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The Art Director And Business Structure
Since every art director is confronted with establishing or participating in a business operation, questions commonly arise which are about business structure. In this area there are generally three types of businesses that are of concern: sole proprietorships, partnerships, and corporations.
Doing Business as a Sole Proprietor
The most common type of business is the sole proprietorship. This is generally a business which is owned and operated by a single person. Many art directors are involved in this type of enterprise. Operating their business in this way gives them control over the business operations, flexibility (and lack of accountability to others) in making decisions quickly, control over finances and profit distribution, and relative freedom from government regulation.
In order to establish a sole proprietorship, usually nothing more is required than a license from the state in which the art director is doing business. Once this is done the financial records of the sole proprietor should be organized to coincide with the business's operations, separate from the art director's personal records, to facilitate record keeping and tax accounting.
Art directors often wonder whether this is the best form of business under which to conduct their operations because of one major drawback: sole proprietors have "unlimited liability". This means that the financial responsibilities which are incurred by the sole proprietor in the course of the business, whatever their denomination or description, are ultimately for the sole proprietor to satisfy. If there is not enough money in the business, the sole proprietor must go to personal accounts or may be forced, by court order, to sell real or tangible assets (house, car, etc.) to pay.
The reason for concern is that art directors are sometimes exposed to liabilities which are substantial. Potential copyright infringements, a missed deadline causing a client to lose a business opportunity, the negligence of an employee, are all hazards of the art director's job. A client's going out of business, their not having funds, their refusal to pay, are all part of a recurring nightmare that the art director will be left with bills for printing costs, freelancer's pay, and costs of typesetting, merchandise or supplies.
Sometimes insurance, or carefully drafted contracts, may help the art director to cover or limit these liabilities. But many art directors who feel that their financial liabilities could be extensive look away from the sole proprietorship to the corporate form of doing business for help.
The Art Director and the Partnership
A partnership is an association of two or more persons to operate a business as co-owners for profit. Partnerships are also a form of business which art directors regularly employ.
Many Art Directors never realize that if their business falls within the definition of a partnership, it is one; that this is really all that the law requires. While many states require partnerships to obtain licenses to do business, the failure to do so does not dissolve the partnership, although it might subject it to fines for a regulatory violation.
The attractiveness of the partnership form of doing business lies partly in the fact that it is so easily formed, partly in the fact that equal partners often share in management and operations responsibilities, and partly in the fact that a combination of two or more art director's abilities and financial resources can facilitate each other's creative and business objectives.
However, in consider the disadvantages of this form or business there are some important points to address.
There is the fact that the partnership can be bound for the liabilities which each partner subjects it to, and for the acts which each partner takes in its behalf. So, for example, the partnership must pay for the stat camera which one of the partners ordered in behalf of the partnership. And, the partnership could be liable for the automobile collision of one of the partners who was en route to review art boards with a client.
There is also the fact that where the partnership cannot pay for the business's liabilities, both or either of the partners may be legally forced to account for them. In short, the rules of unlimited liability apply to partnerships as well.
This may make the partnership form of business especially onerous. So it is well to consider first if in doing business the art directory wants to be bound by the acts of partners and whether the art director understands that the liabilities which the business incurs (including those incurred through another partner) are ones for which the art director may be liable in not only a business but in a personal capacity.
If after considering these points, the partnership's advantages outweigh its disadvantages, it is generally prudent for the partners to execute a partnership agreement. Although not required, such agreements are useful in setting out the nature of the business which the partnership will be conducting, the terms under which the partners will participate, their rights to share in profits and revenues, their interests in partnership property, their respective responsibilities for contributing money to the partnership business, the rules governing the admission of new partners to the partnership, and the terms under which the partnership will be dissolved.
Because there are so many problems which might come up in partners dealings with each other, it is usually a good idea to establish in a partnership agreement a fair and appropriate way of resolving them before they occur.
The Art Director and the Corporation
Corporations are business entities which are formed and are authorized to operate under the authority of state laws. They are considered to be separate entities from the people who form or own them.
The most universally recognized attribute of the corporation is that while the corporation itself is legally responsible for its business transactions and operations, its owners are not.
Thus, if there is any liability for which the corporation is responsible, notwithstanding its denomination or description, it must be satisfied or paid for solely through the revenues which the corporation has, if any, or through the sale of the property, if any which the corporation owns. Due to this fact, it is often said that one of the most important reasons for incorporating is to limit the liability of the corporation's owners, who do not personally have to pay for the corporation's debts.
The structure of most corporations consists of a board of directors which is responsible for the long range planning and overseeing the operations of the corporation, the officers including President, Vice President, Secretary, and Treasurer, who are responsible for the coporation's day to day operations, and the shareholders, who are holders of the stock of the corporation which reflects ownership in it.
However, many states have recognized that there are situations where the complexities of having different directors and numerous officers are unwarranted, for example where essentially one or two people are establishing and operating the corporation. So in some cases the law provides that it is possible to organize a corporation in which a board of directors and numerous officers are dispensed with. These Corporations, sometimes called "close corporations," are then often run by the shareholders themselves.
Many art directors choose the corporate form of business because the limited liability gives them protection for their personal assets, and because they find that the simplified forms of corporate organization easily facilitate the manner in which they conduct their business. Others find when they incorporate they obtain certain tax advantages, and save some money. However, whether incorporating will save the art director taxes will depend on several factors, and their individual case.
To establish a corporation it is necessary to file Articles of Incorporation with the state in which incorporation is being applied for. However, this alone, will not always satisfy all legal requirements.
In many states it is also necessary to establish "bylaws," the internal rules for how the corporation operates, specifying such things as the rights of shareholders, the responsibilities of officers and directors, requirements for issuing stock, procedures for voting, and miscellaneous other matters such as the maintenance of savings and checking accounts, check writing authority, and pension plans. In some states it is also required that the shareholders have an organizational meeting, to enact bylaws, and pass special resolutions.
A failure to comply with ALL requirements properly may result in an incorporation which is legally void, and which will be disregarded for legal purposes. When this is the case any party that sues the corporation may attempt to have the corporate veil of the business disregarded and hold the people doing business under the invalid corporation liable, personally. An invalidly formed corporation may do little to protect the art director.
Although they are many legal matters to which art directors may attend without the help of legal counsel, incorporating is probably not one. This is because attorneys are probably better equipped to maximize all of the benefits of an incorporation, and to prepare and amend forms, articles and bylaws, which best meet the art director's particular needs for their particular situation. They can also ensure that all of the requirements of incorporating are met. In many cases art directors who attempt to incorporate themselves do not understand which of the many approaches to incorporating will serve them best, or do not follow through meeting all of the requirements which must be satisfied.