Whether or not you believe it, as soon as you’re earning any money from your stream you’re running a business. Do you have a good sense of the type of business you’re running or the type of business you should be running? Have you made intentional effort to choose your stream’s class? Just like in any RPG (and you can’t tell me life isn’t an RPG!) your class can have a big impact on how you play the game.
So what are your options? Unless you’re a finance nerd like me or a seasoned business owner I’m guessing you’re more comfortable with the meanings of mage, warrior, priest etc instead of sole proprietorship, limited liability company, or S corporation. Don’t worry, we’ll cover it all in this article. One small note before moving in to the article- we’ve already how these business types impact taxes here so we won’t get in to that today.
I’m not a lawyer so if you’re trying to decide which of these is right for you make sure you reach out to an attorney. If you need a referral let me know and I’d be glad to help.
Sole Proprietorship
This is the most common type of business. A sole proprietorship has just one owner and you don’t need to do anything to create the sole proprietorship. The act of conducting business creates it! Well, nothing is created since not a legal entity but the point stands. You and the business are one and the same in the eyes of the IRS. If you use a different name than your name on your birth certificate you should file a Doing Business As (DBA) form. Then, they don’t get suspicious about you receiving payments for CaptainSparklePants or whatever moniker you use. If you’re a small streamer, this is where you want to live. You won’t be getting much out of this structure but you also won’t be paying much!
Advantages
There is little to no cost to setting up a sole proprietorship. As mentioned above, the act of conducting business forms the sole proprietorship. You also don’t need to worry about holding corporate meetings or maintaining detailed financial documents for shareholders since there are no shareholders. You should make them for yourself, but that’s a different issue.
One of the biggest advantage is you have complete control in a sole proprietorship. You’re the only owner and the only one to whom you need to answer, at least for business decisions. Is CaptainSparklePants a variety streamer or dedicated to one game? Does the stream go nuts with overlays or opt for simplicity? All on you. Any success you have is all on you as well!
Easier taxes. See the link in the second paragraph for the taxes article.
Disadvantages
You control everything, therefore it’s all on your shoulders. All of the responsibility, decision-making, financial control, and mission creation. There is no CommanderSparklePants to come in and make the hard calls.
You have unlimited personal liability. This means that any debts you take on for the business belong to you the person. That’s because you and the business are one and the same. While with streaming this might not be a huge deal because it’s not like you’re manufacturing something you should still be careful of business debt. Also, if you wrong someone through your actions they can sue you for all that you have, not just the business.
It’s hard to raise money as a sole proprietorship. Since you’re the only owner you can’t sell of shares and generally smaller businesses are pretty risky ventures. This means that you may need to turn towards your audience more instead of outside funding.
The business dies with you. Since you and the business are the same entity there’s no way for it to carry on if you die. If you’ve created a lot of value, it’s a shame to have it just disappear.
Partnership
A partnership is a business where there is more than one owner. You do have to register a partnership with the state but it’s a relatively quick process. A partnership must have a business name because it’s a separate legal entity. If you use the last names of the partners (think law firms) then you don’t need to file a DBA but any other name requires one. If you are a part of a group that streams together you should consider forming a partnership. While not legally required, partnerships have partnership agreements that lay out the terms of the partnership including who does what, how operations will be funded, how to resolve disputes, how to bring on new partners or exit the partnership, and how to divide income. In this case you could have CaptainSparklePants and CommanderSparklePants operating together.
There are three types of partnerships:
- General Partnerships have owners who split work and profits equally between all of the partners. It is possible to say that one partner gets more than an equal share of the profit but if that’s the case it has to be documented. General partners have full liability for the business.
- Limited Partnerships have one general partner and all others are limited partners. Limited partners don’t have management capabilities but are sheltered from liability. The general partner has all of the responsibility and liability, but all of the control.
- Joint Ventures are partnerships that are formed for a specific time period and purpose. You’d do this if you wanted to undertake a project with another streamer but didn’t want to be permanently attached.
Advantages
Partnerships are easy to set up and aren’t that expensive. While you should put together a partnership agreement it’s not required.
You have partners! This means that you don’t need to do everything on your own. You can take the tasks that you’re good at and put the others on to the other partner, especially if that’s their area of expertise. Additionally, you’re not responsible for all of the funding. Each partner, unless otherwise specified, is responsible for half of the obligations and half of the income.
You can bring on more partners as needed without much difficulty. If you need more funding or have someone with a skill set that you’d love to include, make them a partner! Yes, you’d need to update your legal documents to reflect it but again those aren’t expensive or time consuming.
Disadvantages
You’re liable for your own actions and those of your partners, unless you’re a limited partner. This means that you need to trust your partners in the utmost. Even if you have a spotless record a shady, or misguided, partner could bring the whole thing down.
You don’t get to keep all of the profit. I mean, it wouldn’t be fair if you did. Even so, it’s good to remember that bringing on a partner can dramatically lower what you take home unless they have a lot to offer.
You don’t have sole control. It’s totally possible that you and your partner vehemently disagree on the way to move forward. Unless you have enough partners to vote, and everyone agreed to go by the vote’s decision, you could potentially reach the point where you need to dissolve the partnership to move forwards. This also means that decisions tend to happen more slowly which can cause you to miss opportunities.
S Corporation
An S Corporation is a small (hence the S) corporation. This is a special type of corporation where your taxes flow through to each shareholder. The main restrictions on S corporations are that you can only have 100 shareholders, they all must be US residents or citizens, and you can only have one class of stock. To become an S Corporation you need to file the documents to become a corporation and then all shareholders sign a form agreeing to elect to be an S Corp. In this case you could have CaptainSparklePants as a shareholder and then 99 others, assuming they meet the requirements. This might make sense once your company is starting to make a good deal of money or you want to involve others in the business.
Advantages
The advantages are mostly tax advantages. Take a peek at the taxes article for a good breakdown. The one that you’ll care about the most is the distinction between wages and dividend income.
You have limited liability because it is a corporation. While the business might go bankrupt you’re safe from any debts you didn’t personally sign for.
You can write off a lot of expenses for employee-owners of an S Corporation that you wouldn’t be able to write off otherwise.
An S Corporation is totally separate from its shareholders, meaning it can persist even if they die. This can be great for passing on businesses to others.
It’s easier to raise money because you have shares that can be bought and sold.
Disadvantages
If you’re not earning much, you don’t have enough income to actually pay out tax advantaged dividends.
You must follow the S Corp restrictions listed above. If you fail to follow any of those restrictions the business can lose its S Corp status. This inherently means that you’ve lost a lot of the control that you’d have as a sole proprietor.
You must operate everything like a business. This means that you need to hold scheduled shareholder and director meetings and keep minutes of what you discussed. This incurs some extra cost and time.
There is extra cost associated with forming and maintaining a corporation. In addition, there’s more for the IRS to scrutinize if they’re auditing you.
Limited Liability Company
A limited liability company (LLC) is a mix of all of the businesses we’ve talked about so far. Basically, the purpose of an LLC is to give you the best of both worlds in regard to taxation and legal protection. You still get flow through taxation but you also get limited liability, which can be a huge deal depending on your business. That’s probably less important for a stream but would be more important if you were offering services like coaching.
To create an LLC you must choose a business name, file articles of organization with your state, create an operating agreement, get relevant business licenses, and announce your business (depending on your state( in a newspaper. I think that last one’s pretty silly but I guess it used to be relevant.
CaptainSparklePants, LLC could decide how it wants to be taxes and can even have more people on as members, all while protecting our good friend from full liability.
Advantages
You get both beneficial tax treatment and limited liability. You can elect the treatment that’s the best for you, so you could have an LLC taxes as a sole proprietorship, a partnership, or even an S Corp. Finally, you get the same limited liability you would get as a limited partner or shareholder in an S Corp to boot!
You don’t have to do a lot of the paperwork stuff you have to do as an S Corporation. Basically, you don’t have to hold regular meetings, keep minutes, or do some of the more complex financial filings.
It’s up to the shareholders (called members) to determine how they distribute profits. That’s all in the operating agreement so you can have someone contribute time and effort and someone contribute money and compensate both fairly.
Disadvantages
Cost. The LLC is more expensive than a partnership or sole proprietorship. In California (admittedly near the most expensive) it costs a minimum of $800 per year to maintain an LLC.
As a member of an LLC you’re still self-employed so you don’t escape self-employment taxes. If you earn a lot of money from your business this could add up to be significant.
An LLC has a limited life. If anyone leaves the LLC through death or disagreement then the LLC is dissolved and the remaining members would either have to form a new LLC or decide to go their separate ways. That could be a serious pain.
C Corporation
This is a big business that pays taxes twice- once on the business itself and then the individual owners (shareholders) pay taxes on what they receive. If you are a streamer I can’t yet think of a reason why you’d need to be a C Corporation.
Conclusion
Business structure is both extremely important and fairly complex. Odds are, you’re a sole proprietorship. That’s what most businesses are and it only makes sense when you’re starting out. As you grow you should consider some of these other options as they can make your life a whole lot easier. Be conscientious about your business structure and you can have the resources to conquer the streaming world! If you have any questions about this article or you have other questions you want us to answer, leave a comment below and we’ll get to it.
You don’t have to figure this out alone. This is what we do- help streamers make great money decisions. If that’s something that sounds interesting to you reach out me or schedule some time for a free consult. You can check out what I do here. I’m not a lawyer but my job is to find these kinds of opportunities and connect you with the people who can do the calculation work.
