This information is presented for educational purposes and is not intended to constitute legal advice or take the place of consulting your own attorney.
Once you start accepting money for readings, you have launched a business and entered a web of legal considerations. The business form you choose for your practice affects your taxes and your legal liability. There are four types that are most likely to be appropriate for an astrology practice.
A. The most common type is a sole proprietorship. This is a one-person business. This is the form that many astrologers use, and it is the form that comes into being by default, if you do not affirmatively create any other type of business entity.
Required filings. No special filing with any agency is necessary is necessary to create a sole proprietorship. It comes into being as soon as you transact business.
One filing may be necessary, however, if you call your business anything other than your given name. In that case, you must file a certificate adopting this name in the appropriate public records of your state. The name of this certificate varies by state. Some call it an assumed name certificate (or d/b/a for short, which stands for “doing business as”), others call it a fictitious name, still others a trade name. Generally this type of certificate is required to be filed with the clerk of the county in which you intend to do business.
Liability. You have full personal liability for the debts of your business. This is because legally you and your business are the same.
1. You must report your business income and expenses on Schedule C of IRS Form 1040. This schedule is called Self-Employment Income.
a. You are allowed to offset your income with expenses you pay out to run your business. These expenses may include the cost of business cards, flyers, ads, stationery, professional organizations dues and journal subscriptions, seminars and conferences, your phone line, etc. For software, office equipment and furnishings you do not deduct the cost all at once. Instead, you amortize the cost over a period of years. (An accountant can help you calculate this.)
b. You must show a profit two out of five years. It doesn’t matter how much – one single dollar is enough. If you do not show a profit two out of five years, the IRS may take the position that your business is a hobby and disallow all business deductions. (The income is still, of course, taxable.)
2. You must pay Self-Employment Tax (the equivalent of social security), as well as income tax, on your self-employment income. This means that your effective tax rate will be higher. The form is Schedule SE to Form 1040.
3. You will probably be required to make estimated tax payments, in advance. (The IRS form is 1040-ES.) Payments are due in the middle of April, June, September and January. Penalties are assessed if you fail to pay or you underpay.
Use the figure of $500 in taxes as a guide. The rule is that you must make estimated tax payments if you expect to owe at least $500 in tax (over any withholding payments and credits) and you expect that your withholding and credits will be less than 90% of the tax on your current year’s return or 100% of the tax on the previous year’s return.
4. You must declare and pay state tax on your self-employment income if your state has an income tax.
5. If you live in New York City, you must also declare and pay a city business income tax on your self-employment income.
B. A general partnership involves more than one person. It is not common for astrologers to form a partnership for a joint practice, but they sometimes choose a partnership to run some other type of business together (for example, a software company).
A partnership can come into existence the same way as a sole proprietorship: if two people act in business together, they’ve created a partnership (whether they’re aware of it, or of the ramifications, or not). A partnership can also come about by a verbal or written agreement. Putting the agreement in writing is the prudent way to go. The agreement should address at least the basic terms of what each partner is putting into the business, how the partners will share profits and losses, what each partner is expected to do, what will happen if a partner doesn’t meet expectations, and how to terminate the agreement.
Filings. Whether it’s verbal or written, a partnership agreement is private and is not filed with any governmental agency. A partnership generally must file the appropriate certificate of the partnership name, however. This may be with the county clerk or the secretary of state; check the requirements in your state to be certain.
Liability. Each partner is fully liable for partnership debts and for the actions of the other partners. Think about that – it’s the reason that makes a partnership a risky business.
1. The partnership must obtain a tax ID number (called federal employer’s identification number, or FEIN) by filing Form SS-4 with the Internal Revenue Service. You can get the form from an accountant, from an IRS office, or from the IRS website,www.irs.gov. The FEIN is equivalent to a person’s social security number.
2. The partnership does not itself pay federal income tax, but must file an information return that reports partnership income and expenses. This information also goes on the personal returns of the individual partners, on Schedule K to Form 1040. If the partnership has income, the individual partners report and pay tax on their share of it; if the partnership has a loss, the individual partners get a reduction in their personal income for it. This information is reported on Schedule K to Form 1040.
3. You must show a profit two out of five years. It doesn’t matter how much – one single dollar is enough. If you do not show a profit two out of five years, the IRS may take the position that your business is a hobby and disallow all business deductions. (The income is still, of course, taxable.)
C. A corporation is one of the business forms that offers its owner(s) some protection against liability for business debts. It can be owned by one person or by multiple people.
1. A corporation comes into existence when you file notarized articles of incorporation or formation with the office in your state government that regulates corporations. In most states this is called the Secretary of State. (Filings can be made online in many states.) Filing fees generally run a few hundred dollars. Some states require you to make a tax deposit. The corporation must next be organized, by issuing stock, electing a board of directors and adopting bylaws. Some states require that a corporation have a specified minimum amount of paid-in capital (such as $1000) before doing business.
2. A corporation does not file an assumed or fictitious name certificate if it is doing business under the corporate name. If it uses a different name, it must file an assumed or fictitious name certificate at the state level, with the Secretary of State or equivalent office.
Liability. Under most circumstances, officers, directors and shareholders are not personally liable for the debts or actions of the corporation. The exceptions to this rule involve misusing the corporate structure and failing to pay certain taxes. When the business involves personal services, however, the person who actually performs the services may still incur liability for his actions as an individual.
Restrictions on trading stock. State and federal laws regulate issuing and selling stock. Violating the regulations can lead to hefty penalties, criminal as well as civil. Stock must either be registered with the state securities board and the Securities Exchange Commission or issued under an exemption from registration. Most small corporations issue stock under an exemption. Stock issued under a registration exemption is not freely tradable. If the corporation has multiple shareholders, they should enter into an agreement restricting the transfer of their shares. This would prohibit them from selling their stock to an outsider without first offering it to the other shareholders, then to the corporation.
1. The corporation must obtain a federal employer identification number.
2. The corporation must file an annual federal income tax return and is subject to federal income tax, unless the shareholders have elected Subchapter S status (which treats the corporation as a partnership for tax purposes only. Warning: there are many restrictions on the availability of Subchapter S status, and the election has an extremely short filing deadline, which is very easy to miss.) The shareholders will also be subject to federal income tax on any distributions that they receive from the corporation.
3. If you elect Subchapter S status, the corporation must show a profit two out of five years. It doesn’t matter how much – one single dollar is enough. If you do not show a profit two out of five years, the IRS may take the position that your business is a hobby and disallow all business deductions. (The income is still, of course, taxable.)
4. If the state of incorporation has a corporation income tax (sometimes called a franchise tax), the corporation must file and pay an annual state tax return. Some states also require annual information filings disclosing the names and addresses of key individuals.
D. A limited liability company is a hybrid between a partnership and a corporation. It has the liability protection of a corporation while permitting the business to be run more informally like a partnership.
Filings. An LLC is formed by filing notarized, signed articles of organization or formation with the appropriate state office. (In most states, this office is called the Secretary of State.) In may states, this filing can be made online. The filing fee tends to be less than the fee for incorporating. The LLC must adopt rules and regulations, which appoint one of the members as the manager.
Liability. Under most circumstances, managers and members are not personally liable for the debts or actions of the company. The exceptions are basically the same as in a corporation.
1. The LLC must obtain a federal employer identification number from the Internal Revenue Service.
2. How federal taxes are handled depends on how the LLC is structured. The IRS lets the organizers of an LLC decide whether the company will be treated as a partnership or as a corporation. If it is structured like a partnership, it must file a federal information return, but does not owe tax; income and expenses will be handled on the personal tax returns of the individual members. If it is structured like a corporation, it will be taxed as one.