Choosing the Right Legal Entity for Your Social Media Business

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

When Should a Content Creator, Influencer Form a Legal Entity?

Once you start to 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 of 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 different 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.

Is a Sole Proprietorship Right for Social Media Influencers?

A sole proprietorship is a business that is 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, and you can operate under your own name. Note: If you do not conduct business under your legal name, Texas law requires you 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 personal tax return, which can be simpler, especially for new businesses.

A major drawback, however, is that you have unlimited personal liability. This means your personal 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 a better choice.

LLCs for Social Media Influencers and Content Creators

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 it easier for your business to secure a line of credit.

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’ personal tax returns, simplifying your tax filing responsibilities. LLC owners do not have to file a corporate tax return, and the business itself 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 how they run their business. Unlike corporations, LLCs are not required to use a formal governance structure or establish by-laws. LLCs also have greater flexibility in profit sharing and are not required to distribute profits equally or in accordance with ownership percentages (in the event you have a partner or shareholders).
• Tax-Deductible Business Expenses: The IRS recognizes an LLC as a business, allowing you to take tax deductions 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: It is not mandatory to create a separate business entity, such as an LLC or corporation, before trademarking your brand name. However, it is advisable to register your trademark under the business name so that you are protected from any liability resulting from that trademark, such as infringement claims or licensing issues.

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

Another Option for Social Media Businesses: The S-Corp

There is another option to consider for your social media business: You can 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 – which is taxed at the self-employment tax rate – and distribute other profits as dividends that are free of self-employment tax.

To be clear, an S corporation is not a type of business entity; it is 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 the complexity of your business.

The business attorneys at Hendershot Cowart P.C. have been establishing 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 make sure your interests and intellectual property are protected.

Call (713) 909-7323 or contact us online to speak with an attorney about your social media business. Our law firm serves clients throughout Texas and the nation.