Welcome back to the Business of Blogging series! I hope you enjoyed my first blog post: “Is your blog a hobby or business?” Whether you’ve just started your blog as a hobby or you’re a few years into your blogging career and you’re generating your income, I hope this series helps you figure out:
When you should file as a business (covered in part one)
What types of business you can file us (what we’ll be discussing today)
What you still need to do if you aren’t ready to file as a business (will be covered in part three)
Consequences of not recognizing your income (will be covered in part three)
If you aren’t sure if your blog falls under hobby or business, feel free to revisit the questions in my first blog post in section 2. I shared the guidelines published by the IRS and rephrased these questions to apply to bloggers/influencers.
If you’re like me, maybe your one year or a few years into your blogging career and you’re starting to generate an income; you might be ready to file as a business.
Here are the Types of Business Entities to File as a Blogger:
Types of Business Entities: Sole Proprietorship
(source: U.S. Small Business Administration):
You are a sole proprietorship if you are self-employed or an independent contractor. This is the simplest structure to start a business. You actually automatically become a sole proprietorship if you’re a blogger, freelance writer or photographer or graphic designer.
If you start entering into brand collaborations and they ask you fill out a W9 form, you’ll mark sole proprietorship if you haven’t filed as an LLC. You probably have the companies/brands you work with write the checks or payments in your name rather than a separate business name.
The most distinct feature about filing as a sole proprietorship is that the owner is responsible for all profits, debts, and federal taxes. This means if the person/the business is sued by another company, the person’s personal assets are at stake. In this situation, the company can come after your house or car if you’re unable to pay your debts or losses in a law suit.
Pros of a Sole Proprietorship:
A sole proprietorship is the least expensive business structure to create. You may have some legal cost associated with getting licenses or permits but it’s definitely the simplest business structure to implement.
Since you own the business, you don’t have to consult with any partners or shareholders.
Cons of a Sole Proprietorship:
As I mentioned above, since you and the business are recognized as one entity you hold the risk of personal liability.
If you’re looking to raise capital for your business, this is a challenge for sole proprietors. Sole proprietorships can’t sell stock like corporations or LLCs. Additionally banks are typically hesitant to lend loans to sole proprietors because of the increased risk of repayment if you fail as a business.
For your taxes:
In a sole proprietorship, you and your business are the same entity. So the business isn’t taxed separately. This means the tax rates are lowest in a sole proprietorship. (SBA website)
Sole proprietors are still responsible for filing their income tax (Schedule C form and the standard 1040 form), self employment tax, estimated tax, and may also be liable to pay social security and Medicare taxes. (IRS website: Small Business/Self Employed Forms)
As a sole proprietor, you have to file for income tax if your net earnings from self-employment were more than $400. But if it was less than $400, you still have to file an income tax return listed on Form 1040. Additionally, you should file a return if your (annual) gross income was at least $10,400.
If you are unsure what gross income or net earnings means, here is a quick breakdown:
Gross income = Revenue – Costs of goods sold. Gross income is the total amount you earn over a year.
Net earnings or net profit = Revenue – All business expenses (tax payments, costs of travel, advertising, etc)
Types of Business Entities: Limited Liability Companies (LLC):
A key feature of becoming an LLC is that your personal assets are separate from the business. So if you were to get sued, on the assets of the business would be pursued – not your personal home or car. Your personal liabilities are protected in most cases if your business ends up facing a bankruptcy. (SBA website)
Pros of LLCs:
LLCs can have members and other owners – and they don’t all have to be citizens or live in the United states.
LLCs don’t need to stand up a board of directors. Instead, members can manage their business and ownership in their preference.
Ease of Transfer: In the LLCs operating agreements, it typically should outline how ownership of the business is transferred or sold to another party. LLCs make it easy for families pass on assets/inheritances like real estate.
Cons of LLCs:
Typically LLCs require more money and paperwork to start up as a business (filing as a business in your state). According to the WeWork website, the initial cost of starting an LLC shouldn’t exceed over $1,000.
Depending on how you look at hiring a lawyer or accountant, this is an additional cost of standing up an LLC.
For your taxes: for federal taxes, if there is one owner, an LLC will be treated like a sole proprietorship. If there is more than one owner of the LLC, they can be treated as a partnership. If you file as an LLC, you’ll have to file with the Washington Secretary of State.
A LLC business structure can be a great option for medium to high risk businesses and those who want to pay a lower tax rate than they would with a corporation. If you want your personal assets protected and separate for your business, you should consider filing as an LLC.
Types of Business Entities: General Partnerships
According to Legal Zoom, general partnerships require more than one owner and are like sole proprietorships. So all owners involved are personally liable for business debts.
A key feature of general partnerships is that all the owners recognize the revenues and expenses of their business on their personal tax return.
Pros of General Partnerships:
General partnerships are typically less expensive; require less paper work, and simpler to form than corporations and LLCs.
The partners involved in the general partnership also have the choice to combine resources and share financial risks and commitments.
Cons of general partnerships:
The biggest con of general partnerships is that the owners involved are personally liable for their business’s debts and liabilities.
Because of these personal liabilities, general partnerships also face the challenges of raising capital/money and attracting investors.
For your taxes: For federal taxes, a general partnership is required to file a partnership return (form 1065 + instructions). Each partner is required to include his/her share of the business’s income or loss on their tax returns.
Types of Business Entities: Corporations
Like LLCS, corporations have limited legal liability. Corporations are required to create bylaws (a governance document). Additionally, corporations typically elect a board of directors, issue stocks, and hold annual meetings:
Pros of Corporations:
One of the major benefits that come with filing as a corporation is that since the corporation is recognized as a separate legal entity, the owners have limited legal liability. If the corporation runs into legal trouble, only the corporation’s assets are at risk – not the owners’ personal assets.
Another benefit of filing as a corporation is that they have the ability to raise capital and attract investors. Corporations have the opportunity to issue stock/stock option for both internal employees and outside investors.
A third benefit of filing as a corporation is that there is established power and structure with the board of directors. Corporations have clearly defined roles and responsibilities for everyone running the corporation.
Cons of Corporations:
Filing as a corporation takes extensive time and resources. It can be very expensive to file as a corporation and you have to ensure you complete the required documents with the state office and other entities to recognize your business.
Corporations are double taxed – meaning that the corporation is taxed on its profits and then individual stockholders are taxed again when they receive dividends from the corporation.
For your taxes: As a C Corporation, you may be liable for Income Tax, estimated tax, employment taxes, and excise tax. You can find all the forms on the IRS website.
Types of Business Entities: S Corporations (S-Corps)
The unique feature of an S corporation is that its business income is only taxed once – like a sole proprietorship and partnership.
The difference between an S Corporation and a C corporation is that this business needs to have less than 100 shareholders. Additionally, if the business has shareholders, they need to be a US citizen. S Corporations can also only offer one type of stock.
Pros of S Corps:
S Corps don’t pay the corporate taxes a C corporation would pay.
Unlike sole proprietorships, S-Corps are recognized as a separate business entity. This means that shareholders/owners of the S-Corp have their personal assets protected if the business faces losses or legal action.
Cons of Corps:
Since S-corps aren’t allowed more than 100 shareholders, S-corps may run into the challenge of raising capital by inviting venture capitalists.
S-corps may also face administrative complexity because each state has its own set of legal and tax laws for your business to stay compliant.
For your taxes: Not subject to corporate tax. Each S corp shareholder must report their share of the business (both revenue and expenses) on their personal return and pay the taxes. S-corps may also be liable for income tax, estimated tax, employment taxes, and excise tax. You can find more information about the different taxes an S-corp is subject to as well as how you become an S-corp on the IRS website.
Do you know what type of business you’ll file as a blogger? I have friends who’ve filed as sole proprietors, LLCs, and S-Corps. What type of business would you file as?
What’s up next on the Business of Blogging series: What to do if you aren’t ready to file as a business and the consequences of not paying your taxes.
I also highly recommend reaching out to an accountant or lawyer if you have any specific questions. Again, I’m a graduate student at the University of Washington and I’m sharing the research I’ve learned from the IRS, Legal Zoom, and US SBA websites.
Thank you to Radley London for gifting the Coopers Row Backpack! It’s been such a great backpack so far for summer. I took this bag with me to the Upstream Music Festival and have used it on weekends. If you’re looking for a bag this summer, you can check out Radley London here.
Thank you also in iSensuelle for this gorgeous yellow maxi dress! Yellow has become one of my favorite colors and I was so excited when iSensuelle gifted this dress. It’s perfect summer – especially with Seattle’s cooler temperatures right now. You can buy this dress for under $30!
Thank you for reading!
Photos: Karya Schanilec