By The Wyoming LLC Attorney Team
Mar 05, 2024LLCs provide legal protection and operational flexibility for Instagram content creators. LLCs separate personal assets from business liabilities, encourage credibility to the marketplace, and provide tax benefits. Influencers should weigh the pros and cons, consider an appropriate tax election, and take preparatory steps before forming an LLC.
Instagram content creators often use an LLC as their preferred vehicle when running a business. So should you do the same? Let’s consider the case of two friends, both models, who became influencers:
Two rising stars, Ava and Bella, were making their mark. Ava and Bella shared similar passions, comparable ambitions, and even the same rapidly growing follower count. They had both cultivated unique brands, fashioning their Instagram profiles into treasure troves of captivating photos, engaging content, and remarkable tales. However, there was one significant distinction in their professional journeys: their approach to the legal structure of their influencer business.
Ava, the wise and forward-thinking model, decided early on to establish her influencer business as a Limited Liability Company (LLC). Having heard horror stories about influencers who faced crippling debts and personal liability due to unexpected lawsuits and business pitfalls, Ava knew she needed to protect herself. She appreciated the safety net an LLC provided, effectively separating her personal assets from her business liabilities.
Furthermore, Ava saw the tax advantages and the professional image conferred by an LLC as essential elements for her brand's growth. Her Instagram business, flourishing under the shield of AvaStyles LLC, quickly became a powerful name in the industry, earning trust from brands and followers alike.
On the other side of the Instagram universe, Bella, ever the spontaneous spirit, dived headfirst into her influencer career with no formal business structure in place. Ignoring the whispers of caution about the perils of operating solely under her personal name, Bella believed her charisma and the strength of her content alone would carry her through any challenges. She brushed off the idea of an LLC as unnecessary bureaucracy that would just complicate her creative process.
However, Bella's path soon took a treacherous turn. An unforeseen copyright infringement claim came crashing down on her, followed by a dispute with a brand partner that led to a hefty lawsuit. With no LLC to shield her, Bella was personally liable. Her personal assets, including her savings and property, were now fair game to cover these business liabilities. The financial strain was significant, and the impact on her reputation was even more damaging. As she navigated these legal and financial obstacles, Bella realized the grave error in her initial decision to forego forming an LLC.
Both Ava and Bella started their influencer journeys with similar dreams and capabilities, but their distinct choices regarding the business structure of their brands led them down entirely different paths. This tale of two influencers serves as a stark reminder of the importance of considering legal and financial protection when launching a business, even in the dynamic and unconventional world of social media ‘influencing’.
Limited Liability Companies, commonly known as LLCs, are legal structures that provide businesses with a hybrid type of protection and operational model. This means that LLCs blend the characteristics of corporations, partnerships, and sole proprietorships. They provide the owners, known as members, with limited personal liability for the debts and actions of the LLC. This means that members are typically not personally responsible for company liabilities and debts, unlike in a sole proprietorship or partnership.
As an Instagram content creator or any social media influencer for that matter, you might wonder whether you need an LLC. In general, platforms do not mandate creators to form LLCs. As a startup, operating as a sole proprietor might suffice. However, once you begin generating substantial revenue, collaborating with brands, or considering team expansion, creating an LLC could be beneficial for taxation purposes, legal protection, and ownership flexibility.
LLCs offer significant advantages for social media influencers. They provide an added layer of protection for personal assets, allowing influencers to separate their business and personal financial matters. This limits the liability to the assets of the business in case of a lawsuit or debt, protecting the influencer's personal assets like their home or personal bank accounts.
LLCs can also help influencers gain credibility and authority in the market by enhancing their professional image, which opens up avenues for collaborations, sponsorships, and partnerships. Moreover, they can provide tax benefits as profits and losses can be passed through to the member’s individual income tax returns, potentially reducing the overall tax burden.
While forming an LLC can offer numerous benefits such as limited liability, credibility, tax advantages, and flexibility, it is essential to consider potential downsides. Running an LLC requires more record-keeping and management complexity compared to a sole proprietorship. Starting and maintenance costs for a social media influencer business can vary greatly.
Generally, costs might include business formation fees, yearly state fees, professional equipment, marketing and branding expenses, and taxes. From there, ongoing costs largely depend on factors such as business structure (LLC, sole proprietorship, etc.), state of operation, branding, marketing efforts, and more. If the influencer business expands to include employees, payroll and associated expenses will also be an ongoing cost.
Therefore, it's crucial to weigh these advantages and disadvantages before deciding to form an LLC for your Instagram business.
Before forming an LLC, influencers should take several preparatory steps. First, conduct a thorough business analysis to determine if an LLC is the best fit for your business model. Consider consulting with a legal advisor or business consultant. Next, choose a unique business name that reflects your brand and complies with your state's LLC rules. Lastly, assign a registered agent for your LLC, which can be you, another LLC member, or a professional service.
A social media influencer business can indeed be lucrative, but success varies widely. Factors such as the platform used, the influencer's niche, audience size, and engagement, and the effectiveness of their monetization strategies play crucial roles. High-earning influencers can make significant income from brand partnerships, affiliate marketing, merchandise sales, and more.
For social media influencers, choosing between an LLC and a sole proprietorship largely depends on their business size, income, and risk exposure. An LLC offers limited personal liability, meaning the owner's personal assets are protected from business debts or liabilities. On the other hand, a sole proprietorship is easier and cheaper to set up but does not offer this protection.
When registering an LLC, owners have the option to elect for their business to be taxed as an S-Corporation. This allows the LLC to avoid double taxation: where corporate profits and dividends disbursed to shareholders are both taxed. Instead, an S-Corp passes corporate income, losses, deductions, and credits to its shareholders for federal tax purposes. This option might be beneficial for an influencer business that anticipates a significant profit, as it can save on self-employment or Social Security/Medicare taxes.
Generally, an S-Corp tax election is applied to a holding company, or the company at the top of your structure. This is because an S-Corp must be owned by a living human. You will need to speak with a CPA you trust regarding which tax election is best for you.
Deciding whether to form an LLC for your Instagram business is an important decision that involves careful consideration of your business model, financial situation, and future plans. By understanding the benefits and potential downsides, you can make an informed decision that positions your influencer business for success.
Regardless of the path you choose, remember that your content and connection with your audience are at the heart of your influence. If you're ready to set up your LLC and need assistance, feel free to contact us. A member of our paralegal team can help. You can complete the contact form or call us at +1 (307) 683-0983 to get in touch.