Business Startup for Artists, Painters, and Sculptors
When painters and sculptors begin to take their craft serious and want to sell their products to the world, one way they can protect themselves is to create a limited liability company such an LLC or S-Corp.
The law in the U.S. allows limited liabilities companies to have many of the rights as people. For example, an LLC can open a bank account, establish credit, and own items such as art and sculptures. In that word, limited liability company focus on the words “limited liability”. That means if something bad happens, it will limit the liability of the painters and artist from being personally sued. When done right, the person can only sue the assets of the company and will not be about to go after the artist’s personal bank account and assets.
This is important because while the artist is putting its art out to the world to be judge, you want to protect yourself legally. Therefore, the artist should put the art in the name of the LLC and sell all of the art from the LLC. Once the artist gets money from the sale, put the money in the business bank account. This will prevent someone from saving you aren’t treating the business as separate and you and the business are the same. In legal terms, they call this an alter ego and a person will try to pierce the corporate veil to sue you personally.
Estate Planning for Artists
In addition, for estate planning purposes, painters and individuals that buy art can place their art into a living trust. This allows them to avoid paying expensive probate costs and having their assets in the public records. You can find a free sample Living Trust here.
It is important to understand these legal fundamentals because artists can protect themselves while sharing their artistic gifts with the world.
Consignment Contracts and Art Galleries
Art galleries are becoming more and more popular as the masses return to the fine arts. On any given weekend you can find events where individuals are wine, cheese and crackers, and art. One way for rising artists to take advantage of this is to place their art in art galleries. This is often done through a Consignment Agreement.
A consignment is basically a contract that allows you to place your art in art galleries and if one of your pieces of art sells, you and art gallery owner will split the profits. The profits are split many ways splits in the profits with the art gallery and the artist. I’ve seen contracts with 50/50 split, 60/40, and even 70/30. If you are a new artist or don’t have much of a track record with selling art, you’ll probably won’t have a high split of the profits. One way to increase your chances of getting a bigger split of the profits is to create leverage.
Life in many ways is about leverage because whoever holds the leverage can dictate the terms. If you’re starting out, the art gallery has all the leverage because they know you really want to sell your art and they are providing you an opportunity to sell it in their gallery.
One way to increase your leverage is to create demand for your work. For example, you can create a website and build up your following on social media. You can do videos of painting yourself, tell people about the meaning of the art, write articles, and many other things. With enough time and patience, you will build a following. People will appreciate your perspective on the world and then they can go to your website and buy your art. This will allow you to have a Direct to Consumer Relationship with the Buyer. Buyers won’t need to go to art galleries to buy your art because they can buy it from websites.
However, art galleries will now want your art because they know people will come to the art galleries. This is your leverage and you can now negotiate better terms of the consignment agreement because in actuality you don’t need the galleries to sell your art.
Loss Leader Artist Marketing
The painter can look at the art galleries as advertisement. In marketing they have a term called the loss leader. Basically, you’ll take less money because you’ll be splitting the profits with the art gallery vs getting 100% of the profits on your website. This is important because the art gallery is bringing you more attention and you’re looking more official because now you have a resume of a number of galleries you’ve been in.
Now all of this take times. It sounds simple, but it’s really not that easy. And patience is truly a virtue. Patience is on the same level as being courageous, truthful, humble, and many other virtues. But often times, patience is the one that really isn’t practiced. But, with enough patience and hard work, you’ll get to where you want to get to. There’s a famous farming analogy that I like to use. It says, “The harvest is plentiful, but the laborers are few.”
It is very critical that you:
Focus on your craft,
Follow your dreams and be exactly what you want to be,
Tune out all the outside noise, and
Just focus on your craft.
At this point in my life, I’m convinced that anyone can be successful at basically anything if they master their craft.
Art Insurance Contracts
As with many valuable assets, there is insurance for art. Insurance protects artists and collectors in case the art is lost, damaged, stolen. When you are getting insurance, it is important to read and be aware of the terms of the insurance contract.
One of the things collectors should be aware of is to ensure that all of the art is being covered by the insurance. Sometime insurance companies will sneak in terms that won’t cover very rare art in some insurance policies. It’ll worth it to be mindful of this and even be willing to pay a higher premium for peace of mind.
Household Art Insurance Policies
Often times, individuals will get insurance policies that cover the art they have at the homes for their personal collections. Then they’ll take a few of those items and hang them at their offices or restaurants. However, insurance companies may not cover any damage or loss to the artwork because the person bought a household policy and chose to take it out of the house.
Fire clauses. Insurance companies are very savvy and will make sure they are not paying for intentional fires.
Art is susceptible to theft and according to the FBI, between 5-8 billion dollar worth of art is stolen every year. Insurance companies will be sure to heavily investigate thefts to ensure no type of collusion is going on.
But some people question whether they should even get insurance. For art is that irreplaceable pieces of art, and no amount of money could cover a Mona Lisa or an Egyptian Kemetic statue. So, instead of paying insurance premiums, many museums are using that money to buy better theft prevention and find ways to minimize damage.
Art Tax Law Implications
Often times artists and painters have trouble selling their art. One way for them to sell their art is to get a little creative and sell their art through what they call installment agreements. Installment agreements are legally binding contracts that allow a buyer to may to pay in smaller payments versus paying a big lump sum payment at one time.
This allows an artist to avoid being a starving artist because they have a larger pool of buyers now. It also helps with tax purposes because installment agreements can put a buyer into a smaller tax bracket because of the installment accounting method.
For example, you can have a painting and you can profit a hundred thousand dollars off of it. If you get a hundred thousand dollars at one time, that'll put you in a higher tax bracket. But if you're able to get those payments over smaller amounts, for example, over four years, you’ll get twenty-five thousand dollars. You'll be taxed in a lower tax bracket through the installment accounting method.
New Art Tax Law Updates
While the installment accounting method is a benefit for artists and investors, one negative for the art world is that the US tax law Section 1031 is no longer available with the new tax laws signed President Trump.
Previously, if a person sold a piece of art they could defer paying taxes if they use the money to buy a similar piece of artwork. This was huge because it allowed collectors to upgrade their art collections without having to pay taxes with every transaction.
But, collectors should not let this prevent themselves from investing in art because art is an incredible investment and has shown to gain in value over time.
In addition, many artists are able to sell prints of their art which will be much cheaper than the genuine original piece. So, artists can ensure they are reaching the largest amount of buyers possible.