Recently, I was consulting with a new business owner, an artist that decided to monetize his efforts and had been selling his work for the past year. Sounds great, right? Doing what you are passionate about AND getting paid for it? Absolutely! The problem is that this client had not fully established his art as a business with proper bookkeeping, which can complicate matters as he tries to grow his business.
Whether you are a musician, painter, photographer, actor or any kind of artist, when you start selling your work, you become a business and you need to think of your art as a business and treat it as such. While it might seem a bit intimidating to set up a new business, going through the steps will help you in the long run. Let’s take a look at the steps and why they are so important.
Step 1: Setting up your business
As an artist, you may have different needs than other businesses, but you still need to decide how to structure your business. Does it make sense to be a Sole-Proprietorship or a Limited Liability Company or any of the other options in between? Choosing the best entity type for you will depend on what your goals are and what type of business you are running. This is an area that you will want to discuss with a business attorney or tax accountant to make the best decision for your future.
Benefit: Different business entities have different tax and liability implications, so this is definitely an area where it pays to consult a professional to see what will work best for you. Also, the entity type you choose will also dictate how you pay yourself, so be sure to take to a professional about taking distributions versus setting up payroll and what may work best for your lifestyle and revenue stream.
Step 2: Register your business & Get your Tax ID numbers
In New Mexico, anyone that engages in business must register with the NM Taxation and Revenue Department. Once you do so, you will receive your State Tax ID (CRS) which you will use to report and pay state and local gross receipts taxes.
You will also need to get a Federal Tax ID (EIN) to pay federal taxes and you can apply for this through the Internal Revenue Service.
Also, some municipalities in NM require that you get a local business license. You can find more info on this and instructions on starting and registering a business in NM at https://www.sos.state.nm.us/steps-to-starting-a-business/#
Benefit: As a business owner, you need to pay taxes plain and simple. If you stay on top of this process, you will save yourself major headaches (and possible penalties) down the road. Also, if you ever need to apply for federal or state grants and loans you will likely need to provide this information during the application process.
Step 3: Separate your personal and business finances
Once you have your business ID numbers you can open a separate business bank account. Use this account for all your business income and expenses. If you must use personal money to cover business expenses, that’s fine, just be sure to keep accurate records, which leads us to the next item…
Step 4: Set up your accounting software
Even as a new, small business you will want to set up accounting software to accurately track your business activity. There are several program options to consider and there may be some better suited to the type of business you will be running. Do your research and consult with a bookkeeping/accounting professional. A bookkeeping professional can help you set up the right accounts you need and walk you through the process of recording income & expenses, as well as how to run reports. They can also help you connect your bank and credit card accounts so that your accounting info is automatically updated.
Benefit: Separating your personal and business accounts is essential in being able to understand how your business is performing. You will want to have a clear picture of how your business is generating and using funds.
The benefits of using accounting software are huge. Having your accounts linked will save you data entry time and your accounting software will likely come with standard report templates that you can run to see how your business is doing. Your accounting software will help you track where your money is coming from and how you are spending it. Having this information will help you make informed decisions on how to move forward and be successful with your business.
Plus, when tax season arrives, all the info you need should be available to you with just a few clicks of your mouse.
Creating a business from your art is a wonderful thing and it doesn’t have to be complicated. Start yourself off on the right track and lay your foundation properly. If you need assistance, check your local business resources such as the Small Business Administration, SCORE, and local business incubators. Many will offer free services or will be able to direct you to professionals that will be able to assist you. Contracting with a professional upfront will save you money in the long run and many headaches in the future.
Plus, taking the time to set up your business properly in the beginning will save you time, which means more time to focus on your art. Win-win!