory concerns of today's influencers, and we founded a social media law practice to address the unique issues facing content creators and social media influencers like you.

We can help you evaluate your options and choose the best structure for your social media business. We can also help you comply with state and federal regulations (such as the FTC Act) and review contracts and influencer agreements to ensure your interests and intellectual property are protected.  

Contact Hendershot Cowart P.C. today to schedule a meeting and learn more about choosing the right entity for your social media business!